David Roodman's Microfinance Open Book Blog

About: David Roodman

David Roodman
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David Roodman has been architect and project manager of the Commitment to Development Index since the project's inception in 2002. He is writing a book on microfinance.


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http://www.cgdev.org/content/expert/detail/2719/

Posts by David Roodman:

February 5, 2010

Weekly Tweets for 2010-02-05

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February 3, 2010

Charting Growth

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After being waylaid by work on Haiti, I am back to toiling on chapter 8. One section surveys the commercialization of microfinance and the financing of microfinance. Unlike most of the book, it is rich in figures and tables. Here I share them with you. I’d appreciate suggestions of what to change, drop, or add. What is confusing? Two disclaimers: My purpose here is to document trends without assuming that up is always good or always bad. And I should be able to add another year of data soon.

For me, the last display is most interesting.

Number of borrowers, 20 largest microfinance institutions of 2007
Number of borrowers, 20 largest microfinance institutions of 2007
Source: Mix Market.
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February 2, 2010

Grameen’s #1 and #2 Divorce

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This blogger does not aspire to be the microfinance industry’s gossip columnist. Still, one recent development seems at least as worthy of reporting as a Presidential Medal of Freedom or a knighting: Dipal Barua, who had worked for Muhammad Yunus for 34 years, was forced in December to resign from his posts as Deputy Managing Director of the Grameen Bank and Managing Director of Grameen Shakti, the solar power unit. The split was acrimonious. The event received almost no coverage in English.

Probably like you, I know less about Barua than I should. He was born in the same village as the Grameen Bank, and assisted Yunus from the earliest days in building the now-famous credit model. He was instrumental in Grameen’s internal revolution a decade ago, called Grameen II, and coauthored a book about it with Asif Dowla. I suspect that much of Grameen’s success owes to the partnership between Yunus and Barua. Yunus was the philosopher, pitchman, and indefatigable visionary. Barua was more the mechanic, experimenter, and hands-on manager. His loss creates, or at least points to, challenges for the Grameen Bank going forward.
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January 29, 2010

Cross-post: For Haitians’ Sake, Drop the “Drop the Debt”

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Another Haiti post on CGD’s main blog: For Haitians’ Sake, Drop the “Drop the Debt”

There’s a resonance with my Kiva post, no?

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January 29, 2010

Weekly Tweets for 2010-01-29

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January 28, 2010

From Microfinance to Macrofinance

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Sorry things have been quiet here. I have been posting on CGD’s main blog about Haiti’s aid and debt:

Haiti Aid Facts
Suspend Haiti’s Debt—And Take Official Lenders beyond Lending

I continue to be struck by this contrast in the zeitgeist: loans to poor people are good; loans to poor countries are bad.

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January 22, 2010

Weekly Tweets for 2010-01-22

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January 19, 2010

Harsh Words from South Asia

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In the last two days, I’ve read separate pieces on bad stuff happening to fast-growing microcreditors in Pakistan and India. The tone in both is brutally honest. The problems they describe may merely be growing pains. Microcredit has experienced crises, or at least widespread repayment difficulties before, in Bolivia and Bangladesh in the late 1990s and in Andhra Pradesh in 2006, yet gone on to thrive. Or the threats might be existential: I don’t know. The similarities to the sub-prime crisis are inescapable. Both make a point I pondered last summer, that by design group lenders are to an extent flying blind about the state of their borrowers’ finances.

The first piece is Unraveling the Delinquency Problem (2008/2009) in Punjab-Pakistan written by Hussan-Bano Burki and published by the Pakistan Microfinance Network (hat tip to Uzma Qureshi). It is intense, compelling, quotable. You wouldn’t know it from the new World Bank report but Kashf, one of the largest microfinance institutions in Pakistan, experienced a borrower revolt about a year ago. It was centered around the city of Muridke, near Lahore, in Punjab, and apparently did not go national. It appears akin to the one in AP in 2006, with a murky mix of aggressive lending and opportunistic politicians, and finger-pointing all around. Unlike in AP, though, an analyst seems to have penetrated deeply into what happened. Perhaps this is what cracked the nut:
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January 17, 2010

Eavesdropping on a Microfinance Conference

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Couldn’t make it to the annual research conference hosted by the Centre for Microfinance (CMF) and the College of Agricultural Banking (CAB) in Pune, India, last week? Neither could I. Not invited? Actually neither was I. But as far as I can tell, CMF is the brightest spot on earth for quality research on financial services for the poor. They are worth watching. I suppose this post is the next best thing to being there. Better, in jet lag and carbon terms.

