Alex Counts is president, CEO and founder of Grameen Foundation, and author of several books, including Small Loans, Big Dreams: How Nobel Prize Winner Muhammad Yunus and Microfinance are Changing the World.
David Roodman, Senior Fellow at the Center for Global Development, the country’s leading think tank on overseas aid and international development, has written Due Diligence: An Impertinent Inquiry into Microfinance, a remarkable book about microfinance. It is, quite simply, the best book I have ever read about microfinance among the many I have gone through. He analyzes the history, track record, recent developments and future of microfinance, and though I do not agree with all of his judgments, I agree with the vast majority of them and admire how he went about deconstructing such a diverse arena of human endeavor.
Most impressive is how he carries the reader through his rigorous thought process. He repeatedly poses important questions, weighs the evidence, assesses whether there is enough information to make a definitive judgment, presents alternative answers and their implications, admits to a degree of uncertainty, and then does his best to provide an answer – all in plain language. The hallmarks of his writing are nuance, detail-based distillations of publicly available information, fairness and dispassionate analysis. If I had to keep one book on my desk for easy access to guide my writings, conversations, analysis and decisions, it would be his. (Due Diligence is the culmination of research and writing process that played out on his blog, which has evolved to become a leading online source for microfinance information and analysis over the past couple of years.)
After some introductory remarks, Roodman sets the modern microfinance movement in a historical context, and does this better than I have ever seen before. His survey also provides some important lessons for those working to expand and improve microfinance today.
The bulk of the book addresses the question “Does microfinance work?” in distinct ways. Does microfinance reduce poverty, does it improve the control the poor have over their lives regardless of whether it leads them to a poverty-free life and, thirdly, has it become a vibrant new industry that strengthens societies by enhancing ecosystems (in the broadest sense) consistent with long-term socio-economic development? I admire how he has given equal weight to the three dimensions of “working” – I strongly agree with him that all are important and the latter two (especially the third) have been comparatively neglected by microfinance advocates and critics alike.
Due Diligence deserves to be read by anyone involved in microfinance, including those who volunteer their time or contribute and/or invest their money. Let me summarize how he answers the main questions he asks, as well as his recommendations, and then distill how I believe someone involved with Grameen Foundation – or any microfinance network or institution – should feel about their past and future involvements, given his judgments and recommendations.
Does Microfinance Reduce Poverty?
Roodman finds the evidence that microfinance reduces poverty on average to be “spotty and muted” based on his standard (a high one) about what constitutes reliable research methods. He rejects as tainted and unreliable more than 100 studies completed over the last few decades, including one that until recently was regarded as the “gold standard,” by Mark Pitt and Shahidur Khandker (one version of which was published in the Journal of Political Economy, a peer-reviewed academic periodical).
Of the three studies that meet his standard, only one is of a reasonably high-performing microfinance institution (which happens to be Spandana, based in southern India). The other two studied organizations that are not even close to being a “best practice” provider of microfinance to the poor. The findings of the Spandana study, which was over a relatively short period of time, are mixed – some findings are quite encouraging, some less so, and some are unclear.
The essence of his answer to whether microfinance reduces poverty, based on this very slim evidence base and other observations, is that it is possible to find correlations between access to microfinance and poverty reduction, but it is impossible to definitively prove causation. To take one example of how these two different standards play out, I’ll highlight a study referenced in the second literature survey commissioned by Grameen Foundation, authored by Professor Kathleen Odell – a survey that Roodman characterized as “great” and “fantastic” in his blog.
In her survey, Odell uncovered and analyzed a study in Bangladesh that showed that, over a three-year period in the mid-2000s, districts where access to microfinance was growing rapidly experienced decreases in poverty that were more than three times as fast as in districts where microfinance was growing slowly. Clearly, access to microfinance and poverty reduction were correlated in this case. However, the study cannot answer the question of how much microfinance contributed to the accelerated poverty reduction (since there were likely many causes), and it cannot rule out the possibility (however remote) that microfinance retarded the poverty reduction in the fast-growing districts compared to what would have happened without it. Roodman ignores the study (and, with not much more than a wave of his hands, many others), while Odell presents the data and its limitations, and shares her view that this research merits attention. In language that is nuanced, fair and hopeful, she writes that “these results gesture toward an association between microfinance access and poverty reduction in Bangladesh.”
