Salon.com on Microfinance: Calves vs. Cows

On Monday, Salon.com's Andrew Leonard posted an enjoyable piece about my new report with Uzma Qureshi, "Microfinance as Business." The purpose of the report is to understand how it is that some microfinance institutions (MFIs) cover costs, attract capital, and scale up--in a phrase, how some manage to succeed commercially. Development success, not commercial success, is of course what matters to most people involved in microfinance, but I found that looking at microfinance as a clever solution to a tough business problem--how to make thousands or millions of small loans to poor people without losing your shirt--gives a lot of insight into why microfinance works in the ways it does.Leonard picks up on a small point we make in the report (and that others have made before us), namely that repayment on microloans begins immediately even when the expected investment, like a calf, will not yield dividends for many months. This is why microcredit tends to go to people who already have other income streams, and gets repaid even when the investments fail. This is one way in which microlenders protect themselves. But Leanord wonders:

Why would the woman buy a calf? Why not buy a full-grown dairy cow, which starts producing milk immediately? Or a few chickens, which start laying eggs right away?

Microcredit appeals to the left as being about empowerment of women and to the right as being about enterprise and self-reliance. Measured against the hopes that are often pinned on it, it is doomed to fall short. BUT if we put aside the hype, and think about financial services as analogous to education, health, roads, telephones, etc.--things we want everyone to gain access to as part of economic development--then I think we can form a more realistic picture of microcredit. In financial services, as elsewhere, it is hard for well-intended outsiders, from the World Bank to the Gates Foundation to Pierre Omidyar, to come in and improve things. It is by no means impossible. But typically the contributions of do-gooders are incremental.What I worry about with microcredit is what I worry about with all credit when it is pushed hard by the supplier. Think of the third world debt crisis, or the trouble that some people get into with credit cards and adjustable-rate mortgages. For some, debt becomes a debt trap. That doesn't mean we should ban credit cards or ARMs. Credit is extremely useful. It makes *my* life better. But the dangers of credit should remind us of the need deploy it with care when targeting poor people, with clear and watchful eyes. It is an empirical question whether, in any given place, it is helping people on average. The available evidence suggests that microfinance sometimes doesn't help people and sometimes does. It does not appear, on average, to transform lives, to end poverty.One thing I like about microcredit is that the leading institutions are substantially self-sufficient. As organizations, they are quite remarkable, employing hundreds or thousands of people at tasks most thought impossible. They operate in difficult circumstances and are relatively accountable to their clients. They are what Bill Easterly calls "searchers." They enrich the institutional fabric of their nations. So even if microcredit does not live up to the hype, if we judge it against modest, realistic expectations (which Easterly implores us to do), it may not be doing so badly.