Covid-19 is causing a microcredit crunch

ACROSS THE developing world vast numbers of people have lost their jobs or seen their incomes fall. Many are being forced to sell their meagre belongings to pay for food. Ideally state handouts would plug the gap in their finances, but in many countries the public coffers are empty. Often people are too poor a credit risk, or live too remotely, to get help from banks. Microcredit, a form of lending tailored to them, should be part of the answer, but the industry is flunking one of its biggest tests.

In the 1990s and 2000s microcredit was one of the next big things in development finance. In 2006 Bangladesh’s Grameen Bank and its founder, Muhammad Yunus, won the Nobel peace prize. The industry’s champions developed a grand ambition. Letting the poor borrow and invest, they argued, would unleash their inner entrepreneur and allow them to earn their way out of poverty. A new model emerged. Instead of demanding collateral, which few poor people have, loan officers judged creditworthiness by assessing expected income. Lending often went to groups of people, who knew and monitored each other better than banks could. That also saved officers time and hassle, creating efficiencies that enabled clients to borrow small sums at affordable rates.

Today the lending portfolios of microfinance institutions (MFIs) are worth a combined...