Senior fellow David Roodman was quoted in an article on microfinance in the Financial Times' This is Africa .
From the Article:
Microcredit has been one of the few broadly accepted success stories of modern development, providing both access to finance for poor, unbanked communities and simultaneously creating commercial institutions that were able to sustain themselves, grow and offer yet more access to finance. Its leading proponent, Muhammad Yunus, was awarded a Nobel Peace Prize, and MFIs, backed by a combination of development and commercial finance, sprung up worldwide.
In Andhra Pradesh, this rapid growth may well have been the problem, as the industry expanded faster than regulators, investors and the companies themselves were able to control. As David Roodman, an expert on microfinance at the Center for Global Development in Washington DC, notes, the roots of the “microcredit crunch” have strong parallels with that of the subprime mortgage collapse in the United States. Commercial capital altered the mindsets of once conservative, community-minded enterprises to promote growth in a weak regulatory environment. The debt that was taken on by customers was beyond their ability to repay. Just like in the US, the issue became rapidly politicised.
“Poor people in India, as everywhere, borrow from lots of places. They borrow from their friends, their family, moneylenders,” Mr Roodman explains. “In Andhra Pradesh, many of them also borrowed from a more government-driven programme called the self-help group. And of course, now, microcredit. But among all these forms, it may well be that microcredit, of those creditors, were the most aggressive in collecting...”
However, the specific conditions that caused the recent problems in India seem unlikely to be replicated. “I really think that most countries do not have a microfinance industry that is like India,” explains Steve Rasmussen, a microfinance expert at the Consultative Group to Assist the Poor. Strong political focus – or at least rhetoric – on rural poverty, a cultural distaste for money lenders, the continued influence of socialism and a powerful media lobby all complicate the Indian microfinance space, Mr Rasmussen notes. The presence of purely commercial capital in large volumes is also unique, he says, and African institutions typically attract more funding from international development financiers or socially-minded “impact investors”.
At CGD, David Roodman is quick to note that impact investors – just like purely commercial ones – can create bubbles by pushing for growth. “If we accept that the core problem was fast growth, I think you can have that even in a case when almost all the investors are there as impact investors. If they’re enthusiastic about what they’re doing and they’re all pouring money in, even if there’s no profit motive, you can have a bubble,” he says.