Edited by Yariv Brauner and Miranda Stewart
Chapter 10: The role of developed world tax incentives in microfinance
Microfinance institutions provide the poor with access to financial tools – such as credit, savings accounts, or insurance – that more affluent individuals often take for granted. The best-known microfinance tool is microcredit, which is the provision of small loans to foster entre- preneurial activity. Microcredit has been among the most lauded of development tools. In 2006, one of microcredit’s pioneers, Muhammad Yunus, and the institution he founded, the Grameen Bank, were awarded the Nobel Peace Prize. Given the promised benefits, the tax policy approach of developed nations to microcredit would seem to be rather obvious: create generous tax incentives that will result in greater resources for these worthy institutions. Professional and scholarly opinions about microcredit’s benefits and future have, however, become increasingly divided. In particular, theoretical and empirical scholarship questions the claims that originally catapulted microcredit to its star status. Microcredit promised to be a self-sustaining development tool that would allow virtually any individual to use entrepreneurial activities as a path out of poverty. While micro- credit does appear to provide important benefits, it can no longer credibly be viewed as a panacea or, to put it more bluntly, as the ‘hand up’ to end virtually all ‘hand outs’. Thus, given the risk of privileging flawed narrative claims, caution is needed in deploying tax subsidies to support microcredit that go beyond those that already exist. While microcredit’s star has dimmed, microfinance tools beyond microcredit – for example, microsaving and microinsurance – may be poised to take microcredit’s place in the development firmament.
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