I’ve given many talks on my book in the last two months---in Washington, Seattle, San Francisco, London, Oxford, and (in a few hours) Paris. Predictably, just as on this blog, it’s been stimulating to get feedback from the audience. Questioners have forced me to think about how I say what I mean, and even what I mean.
The question that has for me provoked the most thought was first voiced at the book launch. It was, basically, “You’re telling me microcredit doesn’t really reduce poverty, and group microcredit may not even empower women. Then you expect me to get excited about building institutions that deliver it to lots of people?” In our debate, Milford Bateman said something similar.
At the book launch, I’m pretty sure now that it was this guy who said it:
A few weeks ago, I attended a lecture about microfinance, and got sucker-punched. Expecting to hear a litany of pros and cons about the business, and an exploration of good and bad models, I was instead greeted with a knockout punch: Microfinance doesn't work, at least not in the way we think it does.
Randall Kempner goes on, in a new blog post for the Harvard Business Review:
I left the discussion feeling defeated and fearful.
For starters, if Roodman is right, I'm a liar, or at least, a misinformed advocate of microfinance. For years, I've been saying that microfinance has lifted millions of families out of poverty, but we need a thriving small and growing business sector in order to lift countries out of poverty. You can't build sustainable national economic prosperity based on tiny firms. It seems like the first part of that isn't true.
Kempner concludes with the excellent news that his organization, the Aspen Network of Development Entrepreneurs, which invests in small companies rather than micro ones, is acting on one lesson from the microfinance saga: the importance of doing rigorous evaluation.
Others have asked Kempner’s question since the launch. What do I say? That if your belief was that microcredit reliably lifts people out of poverty and empowers women, then, yes, my conclusions should disappoint you. But I think it is also inescapable that financial services are inherently useful, especially for poor people, and that institutions, industries, indeed a movement, to bring such services to poor people are broadly for the good. There is not a case for heavy subsidy of these activities; I think less money should go into microcredit. But donors and philanthropists who played a role in the early days of such successes as BRI in Indonesia, Equity Bank in Kenya, and BancoSol in Bolivia, can be proud.
Funders in the area of financial services for the poor should not see themselves as buying the commodity poverty-reduction-through-microcredit. It’s not something you can buy in bulk. They should instead be planting seeds and helping them grow. They should be industry cultivators. Then their initial investments will be leveraged many times over, bringing modest benefits to millions. Service offering will diversify, become more flexible, extend beyond credit. I wouldn't say that aid agencies and social investors should never be directly finance microlending (as oppose to training and other start-up costs of new institutions). But such investment, when on below-market terms, should come with a clear phase-out plan. That's a standard idea when it comes to supporting infant industries. And, since we're talking about loans, with their peculiar propensity to form bubbles, investors must be on constant alert for overheating.
So, for Kempner, I would offer one other lesson from microfinance, in the form of a question: Are you working to build self-sustaining, businesslike, domestic institutions to deliver the financial services you favor? This, in my view, is one route to success.