Abhijit Banerjee presented the CMF-executed Spandana RCT. I embed the slides here less for the content, which is familiar, than the form. Someone at the Poverty Action Lab makes slides like I do, and probably because of similar influences, in my case Edward Tufte and Andy Goodman.

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January 15, 2010

Should Industry Concentration Cause Consternation?

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On my post about Beth Rhyne, Scott Gaul of the MIX commented:

What are the causal impacts that we could expect institution-building to have? Healthier or deeper financial sectors, higher savings rates, more competition, etc.?

I replied:

I think that’s a good question. Beth discusses metrics at the level of the institution—is it self-financing? is it growing?—but not at the level of the country. One metric might be a measure of industry concentration, such as a Herfindahl index, where lower would be better within certain bounds, since it would indicate a more diverse, competitive sector.

Scott again:

A nice attribute of looking at country-level impact is that there is already literature associating country-level financial sector development and economic growth. Does microfinance have any causal impact on financial sector development, through institution-building?

I liked his suggestion that I should look beyond whether individual microfinance institutions (MFIs) are succeeding to whether the financial system is improving. Among his suggestions, I honed in on measuring the concentration of a country’s microfinance industry—whether market share is monopolized by a single giant or divided among many players. That measure’s link to the growth of individual MFIs seems loose enough to avoid near-tautologies like “growth of MFIs increases use of microfinance” but tight enough to avoid grand questions about what causal links you can prove with statistics. Industry concentration interests me because declines in it may indicate rising competition, which seems to lead to lower interest rates and more diverse and flexible products.
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January 15, 2010

Weekly Tweets for 2010-01-15

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January 14, 2010

Rich Rosenberg on Microcredit’s Impacts

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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.

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January 11, 2010

Bubble Controversy Simmers

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Microfinance Focus just posted a fine pair of opinion pieces on the risk of microcredit bubbles in India and what to do about it.

Vijay Mahajan and P.N. Vasudevan, Indian industry insiders, describe recent steps taken to prevent bubble inflation:

This year, around 30 leading [microfinance institutions] that accounts for around 85% of the Indian market have come together to form Alpha Micro Finance Consultants P Ltd. Alpha will help get the credit bureau services made available to the MFIs in the country.
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Alpha intends to engage 2 bureaus; including an investment in one of them as a mark of its commitment. To bolster the rollout of this initiative, Alpha has established a partnership with the Omidyar Network and the IFC. IFC will provide technical support to Alpha as well as member-MFIs in getting themselves technically ready to be ‘bureau ready’ so that they could use this data base to get a full idea of a client’s total indebtedness and credit behavior before taking a call to lend further.

Of course, Alpha recognizes that a credit bureau is not a solution in itself. After all the sub-prime crisis in the USA was not due to lack of data. To optimize the benefit for the industry through this engagement with credit bureaus, the [institutions] have come together to create an association, Micro Finance Institutions Network (MFIN).

MFIN has formulated a Code of Conduct; which will require member-MFIs to adopt certain processes and be subject to certain limitations that will limit over-lending to a borrower.

Daniel Rozas has refined his earlier analysis of bubble trouble signs. And he has joined with Sanjay Sinha, director of the Indian microfinance rating and consulting agency M-CRIL to comment on the industry’s move to regulate itself:
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January 8, 2010

Weekly Tweets for 2010-01-08

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January 6, 2010

Is Money for Microcredit Killing Savings with Kindness?

