Microfinance and poverty reduction: the problematic experience of communal banking in Peru

As a response to many partial and over-simplistic theoretical and empirical studies, this paper presents a more comprehensive analytical framework for assessing the success of microfinance in achieving its dual objective of financial sustainability and poverty reduction. By giving centre stage to the study of group dynamics and using principles of social psychology and imperfect information, the paper argues that microfinance has not only not solved the original problems of information asymmetries between borrowers and lenders but also, in its pursuit of financial sustainability, is destroying the very foundations of these schemes by disrupting the social fabric of communities, creating more poverty and excluding the poorest and most vulnerable from any given group.