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One of my favourite microfinance bloggers 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 who has been following Mr. Roodman’s blog as well as others who have weighed in I wanted to offer a few of my own takes and thoughts. So here we go. Firstly…

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 credit or 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, Batemen and others who have formed and share negative opinions point, almost exclusively, at credit and its impact in the lives of the poor. Each also praise tools like savings accounts and innovative insurance products. These products 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 I believe Roodman is correct in pointing out that…

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…

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. (NOTE: By commercial I do not mean microfinance banks or forma financial institutions, which are the entities that can supply the much needed source of savings and other products, but profit alone focused businesses. There are many great, client focused microfinance “banks” and profit motivated, destructive “small shops”. The size and model of the institution is not what muddies the waters of microfinance but rather the bottom line focus of who owns and runs those institutions.) For these reasons we need to realize that…

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 randomly selecting subjects dooms the outcome from the outset. Any loan officer, venture capitalist or seed funder knows that not all people are entrepreneurs and not all entrepreneurs are created equal. It would be like giving a pair of skates to every American at random and after watching most of them fail determine that American’s can’t play hockey (getting in to some touchy waters here… microfinance and hockey maybe don’t mix). I’d want to see more randomized trials occur with properly selected and capable subjects as well as more of them before I would start stating such bold claims like microcredit has zero impact on poverty. And also…

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 we can measure. 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…

Microfinance is not a sliver bullet or panacea.

I believe job creation is the only way to truly pull economies up out of their current situation and in conjunction with this, educated and trained people need to fill those job positions (the value of education). 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. Microfinance is not the silver bullet no. 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…

If not now then when? If not [microfinance] then [what]?

There are plenty of reasons to not invest in microfinance. Just as there are reasons to not sponsor a child, or donate to international charities and so on and so on. If we are constantly looking at the downsides, negatives and issues facing the world of international development then we won’t truly 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 answer to “microfinance is not perfect” is to quit microfinance altogether. The answer of “microfinance is not perfect” is to find ways to move towards perfection, how can we improve, where do we need to move, where don’t we need to move. That’s why, at the end of the day, I truly am a fan of Mr. Roodman’s and like the criticism’s he, and others, have laid out against the microfinance industry. It should make those of us in the industry take notice, reexamine aspects of our businesses, return greater focus to our clients and their needs, measure more rigorously and invest in areas that are proving impact and so on.

I love the article’s title (probably not in the way the editors do however) as we really do need to continually be thinking again on microfinance.

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