In just 30 years, the microfinance movement has reached 200 million people who had been deemed "unbankable." That's a stunning success. But the narrative that drove this success has implicitly shut the vast majority of the unbanked out of the system. That's why it's time to change the story, and our minds, on how microfinance works, argue FAI's Jonathan Morduch and Timothy Ogden in Foreign Policy. They suggest that the fundamental need of poor households is tools to smooth out volatile and uncertain cash flows, not credit for business investment.
It's not that microfinance doesn't meet the cash flow management needs of the poor at all today. But the language we use matters--it matters because it drives investment, policy, regulation, and take-up. To reach the unbanked half of the world, Morduch and Ogden contend, we need to transform how we think and talk about the financial needs of the poor.