David Roodman strikes a balance in “Think Again: Microfinance,” a new article out this week in Foreign Policy. He gets to the bottom of five microcredit myths, which come from both supporters and detractors of microfinance.

Muhammad Yunus, Bangladeshi Economist and founder of the Grameen Bank. Yunus is credited with popularizing the mircrofinance model. Photo: World Economic Forum(Flickr)

The 2011 Global Microcredit Summit convened last week in Spain amid growing concerns that microfinance might not work as advertised.

The Microcredit Summit Campaign promotes microlending to the world’s poorest familes—and especially to poor women--as a means of poverty alleviation. However, there is a growing global debate over whether microfinance actually lifts people out of poverty, as organizations such as The Microcredit Summit Campaign claim.

Critics point to India’s microcredit crisis and call it a myth that everyone desires to be an entrepreneur. As James Surowiecki argued in the New Yorker, “in any successful economy most people aren’t entrepreneurs--they make a living by working for someone else.” For many, a bank loan will be the best route out of poverty, particularly in the agricultural sector where that loan can help families increase their crop yield or add a new cow to the herd. But others are simply looking for a regular paycheck, like the millions of families making their way in urban area. Furthermore, as Interpress News Service reports, many borrowers feel that they have been taken advantage of by microfinance lenders that charge high interest rates for the small loans, without an additional suite of poverty-alleviation services (like providing business training and financial literacy workshops) to make the interest rate worth it.

Globally, microcredit still remains the most widespread tool in poverty alleviation programs, but more people are beginning to point to its weaknesses and suggest reforms. Others suggest a wider variety of programs aimed at increasing poor people’s incomes and job opportunities.

Microgrants serve the same populations as microfinance lenders, but fund projects that engage whole communities rather than individuals who are unlikely to generate jobs and alleviate pressing social problems. The microgrant accomplishes something different than microloans—social sector projects that benefit whole communities rather than single entrepreneurs or individual businesses, as Marcia DeSanctis reported in the Huffington Post. And microgrant projects are proposed and developed by local people who are intimately familiar with the conditions in the communities they live in—not by foreign "experts."

The global microfinance community is going through a transition as more and more researchers conclude that microcredit is not a ‘magic wand’ against poverty.