Academic journal article International Journal of Economic Development

Microcredit: An Institutional Development Opportunity

Academic journal article International Journal of Economic Development

Microcredit: An Institutional Development Opportunity

Article excerpt


The development of microcredit programs provides an opportunity to strengthen local institutions. Research has focused on the design and management of microcredit programs without enough attention to the institutional environment in which microcredit programs operate. Theory offers a framework for understanding the importance of linkages between microcredit programs and local institutions. These linkages lead to sustainability. Broadly defined, sustainability refers to a net positive flow of benefits to the local community. Microcredit programs embedded in local institutions have the best hope of becoming sustainable.


Microcredit programs provide an opportunity to build sustainable local institutions. While much has been written about the design of microcredit programs and their impact on people's lives, little has been done to place the role of microcredit in an institutional perspective. But there is a body of institutional development theory that can be applied to microcredit (Leonard, 1982; Uphoff, 1986; Esman and Uphoff, 1988; Cernea, 1993; Ostrom, 1993; Howes, 1997). Two theorists, Elinor Ostrom and Norman Uphoff, among others, have contributed substantially to what we know about the role of institutions in effective economic development. Drawing from both economic theory and practical experience, these writers established development policy frameworks useful in designing programs to help the poor. Uphoff examines the advantages of various institutional arrangements in the design of development programs, while Ostrom uses economic concepts to explain the benefits of developing local institutions. While much of the theory has evolved from the study of developing countries, lessons learned apply to microcredit programs in the United States as well.

The conventional wisdom holds that programs to help the poor should be sustainable. But achieving sustainability is a particularly difficult problem in crafting economic development strategies. Microcredit programs can only evolve into sustainable institutions if they are linked, or partnered with local institutions: churches, postsecondary schools, local governments, credit unions, banks, established nonprofit organizations, service organizations, and job training programs. Microcredit programs operating without linkages to local institutions are less likely to be sustainable.

Just how "sustainability" is to be defined is a knotty problem. Broadly defined, sustainability is in direct opposition to quick fix or ad hoc options addressing a particular problem for a short period of time. All too often, quick fix solutions end up embedded in the lengthy catalog of government programs. Most of us have a pretty good idea of what sustainability is not. Sustainability is not achieved if programs do not meet the needs of the people that they are designed to help. Programs are not sustainable if their costs cannot be met over a long period of time. Without a commitment to maintaining, evaluating, and improving programs, sustainability cannot be achieved.

Sustainable programs are well-designed, in terms of operations and institutional relationships, and allowed sufficient time to demonstrate a positive effect. A great deal of research has focused on the design of microcredit programs. The size of the loan, the interest rate, the term, the use of peer group v. individual loans, to name the most prominent issues, occupy a sizeable portion of the literature (Snow and Buss, Forthcoming). The relationship of microcredit programs to existing institutions as an important variable in achieving sustainability has been neglected.

Sustainable Microcredit

Microcredit programs become sustainable institutions when net benefits to the community exceed total costs. Benefits accrue to the community when new businesses are successful and incomes increase. Microcredit fills a niche that banks do not always fill. …

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