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My guest on this week’s Wonkcast is David Roodman, senior fellow and author of the long-awaited book, Due Diligence: An Impertinent Inquiry into Microfinance. After more than three years of unprecedented investigation into the movement, David was able to cut through the hype and come to understand the capabilities and limitations of microfinance in ending poverty.
David explains that while the microfinance movement has built thriving industries that deliver valuable services to millions of poor people, he hopes his book will help the industry shift away from its traditional emphasis on credit to other services focused on savings, insurance, and new technology.
As the hype grew, microfinance supporters and investors became enamored with the idea of being something like personal bankers to impoverished women. I tell David about a thirty-something Californian man I had met who had little interest in development but was nonetheless eager to lend a small amount of money to a microfinance organization so that a woman could buy a chicken, harvest eggs, and then sell the chicks for a profit.
“It really is amazing. I don’t think Muhammad Yunus, the man who helped create this movement, had this story in mind,” says David. “I think he was just incrementally trying to find ways to help people. He also learned how to describe and pitch it to potential supporters. The movement discovered how to best describe itself in a way that excited people.”
Academics began to test the idea of microfinance as the miracle cure in 2009 by conducting randomized controlled trials (RCTs). These trials produced results that challenged the notion that microcredit can lift people out of poverty. It was around this time that David began unpacking the studies in his Microfinance Open Book Blog where he shared questions, discoveries, and draft chapters with the public.
“Writing my book in this way had a lot of effects,” explains David. “It was an incremental exploration. It gave me a sense of audience, and it’s allowed me to explore a different voice—a more informal, humble voice. I feel like when I’m writing the blog I’m writing a letter, and when I write the book I’m giving a lecture. I actually prefer the posture of the blog, and that influenced the book.”
In one of David’s most popular blog posts, Kiva is Not Quite What It Seems, he raised questions about the way the popular website marketed itself. Kiva allowed users to pick the person they wanted to lend money to, which provided a strong person-to-person connection. However, David discovered that lenders’ money did not actually go to the person they believed it went to, so a sort of false illusion was created.
“What I was interested in was the example of a larger theme in microfinance—the difference between rhetoric and reality, and perceptions being exaggerated,” explains David. “Sometimes you have to sell things to raise money for a good cause, but on the other hand it’s always a bit disturbing when you have to distort the truth. I was interested in that tension.”
David’s book delves in much further and measures microfinance’s success against three definitions of development—as escape from poverty, as freedom, and as industry building.
On escape from poverty, microfinance does not perform so well; David says that several randomized studies show that microfinance does not lift people out of poverty, but he cautions that we still need to watch for longer-term studies. On development as freedom, microfinance’s track record depends on circumstances. In some cases, women take pride in going to public meetings and conducting business in public, but in others, women have stolen the belongings of others to pay off their loans—the dark side of peer support is peer pressure. David finds the greatest strength of microfinance in development as industry building, as it has helped build competitive and innovative institutions that serve millions.
“I can’t think of many other successes in foreign aid where outsiders have come in and created such dynamic self-sustaining institutions,” he says.
We go on to discuss David’s list of recommendations for donors, social investors, and microfinance lenders, and he explains why extending credit to the poorest should be avoided.
“It’s common sense that credit is dangerous,” explains David. “You don’t want to be pushing it onto people whose capacity to manage it well is in doubt.”
David also recommends investing less in microcredit for fear of bubbles, favoring the development of safer services such as savings, insurance, and money transfers, and—lastly—looking to new technologies to revolutionize financial services to the poor.
I end the Wonkcast with well-deserved congratulations for David and an appeal to listeners to take advantage of the pre-release discount. To learn even more about David Roodman’s book, and to hear from the author himself, RSVP for the book launch on January 5th here at CGD.
If you have iTunes, you can subscribe to get new episodes delivered straight to your computer every week. My thanks to Alexandra Gordon for her production assistance on the Wonkcast recording and for assistance in drafting this blog post.