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January 19, 2010

Harsh Words from South Asia

Posted by David Roodman in Uncategorized Tags: ,

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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December 27, 2009

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

Posted by David Roodman in Uncategorized Tags: , , , ,

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 17, 2009

Old Man Schumpeter

Posted by David Roodman in Uncategorized Tags: ,

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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December 15, 2009

Beth Rhyne on Microfinance Success as Institution-building

Posted by David Roodman in Uncategorized Tags: ,

I am reading now for my chapter 8, which assesses microfinance from the point of view that the essence of economic development is the creative growth of new institutions—in this case, microfinance institutions. As I have probably written before, this perspective casts Muhammad Yunus as a Henry Ford, a visionary who helped spawn a global industry with novel techniques to mass produce a valued product. The Grameen Bank he founded employs thousands, serves millions, competes, and innovates. The histories of the United States and other rich nations can be seen as streams of such business successes, which together facilitated mass escapes from poverty. In this light, the success of big microfinance institutions from Bolivia to Indonesia is economic development. (On Yunus and other microfinance pioneers, see chapter 4.)

That’s a big idea. So is “development as freedom,” the evaluative perspective of chapter 7. I confess that both these ideas originated in a more mundane effort, my attempt to mentally organize great books I’d read. While working in 2008 on the Pitt & Khandker replication, which involved crunching a lot of numbers on a computer, I visited microfinance programs in Egypt and Bangladesh. As I wrote in chapter 6, seeing women crowd into a branch of the Lead Foundation in Cairo to get new loans forced me to confront this paradox: thanks to work on the computer back in the hotel room, I was concluding that there was little solid evidence that microcredit helps on average—yet who was I to tell these women what to do with their lives? Two months later I visited Bangladesh, first tagging along with Stuart Rutherford in and around Dhaka, then taking an overnight trip into Rangpur district courtesy of my generous host, Imran Matin at BRAC.
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December 14, 2009

Pearl’s Wisdom on Causality

Posted by David Roodman in Uncategorized Tags: , ,

I’ve had no regrets since I left mathematics almost 19 years ago. My last memories of studying it are of sitting in a library at the University of Cambridge, staring at lecture notes full of lifeless equations, struggling and failing to care. But occasionally I read something that reminds me of the beauty that can be found in math, and of the remarkable power of formal analysis. Then I see again what once made her attractive to me, if you’ll forgive the metaphor.

That happened a few days ago as I read Judea Pearl’s Causal inference in statistics: An overview (hat tip to Holden Karnofsky). Everything I know about Pearl I learned from his web site. He works in the computer science department at UCLA and is older than he looks in the picture. He researched advanced electronic devices in the 1960s. He has apparently written the bible on Causality, which is to say, the formal study of what we mean when we talk about variables such as diet and health influencing each other. He just released this overview paper in September, which gives a “gentle introduction” to a subject he appears to have done much to develop.

The analysis is beautiful, but not merely that. It is insightful enough about what statisticians in economics, medicine, and other fields do every day that I think the paper should be required reading for graduate students in all fields that use statistics to study causality. Reading the paper may be a particular thrill for me because I entered econometrics untutored, running my first regressions in 2002 for a project with Bill Easterly. I have learned econometrics on the fly, and only gradually grasped what I was really doing. From my point of view, Pearl has systematized a few things I had come to understand while offering a much greater vista.
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September 16, 2009

Return to Laughter

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My friend Anna Rain just sent me this excerpt from Return to Laughter, by Elenore Smith Bowen. Both the account (of her fieldwork in Nigeria) and her name are fictionalized. The book was first published in 1954:

What had been given must be returned, and at the appropriate time–in most cases, within two market weeks. For more valuable gifts, like livestock, one should wait until the giver is in sudden need and then offer financial aid. In the absence of banks, large presents of this sort are one way of saving.

Fortunately, I had kept lists in the back of my notebook: as many as three pages of names opposite entries of two ears corn, one vegetable marrow, one chicken, five tomatoes, one handful peanuts. I couldn’t remember; I didn’t think anyone could. But they did, and I watched with amazed admiration as Udama dispensed handfuls of okra, the odd tenth-penny and other bits in an endless circle of gifts in which no one ever handed over the precise value of the object last received but in which, over months, the total exchange was never much more than a penny in anyone’s favor.

For me this gift-exchange system was such a nuisance that I had to keep counting its blessing. It furnished me with a steady supply of eggs and vegetables. It gave me an acceptable reason for visiting. The truth, that I just wanted to meet people, aroused suspicion, but everyone thought it quite right and natural that I should walk four miles to give a woman tuppence in return for three eggs.

