Five Reasons Why Microfinance Is in Crisis - And Why it Matters (KPLU's Humanosphere/NPR)
David Roodman's interview was featured in a blog post on KPLU's Humanosphere and was also highlighted on NPR's website.
From the Article
David Roodman, an independent analyst of microfinance rather than a practitioner based at the Center for Global Development in Washington D.C., says the primary reason for the current challenges (everyone likes to avoid the word “crisis”) facing microfinance stem from its rapid growth as an industry, this lack of precision as to its intended social good and, lately, just too much money for easy credit.
“We all know why easy credit is bad,” said Roodman. “Whenever credit grows too fast it’s dangerous whether the motive is to be generous or make a profit.”
“In India, they grew too fast and this certainly led to the crisis,” he said. Yunus is partially correct that some engaged in excessive profit-seeking, Roodman said, but he agreed with Rhyne that there is nothing inherently wrong with making a profit if it can be shown to be serving the organization’s clearly defined social purpose.
Unfortunately, all agreed, much remains poorly defined and unclear about microfinance right now. This was be supposed to about reducing poverty.
“But there’s still little rigorous evidence that microcredit reduces poverty,” Roodman said. The most convincing studies that found little evidence, he noted, only ran for 18 months so you could likewise argue they didn’t really disprove these loans can, over a longer time period, help the poor.
Given all of this uncertainty, how can someone who wants to support a microfinance organization know which one will make the best use of your donation?
“Actually, that’s part of the problem right there,” Roodman said.
The idea of microfinance as if it is some sort of grassroots humanitarian initiative is largely an obsolete notion, he said. Sure, you can give $100 to an organization like Kiva.org based on your belief that you are making a personal connection in microfinance.
But, as Roodman has written, this is based on Kiva’s misleading sales pitch appealing to your mistaken idea of how microfinance works and the fact that it is rapidly becoming a major financial industry in its own right.
That’s neither good or bad, he says.
“It’s just that we need to move away from the old idea of microfinance,” Roodman said. “Building a bank with a solid and sustainable portfolio that serves the poor is not nearly as exciting or appealing as donating to Kiva, but that’s what’s needed.”