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Adriana Garcia and Robert Lensink

Proponents of the microfinance movement long assumed that poor people remained poor because of their lack of financial capital. Poor people were supposed to possess sufficient business and production knowledge, so that offering them a small loan would lead to high returns and a sharp reduction in poverty. Muhammad Yunus (2007: 225) stated this prediction very clearly: “Rather than waste our time teaching them new skills, we try to make maximum use of their existing skills. Giving the poor access to credit allows them to immediately put into practice the skills they already know.” The idea that a shortage of credit is the main obstacle to initiating a growth process has been endorsed by many researchers and international organizations. The immediate policy advice would be grant access to credit to the poor. Credit, and nothing but credit, would be all that was needed. Recent theoretical evidence challenges this assumption and questions the role of microcredit in alleviating poverty (Banerjee 2013). Rigorous impact evaluations suggest that simply providing access to financial capital does not have transformative effects. Banerjee et al. (2015) conclude, on the basis of randomized controlled trials conducted in Bosnia, Ethiopia, India, Mexico, Morocco, and Mongolia, that microcredit generally fails to help poor people raise their incomes or consumption above subsistence levels. Similar conclusions come from Karlan and Zinman (2011) in the Philippines, De Mel et al. (2008, 2009) in Sri Lanka, and Fafchamps et al. (2014) in Ghana.