The authors of a new book that looks at ways to reduce poverty around the world (and whether they work) have suggested one possible reason why the microcredit model may not be creating more entrepreneurs: It rewards cautiousness.
- Sam Panthaky/Agence France-Presse/Getty Images
- A microfinance loan recipient in Gujarat noted weekly repayments from fellow borrowers in January.
Microfinance institutions have "rigid rules" that require small loans of a pretty fixed size, a weekly cycle of repayment often starting within one week of loan issuance, and lending to groups whose members keep an eye on each other, say the authors—economists Abhijit V. Banerjee and Esther Duflo.
"There is a clear tension between the spirit of microcredit and true entrepreneurship, which is usually associated with taking risks and, no doubt, occasionally failing," they write. "It has been argued, for example, that the American model, where bankruptcy is (or at least was) relatively easy and does not carry much of a stigma (in contrast with the European model, in particular), has a lot to do with the vitality of its entrepreneurial culture. By contrast, the MFI rules are set up not to tolerate any failure."
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