Reminds me of Parker Shipton’s How Gambians Save (hat tip to Kim Wilson). The intro is about debt rather than savings, and is more negative:

Juloo, “rope” to a Mandinko, means several things at once. It can refer to a small-scale trader, or to credit or debt. Every Mandinko knows the meanings are related. Traders are also lenders, and their loans, while sometimes useful like a rope ladder, also tie down a farmer like a rope around the neck. When rural people in The Gambia speak of juloo, in any of these uses, they consciously or unconsciously connote slavery. The Mandinko and other peoples of this small and impoverished West African river nation, an ancient trade route winding thinly through southern Senegal, have had occasion in history to learn quite a bit about ropes and involuntary servitude, and about debt. The linked images and overtones are not empty of emotion.

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August 5, 2009

My Brain Made Me Do It (Again)

Posted by David Roodman in Uncategorized Tags: , , , ,

Piggy bank from cover of Mike Dixon, ippr, Rethinking Financial CapabilityA month ago I blogged some reflections on transparency. Transparency is the motherhood and apple pie of microfinance, I wrote, if not in those words. Microfinance institutions (MFIs) should make it easy for clients to understand the full costs of services, not hide fees in fine print or no print at all. And they shouldn’t introduce charges through the back door such as by overcharging for life insurance bundled with loans. But accepting the necessity for transparency, I wondered about the means. Are annualized percentage rates (APRs) the best way to summarize expenses? There, my reflections stopped.

Writing about this for the book just now forced me to push the analysis farther. I realized that transparency is in a way a distorting metaphor for disclosure. After all, pages of fine print are “transparent”: all the information is right there. Accepting that MFIs should give clients a clear window onto costs, there remains the question of how to describe those costs. The window must be framed. One of the most important ongoing developments in economics is the subfield called behavioral economics. The famous duo of Daniel Kahneman and Amos Tversky demonstrated through experiments that how information is presented (framed) often matters at least as much as the information itself for how human beings act. I’ll show you an example below.
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June 25, 2009

Why I’m Afraid to Fund Group Microcredit

Posted by David Roodman in Uncategorized Tags: , ,

Because of circumstances beyond their control (sickness, flood, drought, theft and so on), lack of skills and knowledge or taking bad decisions, a proportion of poor borrowers encounter great difficulties in repaying loans. While MFIs [microfinance institutions] suggest that such problems are overcome through ‘social support’ in some painless way this is often not the case—talk to the dropouts of MFIs! Many (though presently we have little understanding of exactly what proportion) report being threatened by group members and MFI staff or having their possessions (pots and pans, roofing iron) seized. In Bangladesh, MFI debtors have been arrested by the police (this came to light in 1997 when a police vehicle carrying such debtors crashed and the individuals concerned were killed), are threatened with physical violence (Montgomery, 1996), and the press regularly report female suicides resulting from problems of repaying loans. Many poor people are very frightened about getting into debt: this is a rational response to the dangers that arise from indebtedness to MFIs and not a ‘misunderstanding’.

That’s from David Hulme’s “Is microdebt good for poor people? A note on the dark side of microfinance,” which appeared in the Small Enterprise Development and What’s Wrong with Microfinance? I quote it for the exhortation to talk to all microcredit clients, including dropouts, in order to understand the full implications of microfinance for women.

I’ve been reading studies of this subject in the last few weeks. Two headlines: 1) If one defines “talking to” not as running through survey questions to feed into quantitative analysis but as in-depth “ethnographic study” interviews, then it is the true that researchers rarely talk to dropouts. 2) The information we do have about microcredit’s losers worries me.

To show what is shaping my thinking, I offer that most scintillating of Internet content types, the literature review. I encourage you to persevere because I reach a big conclusion that even I am surprised by. You are watching me make some key judgments, live. And you can participate in the deliberations.
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June 17, 2009

Empuzzlement

Posted by David Roodman in Uncategorized Tags: ,

One perspective through which I am judging microfinance is Amartya Sen’s notion of development as freedom. What do we know about when microfinance gives people more agency in their lives and when it, contrarily, reduces their control over their circumstances (the main worry being debt traps)? With regard to microfinance, “empowerment” usually refers specifically to helping women break the bonds of sexism within their families and societies. But for me it means increasing agency in Sen’s more general sense.

Nothing in this book project has puzzled me more than this question as it relates to microcredit. Sen sounds cautiously optimistic:

The availability and access to finance can be a crucial influence on the economic entitlements that economic agents are practically able to secure. This applies all the way from large enterprises…to tiny establishments that are run on micro credit.

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June 17, 2009

In Which the Blogger Flogs His Bit on another Blogger’s Blog

Posted by David Roodman in Uncategorized Tags:

I posted a comment on Nicholas Kristof’s blog on June 1, and it has floated on the right margin of the blog’s home page for a surprisingly long time, being still there at this writing. The subject: challenges to microfinance in Africa.

