In the 1970s, a Bangladeshi economics professor started lending tiny amounts—sometimes just $27—to poor women in rural villages. Muhammad Yunus's experiment would spawn a global industry worth over $100 billion, win him a Nobel Peace Prize, and promise to end poverty through entrepreneurship. Microfinance became development's favorite success story, offering what seemed like an elegant solution: give poor people small loans, watch them build businesses, and poverty would melt away.

Four decades later, that simple narrative has shattered. Stories of farmer suicides in India, debt spirals in Nicaragua, and predatory lending in South Africa have replaced the triumphant tales of village entrepreneurs. Yet microfinance hasn't disappeared—it's evolved. Understanding what went wrong and what still works reveals crucial lessons about poverty, markets, and the complex reality of helping people build better lives.

The logic seemed unassailable. Poor people remained poor not because they lacked initiative or ideas, but because they lacked capital. Traditional banks wouldn't lend $50 to someone without collateral, but that $50 could buy a sewing machine, some chickens, or inventory for a small shop. Give them access to credit, the theory went, and natural entrepreneurship would flourish. Early results from Bangladesh seemed miraculous—repayment rates above 95%, women gaining independence, children going to school.

This narrative captured imaginations worldwide. The poor weren't charity cases; they were entrepreneurs in waiting. Microfinance institutions (MFIs) sprouted from Bolivia to Bosnia, backed by everyone from the World Bank to Silicon Valley. By 2010, over 200 million people had received microloans. Politicians loved it because it promised market-based solutions. Donors loved it because loans could be recycled. The poor, we were told, loved it because it respected their dignity.

But this narrative rested on a shaky assumption: that most poor people wanted to be entrepreneurs. Research reveals that globally, the vast majority of people—rich or poor—prefer stable wages to running businesses. When researchers actually asked microcredit recipients in India what they wanted, most said 'a government job.' The entrepreneurship story was more about our fantasies than their realities.

As microfinance scaled, something dark emerged. Competition between MFIs led to aggressive expansion. Loan officers, paid by volume, pushed multiple loans on single borrowers. Interest rates climbed—sometimes exceeding 100% annually when fees were included. The weekly group meetings that once provided support became shame circles where defaulters faced public humiliation. In Andhra Pradesh, India, over 200 farmers committed suicide in 2010, with families blaming microcredit debt.

The problem wasn't just predatory lenders—it was the model itself. Most microbusinesses barely generate profit. A woman selling vegetables might make $2 daily profit, but her $100 loan at 30% interest requires $2.50 weekly payments. One sick child, one stolen chicken, one week of poor sales, and she's borrowing from another MFI to pay the first. Microfinance had discovered what credit card companies knew all along: the poor pay the highest rates and are the most profitable customers.

Studies revealed an uncomfortable truth: most microloans don't fund businesses at all. People use them for consumption smoothing—buying food during lean months, paying medical bills, covering school fees. This isn't entrepreneurship; it's survival. And charging 30-50% interest for survival loans isn't development; it's exploitation. The sector faced a reckoning: was microfinance helping people climb out of poverty or digging the hole deeper?

While the credit bubble inflated and burst, quieter innovations showed real promise. Researchers discovered that poor households didn't primarily need loans—they needed safe places to save, ways to transfer money, and insurance against disasters. A woman in Kenya doesn't need a loan to start a business; she needs a secure way to save $2 daily for her daughter's school fees. A construction worker in India needs accident insurance more than credit for a shop he'll never open.

Mobile money revolutionized this landscape. M-Pesa in Kenya let people store and transfer money via simple phones, no bank needed. Suddenly, urban workers could send money home instantly and cheaply. Rural families could save without hiding cash under mattresses. During droughts, relatives could provide support immediately. This wasn't about making everyone entrepreneurs—it was about making everyone financially included. Studies show mobile money access alone lifted 2% of Kenyan households out of extreme poverty.

Modern microfinance increasingly looks like this: digital savings accounts that can't be raided by demanding relatives, micro-insurance that pays out when rainfall fails, commitment savings products that help people reach goals. Some MFIs now offer 'graduation programs'—combining small asset transfers, training, coaching, and savings support. These holistic approaches show sustained impacts where credit-only programs failed. The lesson? Financial services should fit into poor people's lives, not reshape them.

Microfinance's journey from miracle to controversy to evolution mirrors development economics itself. We started with elegant theories and simple solutions, crashed into complex realities, and gradually learned humility. The poor don't need us to turn them into entrepreneurs—they need tools that work within their actual lives, cushioning volatility and enabling gradual progress.

Today's best programs combine multiple services, respect local contexts, and measure success by resilience built, not just loans dispensed. The dream of ending poverty through credit alone is dead. But the broader vision—that financial tools can help poor people build better lives—survives, chastened but wiser. Sometimes development's greatest successes come from admitting what we got wrong.