A long time ago in a galaxy far, far away. . . How microfinance evolved and how research followed
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For a long time, scholars and practitioners have questioned the link between economic development and the financial sector. Undeniably, there is a deep connection there, but causalities are hard to capture, and are therefore controversial. Arguably, causal links exist in both ways depending on the precise variables considered. Whether the development of the financial sector follows economic development, or the reverse, is a key issue when it comes to drafting policy recommendations for development aid. This book focusses on the segment of the financial sector that affects the situation of the unbanked and marginalized people. By bringing together original and multidisciplinary contributions from world-renowned scholars in the field, it has the ambition of providing the readers with an up-to-date state of the art on key issues of research in microfinance and financial inclusion. In line with the editorial policy of the series, each chapter also opens avenues worth exploring in future academic work. This introductory chapter explains how the issues addressed in this volume emerged from the field. Next, we describe the plan of the monograph and briefly evoke a few promising topics left aside to fulfill space constraints. Contemporary microfinance appeared in the 1970s, when it appeared that injecting capital through development banks was not the universal cure for poverty (Hulme and Mosley, 1996). At the same time, the ideological context was favorable. The 1980s have witnessed a strong political push in favor of deregulating markets, stimulating private enterprises, and favoring as much competition as possible (Weber, 2004). This was fertile ground for the development of microfinance institutions. First, microfinance carried the great hope that subsidies would make it possible to design organizations financing excluded people and turn them into microentrepreneurs. Their private businesses would generate additional incomes, leading to significantly improving their livelihoods. In a nutshell, poverty understood as a lack of income could be solved by microcredit, which allowed the poor to work their own way out of poverty. Second, microfinance was built on a promise that microfinance institutions (MFIs, as they got called) would break even after a few years and provide financial inclusion to more and more people (Morduch, 1999a). The accuracy of this past prediction is still open to discussion. While, undeniably, microfinance has undergone a tremendous development during the last three decades, leading to more financial inclusion than ever, several original assumptions were severely confronted with reality. First, microcredit does not necessarily generate income through entrepreneurial activities since part of it is used for consumer loans. Second, the initial target pool of borrowers, made up of the poorest of the poor, is hard to reach. Last, the objective of smoothing the impact of economic shocks appeared to be more limited than expected.

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