In the 1990s, one of the dominant ideas in development economics was that poor people remained poor because they lacked access to credit. If only they could borrow, the argument went, they would invest in productive opportunities, grow their incomes, and escape poverty. That belief sparked the global enthusiasm around microfinance.

But in a characteristically thoughtful post, Nicholas Decker looks at what the evidence actually says. The promise of microfinance has simply not been matched by reality. While it has undoubtedly helped many households smooth consumption, deal with emergencies, and, in some cases, build businesses, it has largely fallen short of the sweeping claims that it would become a silver bullet for poverty.

The evidence base for microfinance being effective was always extremely thin. Morduch (1999), in an otherwise hopeful article on the development of microfinance, could not help but note the paucity of the available evidence that it was actually doing anything. The best evidence cited at the time for the Grameen Bank was Pitt and Khandker (1998), who used an eligibility requirement to infer the effect of the loans. However, they skip over the obvious approach in favor of considerably more complicated estimators. Simply running standard estimators, as Morduch and Roodman (2012) do, does not replicate the findings. Pitt and Khandker responded, but it’s almost beside the point – if you have $20 billion in aid money riding on it, you don’t want its utility to depend on involved arguments about what the correct estimator to use on a single dataset is. The comparison is to simply give people money – an action which we now know has substantial multipliers, and at the very least can’t harm anyone.

Shahid Khandker with a thoughtful counterpoint:

The future of financial inclusion therefore lies not in microcredit alone but in a broader ecosystem of financial services.

This is perhaps the most important lesson from fifty years of experimentation. Microfinance should not be judged by whether it eliminated poverty. No single intervention has ever accomplished that. Poverty reduction is driven by economic growth, education, health, infrastructure, labor-market opportunities, and social protection. Finance is only one piece of that puzzle.

The true contribution of microfinance was to demonstrate that poor people are creditworthy, financially capable, and deserving of access to formal financial institutions. In doing so, it helped reshape development policy across the world.

That achievement may be less dramatic than the dream of ending poverty through tiny loans. But it is far more significant—and far more durable.