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As you are probably tired of hearing me say, I am evaluating microfinance from three perspectives. A pattern is emerging: microsavings looks pretty good in all three perspectives. The one randomized trial of savings returned a positive verdict from the perspective of development-as-proven-poverty-reduction. Meanwhile, fraud-free savings serves people much as credit does, yet without raising debt trap fears—good for development-as-freedom. And taking savings turns a microfinance institution into a true bank, intermediating between savers and borrowers. That is development-as-organization-building. Pretty brilliant of me and Nicholas Kristof to figure this out, huh?

Actually, when it comes to advocating savings, Dale Adams is the granddaddy of us all. His publications on finance for the poor go back to at least 1971, and some more recent writings of his just got me thinking about the tensions between supporting microcredit and microsavings. (You can find him on devfinance.)

Read page 436 of the official 50-year history of the World Bank by Devesh Kapur, John P. Lewis, and Richard Webb (the fat red book over my shoulder in the photo at right):


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January 1, 2010

Weekly Tweets for 2010-01-01

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December 31, 2009

The Most Important 2009 Microfinance Post You Didn’t Read

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I tend toward curmudgeonry, as you might have noticed. And I don’t spare new technologies of my skepticism even though I am a natural computer programmer. (Really, what was so bad about punch cards?) I don’t have a smart phone, but am pleased with two features of my dumb phone: It can receive calls. And it can make them too.
And especially because of all the hype about high-tech microfinance, my attitude has been “show me.” As I wrote in July,

So when I hear about how mobile phones and smart cards will revolutionize microfinance, I ask, What’s the business case? How does it solve the business problems traditional microfinance solves?

Of course, I was also unimpressed the first time I heard about the web, blogs, and Twitter. But you can see I came around to those. In time I will probably do the same for high-tech microfinance—or have already, thanks to a post on saving through M-PESA on CGAP’s technology blog.

Most success in high-tech banking for the masses has come in helping people transfer money. In Brazil, people use ATM-like machines at local shops to pay electric bills. In South Africa, the Philippines, and Kenya, people punch buttons on their phones to shift funds. The really extraordinary success, in fact, has been M-PESA in Kenya, which CGAP is all over. Barely two years old, M-PESA now serves something like a quarter (more?) of Kenyans. (Aid success alert: the U.K.’s aid agency sponsored the development of M-PESA.)
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December 31, 2009

Kristof Calls for Microsavings Revolution

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Nicholas Kristof’s column today is about the promise of microsavings. He starts by describing what must be a Village Savings & Loan Association (VLSA), operated by Catholic Relief Services in Nicaragua:

“We used to buy a three-liter bottle of Coke every day,” recalled Socorro Machado, a 49-year-old homemaker in a village here in northwestern Nicaragua. That was a bit less than a gallon, and the cost of $1.75 consumed a large share of the family’s budget.

Then Catholic Relief Services, an aid organization, arrived in the village with a new program to promote savings. It provided a wooden box with a padlock and organized savings groups of about 20 people who meet once or twice a month, typically bringing 50 cents or $1 to deposit in the box.

Some of the money is lent out to start a small business, but the greatest benefit of these programs seems to be that they provide a spur to save.

“Now we buy a bottle of Coke just once a week, and we put the money in savings,” Ms. Machado said. She saves about $5 a month in her own name and another $5 a month in her son’s name and has plans to buy a computer for him eventually.

Kristof also cites the Dupas & Robinson randomized study showing benefits of microsavings for entrepreneurs.

For more on VLSAs, see the notes from my interview with Hugh Allen; this fine report from CARE, which pioneered this particular approach to savings groups; or this CARE video. On MatchSavings, which Kristof mentions, see this post, which contains a video of an excellent discussion.

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December 29, 2009

Randomistas Attempt Message Control

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As I mentioned, 2009 is a milestone year in the study of the impacts of microfinance. It’s also a case study in how subtle conclusions get distilled and simplified and misunderstood as they ricochet around the media. Remember Tim Harford plaintively tweeting, “Note to all microfinance enthusiasts: I DO NOT WRITE MY OWN HEADLINES”? It is tempting to blame “the media” for all this oversimplification. But the media responds to incentives such as people’s narrowing bandwidths and preferences for clear-cut conflictual stories. And the media pass those incentives back to people like me who position themselves as experts. And sometimes we respond. Anyway, it gets harder to blame the media as we hurtle into a media-R-us world. 2009 is the year of Twitter too.

