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The bad – and good – news on microcredit

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ZUMA Press/Newscom/File

(Read caption) Angeline Balungwe, a young widow and mother of five, farms in the Democratic Republic of Congo. Her cassava plants, a staple crop much like a potato, were producing tubers the size of a person's thumb. A micro-loan project brought in a hybrid cassava plant that produces tubers that weigh more than 2 pounds each. Microfinance success stories like this one abound. But what are the real effects of these modest loans? A new study suggests surprising answers.

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First Muhammad Yunus founded the nonprofit Grameen Bank, which lent tiny amounts of money to poor people to start businesses. It appeared to be a revolutionary success and he received the Nobel Peace Prize for his work in 2006.

In 2009, for example, Grameen had 6.4 million active borrowers with an average loan size of $127.

Then came the second guessing. For-profit companies got into the micro-loan business charging high interest rates in order to generate an attractive return for their investors. While nearly all of Grameen's borrowers repaid their loans in full, other lenders didn't do so well. Borrowers began to default. Pressured by their creditors, some in India even committed suicide when they couldn't repay their loans.

In May, the government of Bangladesh forced Mr. Yunus out of his position with the Grameen Bank, saying he had mismanaged the bank. But even before his ouster, Yunus was calling for reforms in microlending, including capping interest rates. "Commercialization has been a terrible wrong turn for microfinance, and it indicates a worrying 'mission drift' in the motivation of those lending to the poor," he said in a New York Times opinion piece in January. "Poverty should be eradicated, not seen as a money-making opportunity."

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