Working Paper
Microcredit and Poverty Alleviation

Can Microcredit Close the Deal?

This paper explores the relationship between microcredit and poverty reduction. To investigate this question, we posit a bare-bone, household model that outlines the economic environment within which various types of family microenterprises operate. It highlights a number of issues that impinge on household earnings such as the nature of the labour market, technology, product demand and entrepreneurial skills. The paper argues that the impact of microcredit is likely to be different across household types as well as across different economic environments. The paper identifies several important demand and supply constraints to the household’s graduation from poverty. These constraints are difficult to overcome in a traditional economic environment, marked by stagnant technology and market saturation. Finally, it is suggested that microcredit has a positive effect on female empowerment—i.e., the agency to make household decisions which helps to improve the quality of family consumption and ‘human development indicators’ of the family. This claim may hold sway in some contexts. However, our a priori reasoning, as well as the available contrary empirical evidence, suggests that female empowerment does not spring automatically from the introduction of microcredit: female empowerment (or the lack thereof) seems to closely track women’s trajectory of economic success.