Hurrah, the Last/From Millstone to Milestone

I feel an inward tremor as I type this. I have just posted the last chapter (revised version, June 22: .docx and .pdf). I began writing almost two years ago, never thinking it would take this long. This blog has been wonderful reason for the delay. It feels very fine to have reached the end of the draft. The labor is far from over. There is much editing to do. But today the completion of the draft has gone from millstone around my neck to milestone.I am happy with the prose of this draft. I suspect however that the logic and conclusions could be greatly be improved by feedback. Daniel, Tim, Alex, other loyal critics, and newcomers too: I hope you will dig in.Note: There's one hole toward the end for a paragraph about M-PESA in Kenya, which I will visit next week. Stay tuned.Here's the conclusion:

I began this book with two opposing stories, one of Murhsida who climbed out of poverty on a ladder of microcredit, one of Eva Yanet Hernández Caballero who, if anything, slipped down a rung. This I did to expose how storytelling forms the public image of microfinance, and to make the case for serious research. We need good research not to move beyond narrative knowledge, but to test it, to inform us about which stories are most representative. That is as close as we can come to the truth about something as diverse as the microfinance experiences of 100 million people.Though this book examines services other than credit and notions of success other than proven poverty reduction, there is no denying that the grain of sand that seeded this imperfect pearl is the impression that microcredit cuts poverty. As a child of bitterly divorced parents, it goes against my nature to choose sides. I see the world in grays and it those who see it in black and white, whether they agree with me or not, who most stir my ire. I cannot dismiss traditional microcredit. But it is hard for me to defend it as a strategy for helping poor people. Consider:

• Credible studies have so far shown no average impact on poverty. More high-quality research is needed and is underway, including a three-year follow-up on the randomized trial in Hyderabad, India.
• Common sense says that microcredit gives people a new option to manage their complex and unpredictable financial lives and helps some build businesses. But common sense also says that it leaves some worse off and has an addictive character, with the need to pay off one loan feeding the need for the next. Overborrowing is more likely where several creditors are competing and growing fast.
• Careful qualitative studies, done by people who immersed themselves in a village for a month or a year, corroborate this ambivalent reading. Some women find liberation in doing financial business in public. Others find entrapment in the peer pressure.
• Perhaps the best that can be said for microcredit is that good things can be built on top of it. Pro Mujer (“For Woman”) in Peru uses the convening power of credit groups to provide basic healthcare and business training. BancoSol in Bolivia began with credit and expanded to savings.

If the best that can be said for microcredit, pending further study, is that it makes other, good things possible, is it right to build these things on such a questionable foundation? Uncertain evidence cannot support a certain answer. But choices today must be made on the evidence available today. To the practical question of whether social investors ought to keep pouring billions of dollars per year into microfinance—mostly microcredit—I say no. Finance for microfinance ought to go down, not up. The priority should not be building giant machines for indebting the poor.At the end of day, I cannot dismiss the story of Eva, the one Compartamos featured on its web site until her business unraveled and she began missing payments on her 100-percent-interest loan. I cannot dismiss the story of families in northwest Bangladesh who “starve themselves or just take rice mixed with water” in the two days before each weekly meeting in order to scrimp for the installment. I cannot dismiss the story of Jahanara, the microcredit borrower and moneylender who boasted “that she had broken many houses when members could not pay.” And I cannot dismiss the report that Sufiyah Begum, Muhammad Yunus’s first borrower, died a beggar, as poor as Yunus found her. I cannot dismiss these stories as so atypical as to be immaterial to the morality of pushing credit.But neither can I dismiss the manifest hunger of poor people for reliable tools to manage their money; nor the extraordinary success of some microfinance institutions in creating and serving this market over the last third of a century. The best way forward is to celebrate this achievement and build on it. The success of the microfinance movement to date has proven the viability of businesslike provision of financial services to the poor. The need now is to diversify more aggressively beyond microcredit—indeed to deemphasize it as a line of business to the extent that it dulls the appetite for deposits. Microfinance institutions such as the ProCredit banks have shown how to balance credit and savings in countries as poor as the Democratic Republic of Congo. But if savings, money transfers, and insurance can also be done through institutional forms less associated with traditional microcredit—through member-run village savings and loan associations (VSLAs) or their formal cousins the credit unions, or national post offices, or commercial banks, or mobile phone operators—let them be done so. At this writing the VSLAs appear to be particularly promising for assisting the poorest of the poor, such as the millet farmers in the dry lands of Niger. For people wealthy enough to own mobile phones—half the population of the developing world and counting—high technology may forge the link to the formal financial system. Among supporters of financial services for the poor, none possesses more financial muscle and autonomy than the Gates Foundation; not by chance is it working along these lines. Over the next third of a century, a global industry could arise to deliver to a billion or more poor people the tools they need to gain a modicum of mastery over the vicissitudes of their financial lives. Better banking will no more end the poverty than more clinics a more schools or more roads ever have. Most poverty reduction has arisen from profound processes of economic transformation nearly impossible to push from the outside. But the poor rightly value financial services, enough that they are often willing to pay the costs of delivery. There is good reason to hope, then that, just as a touch of funding did from the U.K. government did in Kenya, modest outside support can catalyze the growth of a giant global industry serving the poor. If this vision is made real, that will be a mighty achievement. And it will cast the last third of a century as an essential chapter in humanity’s ongoing discovery of ways to help the poor manage their wealth.