David Roodman, from the Center for Global Development, recently published a book called “Due Dilligence: An Important Inquiry into Microfinance” that is drawing attention, once again, to the validity and impact of microfinance. He summed up the book and his stance recently for Foreign Policy and their “Think Again” section in the article “Think Again: Microfinance”. As a microfinance enthusiast and professional who has been following Mr. Roodman’s blog and the surrounding conversations, I wanted to provide 7 additional thoughts to “Think Again: Microfinance”.
1. The criticisms are focused on microcredit… not microfinance.
Microcredit, using small loans, offering credit or using debt as a lever, to help the poor was birthed in the 70′s and rose to prominence in the early 2000′s. Today microcredit or small loans are just one of a number of financial services aimed to help the poor that includes savings, insurance, health care, money transfers and more. The term for all of these services is microfinance. Roodman and others who have formed and share negative opinions point almost exclusively at credit alone and its impact in the lives of the poor while largely praising tools like savings accounts and innovative insurance products. These products, when delivered through methods like mobile, can help meet the financial demands of the poor. Roodman sums it up nicely in the article by saying, “All financial services help meet this demand, however imperfectly: loans, savings accounts, insurance, money transfers. A mother can pay the doctor for treating her daughter by getting an emergency loan from a friend, depleting savings, persuading her brother in the city to send money, or even — if she is very lucky — using health insurance. That is why the microcredit movement became the microfinance movement and today supports other services along with loans.”
That being said Roodman is correct in pointing out that…
2. Credit is a tool and a lever that can be used for good AND bad.
Haven’t we learned that lesson ourselves in North America over the past few years? Our assumptions that credit in another context our country would suddenly lose its negative or destructive powers is simply irrational. There has been harm done to microcredit clients in the past and as long as loans are being issued some people will suffer under the weight of debt. It is up to us, those of us in the industry, to ensure that the positive examples are many and the negative ones are few. There are a number of things that can and should be done like working to not allow multiple loans to clients, providing business training before they receive their loan, offer support while they have their loan and look for solutions when payments are delayed or defaulted instead of coercing and intimidating paybacks. Much of the negative impact has been caused by…
3. The introduction of “commercial” microfinance organizations.
Microcredit started as a tool to help the poor. Funded and administered by nonprofit and nongovernmental organizations in its early days it is now a burgeoning global industry with immense profits in some cases. It is not hard to make a profit off the poor using loans if you want to as you are providing a potential outlet that may mean life or death to some people. Who among us wouldn’t take on a 5th or 6th loan if we thought it could help us feed our families for another week? With the introduction of “for profit” or “commercial” institutions with a focus on bottom line alone there is no moral safeguard to ensure 5th and 6th loans aren’t given. Or usurious interest rates are not charged.For these reasons we need to realize that…
4. Microfinance should not be provided to any “random” person (therefore randomized trials should not be THE test for its impact)
In Roodman’s article he mentions randomized tests or RCT’s – randomized controlled trials that have shown that “the loans did not reduce poverty.” Leading to his summary statement that, “... the best estimate of the impact of microcredit on poverty is zero.” I am in full agreement that we need to incorporate more rigorous testing to see what works and what does not and RCT’s can play a role in this but the “randomness” of the selection by client or district can be skewed by expertise of the loan recipient or length of operations in that rea by the institution so we must tread carefully with RCT’s. And also…
5. Life change and improvement cannot be easily measured or achieved in 12 – 18 months.
This is the time frame that many of these time trials and tests cover looking for “life change” and impact on “poverty eradication” largely through spending habits and other values that can be measured. What we have seen at Opportunity is it takes clients a couple of years before the life changes start to show up. Life change takes time. The infusion of credit or access is a great start but financial literacy or what to do with it is also hugely important. Balancing finances, paying bills, monitoring inventory, etc. are not, in some cases, things that clients have been doing so they are simply learning these things. Roodman does make a great point that the financial burdens on the poor are immense and they are quite resolute and wise when it comes to this (do read Portfolios of the Poor by Daryl Collins et al) so we should also give the poor the benefit of the doubt that they can and will figure out how to have a “successful” business if given the time and opportunity. All that said, I do agree that…
6. Microfinance is not a sliver bullet or panacea.
I believe job creation and providing opportunities for job creation is the only way to move economies forward. Microfinance does create some very successful small businesses that employ others in their community but for the needle to really move jobs need to be created on a much larger scale. And educated, trained employees need to be available to ably fill those jobs. Microfinance may not be the silver bullet but it has a huge role to play in setting up, as Roodman states, “dynamic institutions that deliver inherently useful services to millions of poor people.” Microfinance has proven that there is immense potential in the poor and we need to find ways to unleash this human capital in ways that educate others, improve health care, create jobs and move economies forward. So in review, I end with a question I often ask myself..
7. If not now then when? If not [microfinance] then [what]?
There are plenty of reasons to not invest in microfinance or ask “Why should we care about microfinance?“. Just as there are reasons to not sponsor a child, or donate to international charities and so on. If we are constantly looking at the downsides, negatives and issues facing the world of international development then we won’t invest our resources (time, talent and treasure) in overcoming those obstacles. We need to be wary of those issues facing us and find ways to avoid or solve them. The response to “microfinance is not perfect” should not be to quit microfinance altogether but work to find ways to move towards perfection. Mr. Roodman and the criticisms he, and others, have laid out against the microfinance industry should make those of us in the industry take notice, re-examine aspects of our businesses, return greater focus to our clients and their needs, measure more rigorously and invest in areas that are proving impact.
Let’s never stop “Thinking Again” when it comes to microfinance.