Microcredit was once hailed as a silver bullet for poverty, but randomized evaluations showed only modest impacts on income or business growth overall. The idea behind microcredit is simple: Every business needs capital, yet many in low-income communities can’t access financing. With an estimated US$5.7 trillion financing gap for small businesses worldwide, policymakers and financial service providers hoped to unlock growth by giving small loans to entrepreneurs excluded from traditional banking. But borrowers under original microcredit models weren’t consistently earning more, growing their businesses, or improving their lives. Research suggested a different approach: more tailoring can help. 

Finding and giving larger loans to high-potential entrepreneurs can boost borrowers’ business profits and household income. Microcredit delivers strong results for experienced business owners. Finding those people effectively and efficiently can boost the overall impacts of credit programs. There are several promising ways to find them: Community insights, mobile phone data, and machine learning with psychology data can identify who is most likely to grow their business with credit. Providing high-potential entrepreneurs with different support, like loans that are several times larger than the usual microcredit, or asset-based microfinance, led to growth, too.

Small design tweaks like grace periods or flexible repayment can improve microcredit’s effectiveness. In India, offering a two-month grace period raised recipients’ business profits by 41 percent and household income by 20 percent, though it also increased defaults slightly. Newer studies in South Asia and Latin America show that flexible payment contracts can raise small business profits or household income without necessarily causing defaults to go up, especially by helping experienced borrowers invest when cash flow is uncertain. 

Giving women access to bank accounts or digital payments can help them keep control of their loans and invest more in their own businesses. Traditional microcredit hasn’t consistently increased women’s empowerment, even though most loans target women. Private bank accounts and payment systems help reduce family pressure to share money, and support women’s entrepreneurial success.

Microcredit remains one of the most accessible financial products for low-income entrepreneurs. For some low-income families, access to savings or insurance may be more helpful than credit. Still, many can benefit from evidence-informed, improved microcredit. 

Lenders often face a tradeoff between tailoring loan products to improve outcomes and maintaining scalability and cost-efficiency of credit programs. Research suggests some ways to make microcredit programs more effective, without necessarily increasing default rates. But making these innovations scalable and cost-efficient for lenders will require more testing, investment, and integration into lending practices.

Beware of market saturation and effects of loans on the whole community. Even those who do not borrow may be affected by credit. In areas where many people start similar businesses using loans, competition can lower profits for some firms. Yet credit can also improve business quality and lower prices, benefiting community members who do not borrow. Microcredit programs should take local contexts into consideration when deciding how much credit to extend to local clients, and measure impacts on borrowers and nonborrowers whenever possible.

There is a tradeoff between focusing on higher returns and financial inclusion. When people use loans to smooth income or manage shocks, microcredit may not grow businesses, but can still help families meet basic needs in situations with limited safety nets. Governments and blended finance can help more people access microcredit for household resilience.