Microfinance: Excited about Building an Industry?

Have you ever thought about the Grameen Bank as an employer of 24,000 staff? Are you surprised to hear that 57% of bank accounts in Kenya are with Equity Bank, a microfinance bank? And what about ACLEDA, founded in 1993 as an NGO and now one of Cambodia’s leading commercial banks serving both poor and better-off clients?

These are exciting facts, says David Roodman, author of “Due Diligence: An impertinent inquiry into microfinance”, which he presented on February 28 in Paris. In his book, he looks at microfinance from three angles, derived from three different meanings of the word “development”:

• Development as escape from poverty
• Development as freedom
• Development as industry building

Evidence on whether microfinance helps people escape from poverty is inconclusive, and today, more brainpower, money and rigorous approaches are being used to shed light on the question. However, Florent Bédécarrats from CERISE, who commented on David’s book at the event, cautioned us not to hype randomized control trials (RCTs) as the new panacea for development. In spite of adding some credibility to the academic debate, many previous studies – among more than 150 impact evaluations undertaken since 1980 – had shown similar results.

How about microfinance in light of development as freedom? It definitely adds to the limited choices poor households have to manage their money, helping them to absorb shocks, smooth consumption, make investments and reduce their vulnerability. On the other hand, accumulating too much debt can be a trap and thus reduce freedom.

For David, the real strength of microfinance is industry building – creating institutions that bring useful services to poor people who need them. While clients’ businesses rarely revolutionize the economic fabric of their communities, microfinance institutions (MFIs) do. The vacuum left by commercial banks who typically don’t serve the poor has been a fertile ground for thousands of microfinance institutions serving millions of clients. In a recent blog post, David suggests that we can celebrate the emergence of self-sustaining, businesslike, domestic institutions that deliver financial services to the poor. But he also rightly points out that not all growth is development. Unbalanced growth is one of the reasons behind problems in overheated microfinance markets. “If it can’t be done right, it is better to err on the side of doing less”, he says, and that is also true for foreign investors, whom he blames for inflating microcredit bubbles. Nevertheless, deeper reflection is needed to specify what concrete steps microfinance should take to focus on savings, insurance and responsible lending, as the book advocates.

Jérémy Hajdenberg from Investisseurs et Partenaires (I&P) responded that the problem is not simply about too much money, but about how you spend it. Investors have their role to play in investing in countries where capital is too rare or where MFIs cannot mobilize savings, in building strong institutions, helping them transform, and through their governance role, defend the balance between the financial objectives and the social mission of the MFIs.

However, too much money concentrating in single markets remains a problem. So why not a credit bureau for investors, as David suggests in his book? This idea triggered discussion at the event in Paris. What do you think?