Quotes of the Day

These days, Yanick Mézile darts between her demanding job as Haiti's new Minister for Women and her wholesale business, where her six employees sell goods to a city ravaged by the devastating earthquake two years ago. On Saturdays, Mézile oversees the work in Port-au-Prince's hectic marketplace, doing a brisk trade in luggage, school supplies and dozens of other items. "Things were really bad after the quake," she says, "but I'd say I am more or less back to where I was before."

In a country still struggling to recover, Mézile is a standout. Yet it could have just as easily gone another way. When Haiti's quake hit in January 2010, killing about 85,000 people and leaving a million homeless, the warehouse where Mézile stored much of her merchandise was crushed. With little means to support her family, Mézile appealed to government officials and aid agencies to help restock her business and was told it would take months. So she turned to Fonkoze, Haiti's biggest microfinance institution, even though its loans were typically about $100, a sliver of what she needed.

Mézile's request was well timed, and she was able to borrow $50,000. Fonkoze had begun rethinking its strategy of lending tiny amounts to many poor people — the long-held tradition for microcredit. "For years everything was about very, very small loans," says Georgette Jean-Louis, who was then Fonkoze's chief operating officer and who now sits on the board of Haiti's central bank. "But we realized that if we were really going to have an impact, we needed to go a step up."

Fonkoze was not alone in its rethinking. As microcredit has ballooned into a global industry, it has undergone a shake-up, with institutions, investors and aid agencies questioning whether the model is meeting its mission of ending poverty by giving small loans to start microbusinesses; after all, more than a billion people still subsist on about $1.25 a day, according to the World Bank.

The emerging model of microfinance is broader and less micro. It's one in which for-profit institutions are making bigger loans and focusing less exclusively on women. The idea is to foster larger, more sustainable enterprises that can create wealth at a faster pace, lifting more people out of dire poverty.

By one metric — expansion — microcredit has been a roaring success. Since 1976, when the Bangladeshi economist Muhammad Yunus opened one of the first modern microcredit institutions — the Grameen Bank — more than 3,600 similar organizations have been established, operating in virtually every corner of the world. Yunus' model won him the 2006 Nobel Peace Prize. In 2010, institutions lent more than $70 billion to nearly 100 million people, most of them women — a ninefold increase from just 11 million people in 2000, according to the Microfinance Information Exchange (MIX), a Washington nonprofit that analyzes data from the industry. While funds still come from the World Bank, the E.U. and the U.S. government, investment has also flooded in from venture philanthropists like eBay founder Pierre Omidyar, who gave $100 million for microcredit in 2005 through his alma mater, Tufts University. And private-equity funds and investment banks like Goldman Sachs and Sequoia Capital have increasingly entered the picture.

The emergence of private-sector investors has drastically changed the face of microcredit. By 2008, more people were borrowing from profit-driven institutions than from nonprofits. In 2010, for-profits had about $54 billion in loans on their books, according to MIX. The typical borrower pays interest at about 30%, giving organizations returns on equity of about 8%, MIX says; a bank typically earns about 6%.

The industry's relative wealth has raised alarms that profit-driven organizations might be gouging the poor. But the reality is more complicated. Nonprofit microcredit institutions are now just as profitable as for-profits, according to MIX. And although the moneyed organizations are a far cry from his original vision, Yunus is as passionate as ever about microcredit, telling TIME in an e-mail, "I don't think it would have spread so rapidly if it did not help poor people."

Microcredit has achieved one major — and profitable — feat: building the first financial-services industry for the people at the bottom of the pyramid, a segment that had previously been unbankable. But it appears to have fallen short of fulfilling some key promises — and might have actually harmed many borrowers too, according to new research. To get a clearer picture of the process, researchers have lately begun using more-precise control trials: picking some people at random to receive microcredit while excluding others, rather than comparing those who already have loans with those who don't, as previous studies did.

Their findings are sobering, suggesting the overblown nature of some longtime industry claims — including Yunus' contention that lending to women instead of their husbands improves education and nutrition. In fact, three recent studies found that microcredit had a negligible impact on the education and health of borrowers, according to the Consultative Group to Assist the Poor, an independent policy and research center in Washington.

Another long-standing industry claim, that microcredit creates jobs, might also have been exaggerated. In Tunisia, Enda Inter-Arabe, a microfinance organization, found that about 1 in 8 microenterprises created a "stable, salaried job," says the group's secretary general, Michael Cracknell. "Most people hire their offspring and spouses." New research suggests similar results with regard to creating income. "Historically, the industry argued that they were creating jobs by microentrepreneurs' becoming small and medium-size enterprises," says Dean Karlan, economics professor at Yale University and founder of Innovations for Poverty Action, which evaluates and runs aid programs. "Now nobody makes that claim anymore."