That said, Roodman is quick to note that “the absence of proof is not the proof of absence” – which is to say that there is little if anything in the research studies he deems reliable that shows conclusively that microfinance is irrelevant or harmful to the poor. He also takes pains to demonstrate that reliable financial services are at least as important to the poor as they are to the world’s middle and upper classes. Unfortunately, a review of his book by Time magazine took a few quotes out of context and used them to claim that Roodman argued that microfinance was conclusively ineffective in combating poverty. The misleading headline of the Time article was, “Does Microfinancing Really Work? A New Book Says No” – which I imagine gave Roodman some heartburn. (In fact, about that headline he tweeted, “My book does not say that.”)
A Good Start
On the second point – about whether microfinance enhances the poor’s control over their lives and destiny – Roodman finds cases where it does and where it does not (and provides well-reasoned explanations as to why some examples of empowerment or disempowerment may be commonplace). On the positive side, he finds examples of women being “empowered” with respect to their role in their families and the wider society through their access to credit and participation in commerce and solidarity groups. On the negative side, he finds examples of disempowerment, mainly through microfinance leading to women sometimes becoming caught in cycles of over-indebtedness and antagonistic relations with their fellow borrowers. He is unable to determine for sure which trend is more common, though he plausibly suggests that certain microfinance methodologies are more likely to be empowering than others.
Regarding the third point – building a robust, sustainable industry that makes the fabric of society more hospitable to long-term national progress – microfinance scores the best in his view.
His writing surrounding all three of these areas is sound and presented rigorously. His bottom-line message is this: “Overall the great strength and hope of microfinance lies in building self-sufficient institutions that can give billions of poor people an increment of control over their lives.” He adds that the modern microfinance movement, for all of its limitations, has made a good start toward realizing this vision.
Roodman concludes by making some recommendations about how to improve the future performance of microfinance in all three dimensions:
- Microsavings should be promoted as aggressively as microcredit has been over the last 20 years and, where possible, micro-insurance should be provided as well. Poor people use these services to build assets and cope with life’s emergencies.
- Creating credit bureaus and using them to effectively head off microfinance “bubbles” leading to over-indebtedness (not unlike the recent subprime mortgage crisis in the U.S.) should be an industry priority.
- Easy money (i.e., large amounts of loans and equity flowing to MFIs in short periods of time), especially from overseas agencies, can end up spurring unsustainable growth and retard innovation in critical areas such as micro-savings mobilization, and so should be curtailed.
- Information technology, including mobile money (i.e., the ability to make payments over the phone), could be a game-changer if properly leveraged. He believes it could magnify the most positive elements of microfinance while curtailing some of its weaknesses and potential for abuse.
A Cautious Optimism
What should a Grameen Foundation donor or volunteer make of these conclusions? I believe one should feel reasonably confident that past involvement has helped create a better world while also setting the stage for accelerated progress in the future – especially if Grameen Foundation can deliver on its forward-looking programmatic priorities. Let me elaborate.
In terms of whether microfinance on average reduces poverty (which, if true, would suggest that past support of organizations like Grameen Foundation has been helpful), I believe that people should reflect on the entire body of research that has emerged over the last three decades, bearing in mind the limitations of the three different types of studies (experimental, quasi-experimental and non-experimental) and the limitations of specific studies using these methodologies.
My first conclusion is that researchers still have a lot of work to do in terms of properly evaluating what impact quality microfinance services have on poverty over the long term. My second conclusion is that what we do know leads to – at worst – cautious optimism. Perhaps one can also be intuitive about the matter, reasoning that poverty has probably been reduced, or at least been made more tolerable, by providing reliable financial services clearly needed and demanded by the poor. (Regarding how important these services are too the poor, Roodman writes, “it turns out that because poor people live close to the jagged financial edge, they need [financial services] more than rich people.”