So what’s my point? Other than an invitation to blame yourself (which I’d prefer to blaming me), it is that public conversations about complex topics are inevitably cacophonous and inefficient, even comical. I guess the best you can do is keep at it.

I gather that Abhijit Banerjee, Esther Duflo, and Dean Karlan, the leaders in testing microfinance with randomized trials, have felt somewhat dismayed at how their careful experiments and nuanced conclusions became “Perhaps microfinance isn’t such a big deal after all” and “Billions of dollars and a Nobel Prize later, it looks like ‘microlending’ doesn’t actually do much to fight poverty.” As blogging guests of Nicholas Kristof yesterday, they attempted to regain control of the message:

MFIs have managed to find ways to be financially sustainable and to keep growing fast.

This is itself is a remarkable achievement. Very little works in many of these countries in terms of delivering to the poor; previous attempts to deliver credit, through state-run banks, for example, collapsed in the face of widespread corruption and defaults. Many microcredit institutions are led by dynamic entrepreneurs who have mastered quality service delivery on a large scale, a tough challenge in many developing countries.
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[A]s we see it, microcredit seems to have delivered exactly what a successful new financial product is supposed deliver—allowing people to make large purchases that they would not have been able to otherwise. The fact that some people expected much more from it (and perhaps they are right, may be it will just take longer), is perhaps inevitable given how eager the world is to find that one magic bullet that would finally “solve” poverty.

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December 27, 2009

Stuart Rutherford’s Insights into Microfinance (The Prism of History)

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2009 brought an embarrassment of riches in readings on the impacts of microfinance: Portfolios of the Poor, two randomized studies of microcredit and one of microsavings, and—at least worthy of a footnote—my challenge, with Jonathan Morduch, of older, non-experimental microcredit impact studies.

All that overshadowed what otherwise might have been the most important publication on microfinance this year: a typically understated volume by Stuart Rutherford called The Pledge: ASA, Peasant Politics, and Microfinance in the Development of Bangladesh. It’s not obvious why a history of Bangladesh’s third-largest microcreditor, ASA, should top your reading list. But this is written by a man who has been visiting Bangladesh for a quarter century, who started his own innovative microfinance institution there, who is fluent in Bangla, who has spent countless hours interviewing poor people on several continents about how they manage money, and who brings a careful intelligence to all he surveys. Almost inevitably, the book is shot through with insights about the history of microfinance and its practice today.

I read this “biography of an NGO,” to borrow from the title of the 1995 version of the work, as part of my labor on chapter 8, in which I am looking at success in microfinance as success in building organizations. I will not attempt to review the book. Rather, I will quote extensively from it, as I did last week from Beth Rhyne. In effect, this is a scattered, involuntary guest blog post. I hope you like it. I am sharing my highlighting with you.
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December 25, 2009

Weekly Tweets for 2009-12-25

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December 23, 2009

Beth Blogs Back

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Beth Rhyne just elaborated on my post in which I quote her 1992 writings at length. She explores why her perspective, not so surprisingly, did not catch on much:

NGOs are under constant pressure to make that one-to-one heart-connection for their donors. “A $100 loan enabled Juanita to buy a potter’s wheel and so transform her life.” At ACCION, we have logged thousands of such microenterprise success stories. But just as often, the loan may tide Juanita over six weeks when she has no income, enable her child to stay in school when another relative working in the shop gets sick and she needs a pair of hands, or keep the house heated through the winter until business picks up. Complex stories are difficult to tell in donor brochures, and “institution-building” does not excite the emotions of most people.

Interesting to me is how the new randomized trials of microcredit are forcing a return to old conversations about how to think about the impacts of microfinance—or at least have forced me that way.

