Questioning the popular notion that microfinance helps lift the poor out of poverty, a new study claims that it does not foster as much economic development and entrepreneurship as was previously thought. In the study prepared for Cato Institute, nonpartisan research foundation, author Thomas Dichter, who is analysing international development since 1964, argues that micro-loans do not help noticeably either in economic growth or entrepreneurship. Microfinance provides small loans to the poor for investment in small businesses which, in turn, are expected to lead to economic growth and reducing poverty. But Dichter distinguishes between subsistence activities and real business, asserting that microfinance is not, in fact, used for business purposes at all.

The average poor person in the past (and today) is not an entrepreneur, and when he or she has access to credit it is largely for consumption or cash flow smoothing, he said in the study A Second Look at Microfinance: The Sequence of Growth and Credit in Economic History, released on February, 16. The average entrepreneur prefers to start with informal credit or savings rather than formal credit, he added. The credit for the masses, the author said, has been in the past, and even today, is largely for and about consumption and the credit for real business is not for or about consumption, nor does it need to be accessible to everybody, he said. The history of economic development shows that growth comes first and then mass credit develops and even then, the credit is for consumption, not investment, he said.