Providing microcredit to the impoverished has been celebrated as a way to alleviate poverty, aid entrepreneurs and empower females in low-income areas. However, a new study published by the Center for Economics & Public Policy at UC Irvine finds that changes within the program’s structure have hindered its success in improving quality of life for those it aimed to help.

“The first generation of microcredit organizations offered small loans, primarily for business purposes, to peer groups who guaranteed each other’s repayment,” said Jennifer Muz, UC economics graduate student and study author. “After their success, a second generation of private lenders entered the market, offering loans to individuals with few restrictions on loan use.”

She examined the impact of these second generation loans through an evaluation of Banco Azteca, a private bank in Mexico that offers less restrictive microloans to low-income households.

The loosening of restrictions, she argued, led to money being used in ways that resulted in worse long-term outcomes. Funds were used as emergency loans to cover short-term expenses rather than to purchase assets or invest in small business development, as was the intention of the first generation of microfinance organizations. This limited the possibility that future income streams would help with the loan’s repayment.

“We should be cautious in judging this second generation of microcredit organizations, which are more likely to offer individual liability loans without restriction on loan use, in the same light as the first generation of microcredit organizations, which offer group loans and focus on small business development,” she says. “Modifications in these fundamental features could be undermining the qualities of microcredit that made it attractive in the first place.”

The full study is available online at

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