The microfinance schism

Few recent ideas have generated as much hope for alleviating poverty in lowincome countries as the idea of microfinance. Microfinance promises both to combat poverty and to develop the institutional capacity of financial systems through finding ways to cost-effectively lend money to poor households.2 Poor households are typically excluded from the formal banking system for lack of collateral, but the microfinance movement exploits new contractual structures and organizational forms that reduce the riskiness and costs of making small, uncollateralized loans. Microfinance programs have also demonstrated that even poor households can save in substantial quantities. Success stories are being written around the world, from Jakarta to Dhaka to Nairobi to La Paz. Advocates have broadcast these successes widely, and donors have been quick to pledge billions of dollars to support the expansion of programs in the next decade.