Beth also posted the document that I excerpted.

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December 21, 2009

When Socially Responsible Investing Isn’t

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I wrote about how, since all Wall Street stock pickers are smart, it is hard for any one of them to consistently out-smart the rest—and even harder for you, the small investor, to pick such a winner in advance. In the old post, I emphasized the upshot for your finances: trying to beat the market is a loser’s game, so your best bet is to buy mutual funds that track markets as cheaply as possible, such as index funds. I did beat the market during the tech bubble downdraft, but that may have been a lucky one-off. A broker who tries to sell you a mutual fund whose expense ratio (the % of your money the fund manager takes each year) exceeds a rock-bottom 0.2–0.5% is ripping you off, probably knowingly and possibly in exchange for a legal kick-back from the fund manager. An extra, say, 1%/year of expenses might seem trivial, especially if it is written in fine print and obscured by wide year-to-year swings in investment performance. But it adds up: multiply 1%/year by 40 years of saving for retirement. In short, go to Vanguard, the leaders in low-expense investing.

Here, I will write an implication of this idea for social policy. A higher savings rate, after all, is an explicit government goal in many places.

Though you wouldn’t know it from our historically abysmal savings rate, government in the United States provides copious tax incentives for people to put aside money, mainly for college and retirement. These incentives work by shielding investment gains from annual taxation, so that the earnings can compound faster. In some cases, including 401(k)’s and traditional Individual Retirement Accounts (IRAs), you pay no tax until you take the money out (at retirement). In other cases, such as the 529 college savings plans, you pass through the tax gate just before the money goes in, and never again.
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December 18, 2009

Weekly Tweets for 2009-12-18

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  • Q:what is this ranking? 1.Zimbabwe 2.Japan 3.Lebanon 4.Jamaica 5.Italy 6.Sudan 7.Singapore 8.Greece A:debt/GDP http://bit.ly/7PTi7T #
  • "The assumption that conduct is prompt and rational is in all cases a fiction. But it proves to be sufficiently near to reality… #
  • …if things have time to hammer logic into men."–J.A. Schumpeter, The Theory of Economic Development #
  • RT @owenbarder: Is aid undermined by extravagant claims of its supporters? My openDemocracy article http://tinyurl.com/yclqxca #
  • Critique of @NickKristof article & playing into donor/P2P illusions RT @saundra_s: More bad donor advice http://bit.ly/8DKNAH #
  • RT @savetogether: Nice brief on savings & #microfinance by Ignacio Mas of @gatesfoundation http://bit.ly/5P3W2j #
  • Report from @Oxfam: The Missing Middle in Agricultural Finance http://bit.ly/8bPZjT #microfinance #

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December 17, 2009

Old Man Schumpeter

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Schumpeter is a sort of patron saint in this field. I may be alone in thinking that he should be treated like a patron saint: paraded around one day each year and more or less ignored the rest of the time.—Robert Solow, 1994

I explained Tuesday that I am looking now at microfinance through the development-as-institution-building lens (or filter). “Development” in English signifies both an outcome, as implied by the Amartya Sen–inspired Human Development Index, and a process, as encoded in the Latin root volvere, “to roll.” And it is really the process of development that is hardest and most important to understand. It seems that most countries that have become rich did so by enduring decades of economic churning, in which new ways of making things displaced old. Typically the spread of these innovations was associated with the rise of new corporations—makers of steel, software, etc. “It is not the owner of stage-coaches who builds railways.” To use another word from the same root, development is a series of revolutions. An economy that ceases to generate such institutional revolutions ceases to develop. For the development process to avoid becoming cancerous, institutions’ drive for growth must be checked by external factors such as competition, regulation, and consumer preferences. One can generalize the conception beyond corporations to organizations generally: non-profits such as the Red Cross as well as democratic governments also arise to put their stamp on society by producing things that people have reason to value.

The leading proponent of this view of development in the history of economics was the Austrian economist Joseph Alois Schumpeter. In Capitalism, Socialism and Democracy (1942), He popularized, but did not coin, “creative destruction”:
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