By Anindya Shubhra Banerjee, Ismiat Zerin, Saifa Islam Dipty
Bangladesh gave the world microcredit, and for decades it was celebrated as a miracle. The idea was seductively simple: provide small loans to poor women excluded from banking, and they would create microbusinesses that could pull their families out of poverty. The narrative was powerful enough to win Muhammad Yunus and Grameen Bank the Nobel Peace Prize in 2006. Today, the legacy of that innovation is enormous. According to the Microcredit Regulatory Authority, around 30 million people in Bangladesh are enrolled as borrowers, while more than 750 licensed microfinance institutions (MFIs) serve over 35 million clients nationwide. Grameen Bank alone has more than 9.5 million members, 97 percent of them women, covering nearly 94 percent of the country’s villages. Annual loan disbursements in the sector amount to more than BDT 1.6 trillion, and repayment rates officially hover above 95 percent. These figures make microcredit one of Bangladesh’s most ambitious social experiments, and for many households, it has indeed meant the difference between survival and collapse.
Yet beneath the numbers, the miracle narrative is fraying. A growing body of research shows that microcredit is effective at smoothing consumption but limited at generating sustained income growth. Randomized controlled trials conducted by the Abdul Latif Jameel Poverty Action Lab (J-PAL) and others consistently show that while access to microcredit increases household resilience, it rarely enables upward mobility. A loan that helps finance a cow, a tea stall, or a sewing machine provides some stability, but it does not create the conditions for scaling into larger, wealth-creating enterprises. A tailoring shop remains a tailoring shop; a tea stall rarely grows into a restaurant. The structural limitations of the model mean that most borrowers hover around subsistence, never achieving the income jumps necessary for permanent poverty exits.
At the same time, repayment fatigue is a mounting problem. Many rural households juggle loans from multiple institutions at once. A BRAC Institute of Governance and Development study in 2022 found that nearly half of rural borrowers held three or more active loans. Weekly repayment schedules—originally designed to enforce discipline and reduce moral hazard—often pressure households into borrowing from one lender to service another. The treadmill of debt keeps institutions reporting near-perfect repayment rates, but for borrowers, it means constant financial stress. The repayment structure also discourages riskier but potentially more profitable investments, since households cannot afford to delay cash flow to pursue ventures with longer gestation periods.
The exclusion of the ultra-poor is perhaps the starkest contradiction of all. Microcredit was promoted as a tool for the “poorest of the poor,” but in practice, MFIs often avoid households with no assets or reliable income. This is rational behavior from a lender’s standpoint: borrowers without collateral or networks are far riskier. But it undermines the moral claim of microfinance. Recognizing this gap, BRAC pioneered its Targeting the Ultra Poor (TUP) programme, which combines asset transfers, training, and coaching. Evaluations of TUP show durable impacts: households diversify their income, increase food security, and accumulate assets. In cost-benefit terms, the programme delivers more than three times the benefits relative to costs, far outperforming traditional microcredit. The lesson is clear. Credit cannot substitute for a safety net. For the poorest, debt is a burden, not a solution.
From a development economics perspective, these outcomes are entirely predictable. Credit markets fail in poor economies because of asymmetric information: lenders cannot distinguish between safe and risky borrowers, and borrowers may shirk or default. Microcredit used group liability, peer pressure, and rigid repayment schedules to partially solve these problems. This explains its early success. But the tools that enabled rapid expansion are also what limit the model’s potential today. Weekly repayment prevents long-term investment; peer pressure excludes the most vulnerable; and small loan sizes cap ambitions at subsistence. Microcredit was always designed to manage poverty, not to create transformative growth. What seemed like a revolution was, in hindsight, a stopgap.
The question, then, is what comes next. Abandoning microfinance altogether would be a mistake—millions still depend on it. But clinging to the old model is equally dangerous. Bangladesh must evolve the microfinance revolution. One path is microenterprise finance. This means larger, longer-term loans aimed at businesses with the potential to scale. Supporting a tailoring shop to expand into a proper subcontracting unit, or a dairy farmer to supply regional markets, requires more capital, longer repayment horizons, and technical assistance. Without that, microcredit remains trapped at the level of petty trade and self-employment.
A second path is digital finance integration. Platforms like bKash and Nagad already handle billions of takas in transactions daily, transforming the way households send and receive money. These platforms could also revolutionize credit. Digital repayment systems could reduce transaction costs, lower reliance on weekly meetings, and build transparent borrower histories. Smart use of mobile data could help MFIs identify creditworthy clients, reduce overlapping loans, and design repayment schedules that match actual income flows. With proper regulation, digital finance could make microcredit more efficient, scalable, and less exploitative.
A third priority is linking finance with skills and market access. Loans alone are blunt instruments. Without training in entrepreneurship, access to supply chains, and stable market linkages, borrowers remain confined to low-return activities. BRAC’s graduation model, which combines assets with training and coaching, demonstrates that bundling finance with capacity building yields far stronger results than credit alone. If replicated at scale, such integration could transform microfinance from a survival tool into a pathway for upward mobility.
Finally, the ultra-poor must be supported with social protection beneath the credit ladder. Cash transfers, public works, or health insurance may be more appropriate for households on the brink of destitution. Once survival is secured, credit can serve as an enabler rather than a trap. The irony is that microcredit, once seen as a standalone cure, is most effective when embedded within a broader ecosystem of protection and opportunity. Development economics tells us that poverty traps are multidimensional; breaking them requires more than loans.
This agenda is urgent because Bangladesh faces a turning point. With LDC graduation scheduled for 2026, the country will lose preferential trade terms and concessional financing. The economy will have to rely increasingly on domestic innovation, productivity, and resilience. Microcredit in its current form, managing poverty rather than reducing it, will not be enough. Bangladesh once gave the world a bold idea that reshaped development policy. If we fail to adapt, that idea will ossify into nostalgia. If we succeed, we can once again lead the world in reimagining how finance serves the poor. The choice before us is stark: cling to a fading myth, or build a new, evidence-based revolution.
The writers are MSS students of Development Economics at East West University.
