Last Chapter Revised!

Yay. I have at last finished the rewriting pass on the book, having just posted chapter 9 (.docx and .pdf).The major additions were material on regulation, based on the fantastic CGAP review of the issues by Bob Christen, Tim Lyman, and Rich Rosenberg; and material on the controversial Nigerian MFI LAPO, based primarily on the sharp work of GiveWell, as a way of highlighting concerns about the tensions in the microfinance investment industry between pressure to disburse and social performance.I am feeling more strongly that the global microfinance investment industry, because of its scale, is throwing microfinance out of kilter. That criticism applies at least as much to public investors as private ones, so it doesn't work to blame the profit motive. We've had crises recently in Bosnia, Morocco, Pakistan, India, Nicaragua... I've just been learning about how Nigeria blew up in its own strange way (with domestic factors mainly to blame, but some involvement of foreign investors). Perhaps the crisis in India is the needed corrective. But I will feel better if the investors were forthrightly acknowledging that sometimes they are part of the problem.Here is the revised peroration:

I began this book with two opposing stories. One was about Murshida, who climbed out of poverty on a ladder of microcredit The other was about Razia, who slipped down a rung after taking loans. I did so 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 thinking in stories, but to test stories, to inform us about which are representative. That is as close as we can come to the truth about something as diverse as the microfinance experiences of 150 million people.Though I have examined services other than credit and notions of success other than escape from poverty, there is no denying that the grain of sand that seeded the imperfect pearl of this book is the common belief 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 is those who see it in black and white, whatever side they choose, who most stir my ire. So I could never dismiss traditional microcredit as nothing more than hype. But it is hard for me to defend it as a great way for aid agencies, philanthropists, and social investors to help poor people. Consider:

• While microcredit gives people a new option to manage their complex and unpredictable financial lives and helps some build businesses, it also leaves some worse off and has a potentially addictive character. On the creditor side, it often pays to keep lending to clients in a continual cycle. On the borrower side, the need to pay off one loan often leads people to take out another. Overlending and overborrowing becomes more likely as creditors multiply and compete, often by lending to the same clients.
• Although good studies show microsavings and microcredit stimulating microenterprise, those on microcredit have so far found no impact on poverty.
• Qualitative studies by people who immersed themselves in a village for a month or year corroborate this ambivalence. Some women find liberation in doing financial business in public. Others find entrapment in the peer pressure.
• Enthusiastic flows of money into lending are inherently dangerous. They can reward overly-rapid lending and, in competitive markets, nearly force it through a vicious cycle in which each lender strives to keep up with its peers. The microfinance movement has compiled a rather long list of disasters in recent years: Bosnia, India, Morocco, Nicaragua, Nigeria, Pakistan. Probably none will be fatal, but together they point to a deep problem of instability.

Credit is undoubtedly useful in moderation, as a way for people to discipline themselves into setting aside money for big purchases. It becomes dangerous when it is pushed too hard. And it is here that the mythology that has grown up around microfinance is not just deceptive but destructive. How much support for microcredit is too much? Incomplete 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 microcredit, I say no. Seed money for start-up MFIs is one thing; large-scale, submarket financing of microcredit portfolios is another. Indeed, the history of microfinance reviewed in chapter 4 shows that small amounts of aid, intelligently placed were invaluable to the microfinance movement. The Ford Foundation, and the U.N. International Fund for Agricultural Development (IFAD) gave crucial early support to the Grameen project. The U.S. Agency for International Development worked behind the scenes in Indonesia and Bolivia, as did Germany’s Gesellschaft für Technische Zusammenarbeit in the India on the self-help group program. Since such flows currently account for the majority of money going into microfinance, it follows that finance for microfinance should go down. The priority should not be building giant machines for indebting the poor.The priority should be to create balanced, self-sufficient institutions that offer credit in moderation, that help people save and move money safely, and that push the envelope of practicality on insurance. While such a path may superficially contradict the credit-centered mythology advanced by some of the founders of microfinance, it is in fact the truest realization of their vision: businesses serving the bottom of the pyramid, giving millions of poor people more leverage over their difficult financial circumstances. Nimble social investors have helped build such institutions with money and advice, and can do more. But the scale of funding needed is an order of magnitude less than what is seen today in microcredit. The U.K. government helped bring M-PESA into being with a grant of just £1 million.At the end of day, I cannot dismiss Razia’s story. Nor can I dismiss the story of Eva Yanet Hernández Caballero, who Compartamos featured on its web site until her knitting business unraveled and she began missing payments on her loans with triple-digit interest rates.[1] 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.”[2] I cannot dismiss the story of families in Andhra Pradesh who lost wives or fathers to suicide after falling into debt—debt that included microcredit.[3] I cannot dismiss these stories, that is, as immaterial to the morality of favoring 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 what is good in 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, especially into microsavings. If savings, money transfers, and insurance can also be done through institutional forms less associated with traditional microcredit, let them be done so.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 master 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. And building businesses and industries to meet their demand is in fact a contribution to transformational development, however incremental. As it did so often over the last third of a century, judicious outside support can catalyze the innovations needed, innovations that can help all the world’s poor manage their wealth.

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[1] Epstein and Smith (2007).[2] Karim (2008), 23. See chapter 7.[3] E.g., see Biswas (2010) and Lee and David (2010).