Seven of Nine

Heck of a week.Last Saturday night, I learned that Mark Pitt had released a "response to Roodman and Morduch" that "seeks to correct the substantial damage that their claims have caused to the reputation of microfinance as a means of alleviating poverty." It was a little distracting.On Monday I spoke to faculty and then students at the Harvard Kennedy School's MPA/ID program. And I dined with undergraduates at Dunster House, where I lived for three years. I also strolled around, seeing places I haven't laid eyes on since I graduated 21 years ago. Boy was that powerful. Several times I came around a corner, slammed into a memory, and stopped to stare at things that weren't there. Turns out my memories are geocoded. And most of the memories were happy, having nothing to do with getting educated and everything to do with the woman who is now my wife.Trouble was, yesterday is the day I agreed with Nancy Birdsall as my target for readying all nine chapters for the copy editor. It was obvious by last weekend that I would miss that deadline, but I had mentally recalibrated to aim for seven of nine chapters by April 1.I just posted chapter 7, which appraises microfinance from the viewpoint of development as freedom (.docx and .pdf). It is a challenging chapter because the concepts all have fuzzy boundaries (usury, transparency, etc.) and the evidence is fragmentary. It is also the longest. In the conclusion, I backed off trying to firmly evaluate microfinance from this perspective. Here's the revised peroration. Comments welcome as always:

The development-as-freedom perspective validates the provision of financial services to the poor as a contribution to development. The contribution looks modest next to the goal of eliminating poverty, but if it is commensurate with the costs, if any, to donors and social investors, then it is worthwhile. People need many services to get by—in finance, transportation, education, health. Financial services deserve a place in the portfolio of programs to help the poor.It should be recognized however that on any given day, in any given place, the immediate business interests of the lender conflict with the agency of the borrower. As laid out in chapter 5, business imperatives have driven the microfinance industry toward inflexible services that put the banker’s responsibilities on clients. The poorer the clients, the greater the pressure on costs and the greater this need to impose. To a substantial extent, this trade-off is unavoidable and worth making. Being poor means having access only to lower-quality services, which are often better than nothing. And if by doing business in ways that reduce clients’ autonomy at the margin, MFIs grow to make loans available to more people when they need them, the net benefit for freedom may well be positive in the long run.Fortunately, the short-term trade-off between the lender’s bottom line and the client’s freedom is not an iron law. In fact, MFIs have found many ways to dodge the trade-off, for example by making loan repayment terms more flexible and taking savings. Technologies such as mobile phones and smart cards may open up radical new possibilities in this regard by cutting the cost of individualized service and giving financial institutions better data about clients. In Kenya for example, the phone company behind the M-PESA money transfer service has teamed up with the country’s leading MFI, Equity Bank, to provide savings accounts and loans. Computers score the loan applications based on the client’s cash flow history. That judgment obviates the need for traditional group arrangements and peer pressure. The practical upshot of this chapter’s analysis, in my view, is to embrace microfinance as fundamentally freedom-enhancing while recognizing its potential to restrict freedom and working to maximize its positive potential. Ironically, that means deemphasizing to the extent practical the very model that made the movement so successful. The stripped-down South Asian solidarity group loan appears least intrinsically empowering. Social investors should support experimentation with and scaling up of alternatives.With that conclusion, we now half-understand microfinance’s potential contribution to development. In particular, we have gained a sense of its role in the lives of poor people framed in theory and anchored in data. Completing this inquiry into the contribution of microfinance to development requires returning our gaze once more to the financial institutions on the other side of the teller window. We need to view microfinance as a living industry.