Sadly, microcredit's ability to accomplish its main mission — ending poverty — has also come under challenge. It occurs only sometimes and under certain circumstances, says David Roodman, a senior fellow at Washington's Center for Global Development, who analyzed the experiences of hundreds of microcredit clients over several years. His findings, published in December in a book titled Due Diligence: An Impertinent Inquiry into Microfinance, highlight one critical deficiency: the industry's preference for lending money to the very poorest people. In fact, U.S. law mandates that half of all microcredit funding from Washington go to the very poor — a mistake, according to Roodman. He says the poorest people tend to use their loans to pay for basics like doctor's bills and school fees rather than to build microenterprises. And with median interest rates of 30%, poor clients rarely build up capital. Says Roodman: "The best estimate we have of the impact of microcredit on poverty among clients is zero."

It was not supposed to be that way. When Yunus began Grameen in the 1970s, he was convinced that millions could escape poverty with loans as small as $25. In a model since replicated across the world, Grameen organized women into five-member groups to jointly assume debts, aiming to break the grip of loan sharks who'd long exploited Bangladesh's deep poverty. With the help of intense peer pressure, the rate of repayment was exceedingly high, and Grameen still claims to have a whopping 95%-to-98% repayment rate. In many microcredit programs, interest rates can top 60% on a six-month loan, largely because these small, short-term loans remain costly to manage, with loan officers traveling across remote areas to meet borrowers. Grameen itself, hugely profitable, became an independent bank in 1983. Its operating income in 2010 exceeded $100 million. No surprise, then, that Grameen is cited as proof of microcredit's giant potential.

To Roodman, saving is a much better antipoverty strategy than borrowing, but many microlenders naturally push borrowing because they depend on loans for income. That conflict of interest has a price. "The more money we lend to microfinance [clients], the more they can say, We don't have to worry about savings," he says.

As microfinance institutions increasingly began to resemble big businesses, a backlash became inevitable. Nicaraguan microlender Banex went into liquidation in 2010 after borrowers revolted against high interest rates. In addition, runaway growth has led to bubbles, which are bound to burst. The most spectacular collapse came in India's Andhra Pradesh state, where about 40 microcredit institutions chased the same customers, who took on multiple loans. Unable to repay debts, a spate of borrowers committed suicide in 2010. The state government — itself heavily invested in microcredit — ordered microcredit institutions to suspend their operations, putting many livelihoods in jeopardy. "Microfinance was a victim of its own success," Roodman says. "For a while everything looked great because there were a lot of new lenders. But of course, it had to end."

Ironically, the scandals could ultimately leave microcredit in better shape. Shaken by the collapse in Andhra Pradesh, the Reserve Bank of India recently imposed an interest-rate cap of 26% on microcredit organizations, a move heavily criticized by the industry, which fears it could stifle profits and tighten credit for poor Indians.

For now, such government curbs are rare. Instead, organizations are overhauling their operations, determined to survive the shakeout. Thanks to the huge proliferation of mobile-phone banking, groups in Kenya, Tanzania, Rwanda, Pakistan and India have begun mobile-payment schemes, drastically reducing their costs. And since the 2008 recession, dozens of organizations have begun to finance themselves by offering savings accounts, seeing them as a more reliable source of capital than foreign investment because saving "tends not to go away during global financial crises," says Larry Reed, director of the nonprofit Microcredit Summit Campaign in Washington.

In Haiti, where hundreds of thousands are still homeless from the 2010 earthquake, Fonkoze last year started the country's first catastrophic-insurance plan, underwritten by Swiss Re and the aid organization Mercy Corps. The plan can allow businesses to get on their feet quickly in the event of another natural disaster.

Curiously, one of the biggest players in the industry remains the organization that began it all: Grameen. Yunus no longer runs it, since his fame apparently made him a threat to Bangladeshi Prime Minister Sheik Hasina Wajed. Last March, she removed him as head of Grameen on the pretext that he was past the legal retirement age. Grameen officials insist the move was politically motivated; Yunus remains on its board. He says his battles back home have not prevented him from traveling the world as microcredit's leading visionary — a role he says still surprises him. "When I started, I was only trying to solve a local problem," Yunus wrote to TIME. "I had no idea one day it would grow to be a nationwide program or a global program, but this is the reality now." It's also the reality that the world isn't going to run out of poor people anytime soon — or, apparently, of institutions willing to lend them money at a price.

• Vivienne Walt
• This $100 billion industry developed critical flaws. But new approaches are recasting its business model