Over the past couple of years microfinance has gone from being praised as the miracle-cure to poverty globally, to being seen as the source of poverty by maliciously capturing loan takers in loan-addiction. In an attempt to bring some objectivity to this debate David Roodman, a researcher at the Center for Global Development in Washington, recently released his much anticipated book Due Diligence: An impertinent inquiry into microfinance. In it he offers one of the most extensive and ambitious attempts at studying the impact of microfinance to date. He focuses mainly on three questions; does microcredit reduce poverty, does microfinance increase the control poor people have over their lives, and does microfinance contribute to build sustainable economic institutions.
At first glance his findings might leave the reader doubting whether microfinance matters at all. He concludes that the evidence for an impact of microcredit on poverty reduction is weak and he rejects most previous studies on the topic as unreliable and lacking reliable research methods. Furthermore, regarding the issue whether microcredit emancipates poor people, the evidence he finds is inconclusive. He instead argues for focusing on the offering of savings, insurances, and other financial services, but not on microcredit.
These were the points that have been highlighted in many reviews of the book, among these a review in TIME magazine entitled “Does Microfinance Work? A New Book Says No”. However, this title is misleading. Firstly, the book has had to withstand some heavy critique from a number of prominent researchers and practitioners within the microfinance field, such as Grameen Foundation CEO Alex Counts(read the review here), and founder and CEO of FINCA, Rupert Scofield(read the review here). The main criticisms voiced are that Roodman’s standards for what makes a reliable study are set too high as he ignores hundreds of qualitative and quantitative studies made simply by calling them unscientific. Furthermore, his high standard for what makes a good study leaves him with only four studies to examine, one of them conducted in Kenya with only 122 people. This is a weak basis for drawing conclusions regarding an industry of 150 million people. Add to this that of the four studies he does deem good enough, two are made of MFIs that does not apply best practice to their operations.
Secondly, the book does contain a number of points where Roodman himself admits the importance of microfinance. Especially on his third focus, the long-term industry-building capability of microfinance, he does believe in the positive impact of microfinance. Further, Roodman admits that reliable financial services are just as important for poor people in developing countries as for people in developed countries. He also finds some evidence of the ability of microfinance to empower women in respect to their role in their families. Finally, he does admit that: “the absence of proof is not the proof of absence”. Given the number and extent of the studies he actually does take into account in his conclusions, this point is important to keep in mind.
In the final sections of his book, Roodman makes a number of recommendations such as the promotion of microsavings, regulation and monitoring of the microfinance industry limiting the access to “easy” money, and promoting the use of information technology, such as mobile money.
Reflecting upon the book and its findings, it must be mentioned that there does not seem to be a clear distinction between microcredit and microfinance in Roodman’s book, the correlation he investigates is mainly focused on micocredit, while the book claims to be investigating all of microfinance. This distinction must always be made clear as many MFI’s of today offer a full range of services, not one or the other, and any study of the impact of microfinance needs to take this into account.
It is obvious for us at MYC4 that access to finance is a cornerstone in the development of any economy. One need only to imagine how life in developed countries would be if banks suddenly chose to stop offering loans to individuals and businesses. But it is crucial to remember that microfinance is not charity, and should not be. The loans and services offered need to be fair and sustainable, and the process of giving them needs to be supervised. We believe that the way we do business at MYC4 truly fulfills these conditions. It should be mentioned that a majority of our African partners not only focuses on microcredit.
For example, one of our most recent partners, KEEF in Kenya, offers their clients a number of services, such as savings and insurances, all of which contributes to improve the financial infrastructure for many poor people in rural areas (see example in the screenshot above). We also believe and promote the use of new technologies to make this process easier and to include even more people financially in the global economy. However, as in any situation it is important to be self-reflective and constantly question ourselves and the way we do things. This is the only way to improve and to ensure that our work truly contributes to making this world a better place.
Maybe one of the problems in “studying microfinance” is that the concept is used as an umbrella for extremely different situations. Just on the MyC4 platform we see loans ranging from 175 Euro (fully funded) to this one of 16.666 Euro (still needs funding):
https://www.myc4.com/Invest/Loans/View/10132
Almost a factor 100 in difference. It probably does not make sense to try to compare the two borrowers’ situation and the impact that MyC4 has. In the first case it could be the borrower’s only access to a loan, in the second case it could be that the borrower finds MyC4′s conditions (=price) more attractive than a traditional bank loan.
The fact that on MyC4 there are (usually/sometimes) more demands for loans than money to fund them could be taken as a sign that Africans think it helps? Though Roodman would probably reject that as being unscientific
—lars
Markus,
Thank you for what I think is a thoughtful and fair review. I really only snagged on one comment, that “there does not seem to be a clear distinction between microcredit and microfinance.” I think I am pretty careful to use “microcredit” when I mean “microcredit” and “microfinance” when I mean “microfinance.” It is true that microcredit gets more attention in the book, but I think that is appropriate given that it has received more emphasis within the industry and because, since loans can be harmful, it deserves more scrutiny.
–David
It is hard not to find David’s arguments compelling as they are unavoidably intuitive. Indeed David’s arguments are analogous to another David’s, David Ricardo i.e. his point is that microfinance should stick to what it is good at which is building institutions that provide a vital portfolio of financial services to the poor. In Ricardian terms microfinance should stick to its comparative advantage. That makes perfect sense to me and it does not sound like he is dismissing microfinance or microcredit rather he is just proposing greater restraint.
Overall I think David has done a brilliant job of tackling an incredibly esoteric topic and making it clear with neat concise arguments. Plus I really like the analogies used and the philsophical inquisitive way that the book was written in. So thanks David!!
Dear David,
Thank you for taking your time to read my review. I am still a “rookie” in the field and I am happy to get any feedback, good or bad.
Regarding your comment I would just like to add that I think you have a point in that your book in itself makes the distinction. However, I still think many readers will leave the book with the impression that it is microfinance that does not work, exemplified by the TIME article I reference to. This, of course, might be the result of selective reading or misinterpretation. Nevertheless, the confusion of terms is a problem with the whole debate around microfinance and microcredit and it is always important to make sure that the right issue is being scrutinized.
- Markus
[...] couple more reviews of my book appeared in the digital ether this week. One is on the blog of MYC4, which is a European peer-to-peer lending site that typically does loans larger than Kiva. I think [...]
[...] couple more reviews of my book appeared in the digital ether this week. One is on the blog of MYC4, which is a European peer-to-peer lending site that typically does loans larger than Kiva. I think [...]
I would like to leave a quick remark having just finished David’s book in preparation for my thesis on microfinance.
I thought it was an excellent book that made the distinction between microfinance and microcredit exceptionally clear. I find it difficult to accept any such criticism leveled at someone who writes with such clarity and insight, as it is such an elementary mistake to make. I do not believe that any reader after finishing this book should conclude that microfinance or microcredit in its entirety does not work because at no point in David’s book is this suggested. Crudely put, David’s argument is simply better management and realism about microcredit is required because its popular image as the panacea for poverty does not stand up against the evidence. Furthermore, this popular image is actually doing more harm than good contributing to microcredit bubbles and consequent crashes in India, Pakistan, etc. This is in its most basic form the argument that David makes I believe.