It is also worth noting that Pitt and Khandkher continue to defend their positive findings about what microfinance achieved in terms of poverty reduction in Bangladesh, and that the paper Roodman and New York University Professor Jonathan Mordoch have written – arguing that Pitt/Khandker’s key findings are unreliable – has not been published in a peer-reviewed journal yet (though Roodman has expressed a high degree of confidence to me that it will eventually get this endorsement).
In terms of the issue of microfinance promoting greater control by the poor of their finances, Roodman holds up for specific praise the innovations that Grameen Bank rolled out under “Grameen II” in 2002 in Bangladesh. Grameen Foundation, which has long promoted these innovations, published a detailed manual last year – freely available for download, thanks to some of our generous donors – that details how these breakthrough products and policies can be incorporated by any MFI. Beyond this manual, we have helped many individual MFIs, including some of the largest in the world, incorporate some or all these innovations – which include aggressive microsavings mobilization, more flexible and client-friendly credit products, and reduced reliance on peer pressure to ensure repayment – and will continue to do so.
In terms of Roodman’s main recommendations, Grameen Foundation is already on board. We have some bold plans based on past accomplishments and learnings, to ensure they are implemented broadly. To wit:
- GF is in the final year of a three-year, $9.9 million project funded by the Bill and Melinda Gates Foundation to promote micro-savings within leading MFIs in Ethiopia, India and the Philippines. We are on course to meet the project’s aggressive goals. Most hopefully, after strenuous efforts by our team and partners, we have come up with an innovative way to use technology to provide micro-savings services in India while complying with laws that have up until now stymied deposit-taking initiatives by MFIs. This could be a historic breakthrough and we are very excited about it! Furthermore, in my personal capacity, I chair the board of Fonkoze USA, whose Haitian sister organization Fonkoze inaugurated an exciting micro-insurance product last year that covers all of its 60,000 loan clients and could be extended to other MFIs inside Haiti and beyond.
- Grameen Foundation has long been in favor of credit bureaus in microfinance. In fact, we worked with PlaNet Finance, a French development organization, to create one in Morocco a few years before a crisis hit the microfinance sector there. Our effort did not succeed but it arguably laid the foundation for one that is now being created in the wake of the crisis. (Crises tend to concentrate the minds of microfinance leaders – as they do with all leaders! – to adopt necessary reforms and invest in collective problem-solving.) Incidentally, I have just returned from Peru, which has had a credit bureau since at least 1998. It was clear that a credit bureau was not itself sufficient to prevent over-indebtedness, which is emerging in some parts of that country.
- Grameen Foundation has frequently urged MFIs to resist the temptation of taking on excess debt, especially in the form of overseas loans that carry foreign-exchange risk. Our Growth Guarantees program has facilitated nearly $200 million of local-currency borrowing from local financial institutions. The program has never experienced a default, and is still going strong.
- We have also been working to leverage information technology as an enabler of best-practice, high-impact microfinance since 2001, when we launched the Grameen Foundation Technology Center, the first center of excellence of its kind. Later this year, building on some pilots in Kenya and the Philippines, we are launching with some world-class partners what will be the world’s largest incubator for initiatives to leverage the possibilities of mobile money for microfinance and poverty reduction more generally. Stay tuned for an exciting announcement in the weeks ahead!
Overall, microfinance emerges from this book as a solid contributor to socio-economic development for poor nations from a cost/benefit perspective (though it is certainly no panacea). More important, it becomes clear that microfinance has the potential to have a much bigger impact if it can use the years ahead to build on its strengths and address some of its current limitations. (Among those strengths is the network of sustainable organizations already providing microfinance created through relentless innovation and impressive growth over two decades. In Roodman’s words, “More than any other domain of support for the global poor, microfinance comprises spectacular indigenous institutions.”) Grameen Foundation looks forward to being part of that process of building the next phase of microfinance’s evolution along the lines Roodman outlines in his concluding chapters, and we invite our friends around the world to join us in that journey.
Note: I have written a supplemental review of Roodman’s book for microfinance professionals. It is not too technical and can be accessed here.