In the past decade, wealthy nations and international organisations have been captivated by the idea that microfinance initiatives, which provide small loans to the poor to invest in their own businesses, could be the panacea for two of the most tenacious problems of development: alleviating poverty and creating a seedbed for industrialisation. Heartening stories of poor people pulling themselves up by their bootstraps by building viable economic enterprises with loans of $50 to $1,000 appeal to our belief that companies are all started in a garage with nothing but entrepreneurial spirit and angel capital.

Microfinance has been a valuable tool of poverty alleviation and deserves continued support for helping the poor build income-generating micro-enterprises. But microfinance can only accomplish limited objectives since these businesses can rarely graduate beyond subsistence level to become competitive, employment-generating enterprises. Even if they could, the amount of capital microfinance provides is too small, the terms too short and the costs too high to support significant growth in such businesses.