Two rallying cries propelled the second wave of microfinance. First, in the 1970s it was ‘proved’ that poor people repay their loans; and second, we ‘learned’ that you can lend money to poor people and make money doing it. These statements may motivate people, but they are impoverished reflections of history.
The first wave of microfinance began in 1864, and rapidly spread over much of Europe, delivering both credit and savings in villages the banks would not touch. Reflecting on nearly 50 years of village finance practice, the journalist Henry W. Wolff wrote in 1910 that “… there has been found to be no more regular and more scrupulous repayer than the small man.” (People’s Banks, p. 27)
The private incentives driving this movement were observed by Léon Say, a laissez faire economist and French Minister of Finance. He visited many ‘people’s banks’ and commented that “… all these wonders which I have seen are the wonders of private initiative and decentralization. It is private initiative, it is the decentralization of credit which is the dominating cause of all this progress in wealth.” (People’s Banks, p. 10)
The first wave of microfinance now accounts for about 10% of banking assets in America and 20% in Europe. It deepened financial inclusion, filling in areas that banks could not. Practitioners in the second wave have ignored this history. Why? Einstein did not reject Newton, and we cannot defeat poverty by ignoring such a rich vein of human experience.