Chapter 3 Main Post: Credit History

March 9, 2009

Microfinance is a modern phenomenon, right? Maybe thirty years old?

Wrong.

When what is now chapter 3 (.doc .pdf) was but a twinkle in my eye, I thought it would be just a few paragraphs near the top of what is now chapter 4. But as I delved into its subject–the long history of projects to bring financial services to poor people–the terrain expanded before me and drew me in. I do believe this is the fullest review of that history, but it is superficial relative to the richness of its subject. Someone should write a book on this topic.

From the intro of chapter 3:

To the extent that microfinance is older than most enthusiasts and practitioners think it is, that begs the question of what lessons from history are being missed. What are the constants of history? What are the variables? How do economic and cultural characteristics of a country, such as wealth and tightness of community bonds, determine which methods succeed? And since history never repeats itself exactly, how does modern microfinance break from the past? What have today’s innovators contributed to the long historical flow of ideas? Those questions motivate this excursion into history.

Another revelation for me in drafting this chapter is the power of Google Books. In its database are scanned images of thousands of rare and ancient books, books once only accessible to small handfuls of people but now freely available to anyone with an Internet connection. It is as if a light has been turned on on the past. It has become easier to read 200-year-old books online than 2-year-old ones. And in those old books, we find people as intelligent as ourselves pondering and debating questions that occupy us today. Now, for example, you can read both volumes of a history of savings banks in the United States published in 1876 and read an account by Priscilla Wakefield, the forgotten heroine of financial services for the poor, of how she started what was arguably the first savings bank in 1801. See my bibliography of historical materials on financial services for the poor for more examples.

Post comments on chapter 3 as comments on this blog entry. I’d be particularly interested in historical examples of financial arrangements from outside North America and Europe, especially ones a step up in formality from the ubiquitous ROSCAs and ASCAs (which are defined near the beginning of the chapter). The chapter’s scope is limited by what is available to me in English. Also, I need to learn more about the history of insurance for the masses.

Thanks to Nancy Birdsall and Lawrence MacDonald for edits of earlier drafts.

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1. Courtney Says:
   March 10th, 2009 at 5:16 pm

   Have you thought about writing a section on technology & microfinance? Or innovations in microfinance? I think that many p2p sites would be a great section addition. Also, other technology applications like mobile banking, green banking, and mifos technology finance mgmt systems. They are really driving down theh cost and increasing funding to the sector.

2. Charles Ruys Says:
   March 10th, 2009 at 5:20 pm

   I hope you have heard of the Raifeissen systems that were created in the 1860ties and are the background of Rabobank Group(Netherlands)and the DG-bank in Germany.
   There are even earlier examples from the 1600 in several towns, now still existing as funds for special local projects.

3. David Roodman Says:
   March 10th, 2009 at 6:05 pm

   Oh yes, I do write about Raiffeisen. But if you can tell me more about those examples from the 1600s, I’d be interested. Perhaps they are like the English “friendly societies”?

4. David Roodman Says:
   March 10th, 2009 at 7:56 pm

   I think Courtney’s question is a good challenge for me. I have not made a place for technology in my current outline. Partly this is because I am focused on the question of what we know about the impacts of microfinance, and I think I need to figure that out before I can understand the implications of using technology to deliver the same services more efficiently or deliver new services altogether. I think the most important technology is probably the mobile phone.

5. Ben Says:
   March 11th, 2009 at 5:44 am

   Interesting. We have a research group that will travel to Uganda and this is one of the questions I will consider. The role of technology as an agent for Entrepreneurship. Will let you know if I discover anything that might be useful for your book. Such a section might include an overview of new channels like Kiva, Microplace, MyC4 and others….

6. John Harrison Says:
   March 11th, 2009 at 11:48 am

   The history of credit unions in in former British colonies, and especially the Caribbean is relevant to matters of micro finance. Especially as many of these organizations deeply penetrated working families and communities. In Dominica for example in the 1990s it was estimated that 70% of the population were affected by credit union activity.

   Historically, there has been a long tradition ofinformal savings institutions in the Caribbean: tontines. help-hand, sou-sou etc., which have provided safety nets and investment funds to thousand of families and small businesses. Why does the current generation always feel it must re-invent the wheel?

7. Peter Burgess Says:
   December 31st, 2009 at 6:13 pm

   Dear David

   I am so happy to see this section of your book. I was already working in developing countries in the mid 1970s, and all sorts of traditional self help credit groups were operating, and as far as I could see, had been operating for generations. Over a period of several years I looked for these groups and in every country in Africa where I looked, I found some variant of the idea … from the Horn of Africa to West Africa to Southern Africa.

   I believe more microfinance services will be helpful in making development progress … but it is a full range of multi-sector initiatives that are needed as well as microfinance. Lessons learned from the past are going to be very important!

8. Meliza H. Agabin Says:
   January 7th, 2010 at 1:06 am

   May I refer you to the paper “Alternative Approach to Rural Financial Intermediaion” authored by moi and Jorge Daly and published by Chemonics International in 1996/7. This paper, which provides the Philippine experience over the 1970s through the early 1980s with targeted and government-subsidized credit through the Philippine rural banking system and what happened to the system. There is also a book entitled Small Farmer Credit Dilemma that may still be available with the Agricultural Credit Policy Council of the Philippines. The book focuses on one and the ” grandest” government credit program for rice farmers and written by 3 co-authors (Sacay, Agabin and Tanchoco) who were in one way or the other involved in the process of implementing this rice credit program. They come away with an interesting conclusion.

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