Rich Rosenberg on Microcredit's Impacts

Rich Rosenberg of CGAP has just published a fine essay on how to think about the impacts of microcredit. It is clearly part of the microfinance world's effort to digest the impertinent arrival of randomized trials. Like Beth Rhyne, Rich is a longtime, thoughtful participant in the business. In fact they worked together in assisting the birth of BancoSol in Bolivia. And like Beth, much of what he has to say he probably could have told you ten years ago. But the challenge from the RCTs gives his ideas currency. You should read the piece.Rich first touches on themes familiar to followers of this blog, including the difficulty of measuring impact and the ways that financial services can give people more control over their lot, the totem for which is now Portfolios of the Poor. Then he comes to his central point: "hundreds of millions of clients... demonstrate how important microfinance is to them by 'voting with their feet.'”For example:

The experience over three decades has been that when providers make microfinance available to clients who haven’t had it before, there is hardly ever a need to advertise. Customers arrive in droves, propelled by word of mouth.

And people keep paying back the loans, apparently for the sole purpose of preserving the ability to borrow anew---and do so year after year after year. Yes, repayment rates are also high just before bubbles pop. But some microcreditors have maintained high repayment rates for a decade. If there were big bubbles, wouldn't they have popped by now?

Of course, repeated use does not by itself prove that a service is benefitting users. No one would make this argument about repeated use of heroin, for instance. People do not always borrow wisely. With microloans or any other loans, some borrowers will inevitably over-indebt themselves and be worse off as a result. As long as the number who do so stays relatively small, it is better to live with the over-indebtedness than to deny the loan product to the great majority who are helped by the borrowing. But could it be that large numbers of repeat microborrowers are caught in a debt trap, able to pay off one loan only by taking out another? Probably not. When significant numbers of customers are taking on more debt than they can handle, it is highly likely that many of them will eventually default on their loans, and the lenders’ collection rate will plunge. To the contrary, MIX Market data show that, among the MFIs that account for the vast majority of borrowers, most maintain very high collection rates over the long term. While it does not settle the matter conclusively, this general pattern of high repayment over the long term justifies a strong presumption that microfinance is not over-indebting large proportions of its clients. At the same time, this presumption needs to be tested by further research.

Microcredit may not help as much as educating girls, say, but its value lies in helping a lot of people a little bit, for the money:

BancoSol in Bolivia represents a few million dollars of donor subsidies in the mid-1990s that turned into a loan portfolio of over $200 million and services for over 300,000 active savers and borrowers by the end of 2008, funded almost entirely from commercial sources.

I think this is a strong argument, the most important thing Rich has taught me through this work. A few critical thoughts come to mind. Rich will recognize most of them from a friendly debate we had in e-mail and over lunch in a World Bank cafeteria:

• First, a GiveWell blog post has me woundering how much we can trust reported repayment rates. Are losses higher than we think, masked by a steady flow of subsidies and new capital? Perhaps not at the big microfinance institutions that account for most of the clients?
• Second, I was struck to read in Rutherford's Pledge that Shafiqual Choudhury, founder and leader of what Forbes dubbed the savviest microfinance business in the world, was scared about overborrowing in the seemingly tranquil market of Bangladesh.
• Third, lots of people in rich countries go unwisely into debt, yet never miss a payment.
• Finally, while the financial diaries reported in Portfolios of the Poor reveal the mechanics of money management with remarkable subtlety, they give us less insight into the ripples from microfinance into people's lives in the full. Careful researchers have tried to follow those ripples, living among and talking to people who use microcredit. Some of their stories are happy. But enough are disturbing that I cannot completely let go of worry.