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June 10, 2009

Distrusting the Debtor

Posted by David Roodman in Uncategorized Tags: , ,

A central question in judging microcredit: When can we as creditors trust the judgment of the poor as borrowers? These days we can all reel off examples of unwise borrowing in rich countries (though I daresay unwise lending is more to blame for the current crisis). Do the world’s poorest people, with less margin for financial folly, borrow more prudently? Two things I’ve read recently tend toward opposite answers to this question.

A rough concept paper by Bindu Ananth, Dean Karlan, and Sendhil Mullainathan asks us to

Consider the case of a vegetable vendor in Chennai: Nearly every morning, she takes out loans to buy vegetables from a wholesaler, and in the afternoon she pays the loan off with her daily sales. She does this every day, paying an interest rate of 10% per day. Fruit vendors, flower vendors, and other vendors of perishable products take out similar high interest, short-term loans to finance their working capital.

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June 5, 2009

Fiery Dragons, and Other Names for Moneylenders

Posted by David Roodman in Uncategorized Tags: , ,

Cover, Sean Turnell, Fiery Dragons: Banks, Moneylenders and Microfinance in Burma
The Chettiars were moneylenders from Chettinad, in Tamil Nadu, India. In the 18th and 19th centuries they spread with British dominion into Ceylon (now Sri Lanka) and Burma (Myanmar). They played a major role in financing the “reclamation” of the swamps and jungles of southern Burma, which turned the Irrawaddy Delta into the rice bowl of the British Empire. Chettiars lent mostly on collateral, including the land being reclaimed. When the Great Depression hit, world rice prices plunged, Burmese farmers defaulted, and the Chettiars foreclosed. By 1938, they owned a quarter of the land in Burma’s main rice-growing districts. But not for long. Anger about British rule and the Depression found an easy target in these foreign moneylenders who had alienated native Burmese from their own soil. After the Japanese invaded, the Chettiars were forcibly expelled.

I know all that because I just read the first two chapters of Sean Turnell’s new and vigorously written Fiery Dragons: Banks, Moneylenders and Microfinance in Burma. (A chunk of the book is free through Google.) Alas, I learned too late that he was to present it here in Washington in April.

I perused (and ordered) the book because I wanted to learn about what I thought could be a powerful exhibit in a court trial of history’s moneylenders, an illustration of how credit inevitably sucks wealth toward the already wealthy. Turns out Turnell’s text would be a powerful exhibit—for the defense. He convinced me that the Chettiars’ rates were not so high, that they generally faced competition from each other and more informal moneylenders, and that they would much rather have had their loans paid back than repossess people’s land.
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June 1, 2009

Reassuring CGAP Analysis of MFI Interest Rates

Posted by David Roodman in Uncategorized Tags: , ,

Richard Rosenberg, Adrian Gonzalez, and Sushma Narain, The New Moneylenders: Are the Poor Being Exploited by High Microcredit Interest Rates, CGAPJust as I finished asking When is lending just?, a CGAP report on microfinance institution (MFI) interest rates landed in my electronic inbox. I just read it, and highly recommend it for its careful and creative turn to the evidence amidst an inflamed debate:

A few MFIs have charged their borrowers interest rates that may be considerably higher than what would make sense from this perspective. Indeed, it would be astonishing if this were not the case, given the diversity of the industry and the scarcity of competitive markets.

The real question is whether unreasonable MFI lending rates are more than occasional exceptions. We do not find evidence suggesting any widespread pattern of borrower exploitation by abusive MFI interest rates. We do find strong empirical support for the proposition that operating costs are much higher for tiny microloans than for normal bank loans, so sustainable interest rates for microloans have to be significantly higher than normal bank interest rates. We are encouraged by the rapid decline in interest rates, operating costs, and profits in recent years, and we would expect this trend to continue in the medium-term future.

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May 26, 2009

Debt = Rope

Posted by David Roodman in Uncategorized Tags:

Strong stuff from anthropologist Parker Shipton:

Juloo, “rope” to a Mandinko, means several things at once. It can refer to a small-scale trader, or to credit or debt. Every Mandinko knows the meanings are related. Traders are also lenders, and their loans, while sometimes useful like a rope ladder, also tie down a farmer like a rope around the neck. When rural people in The Gambia speak of juloo, in any of these uses, they consciously or unconsciously connote slavery. The Mandinko and other peoples of this small and impoverished West African river nation, an ancient trade route winding thinly through southern Senegal, have had occasion in history to learn quite a bit about ropes and involuntary servitude, and about debt. The linked images and overtones are not empty of emotion.

The source is a 1990 World Bank working paper, How Gambians Save, which commenter Kim Wilson pointed me to. For the book What’s Wrong with Microfinance, Kim contributed a provocative piece called “The moneylender’s dilemma” about rise and fall of Catholic Relief Services’s involvement in microcredit.

Shipton’s point is not that all debt is bad, but that poor people are often wisely wary of it and like to save too. I’m confronting the dual nature of credit/debt now as I think about usury and the ethics of lending.

The rope metaphor is linked to the Jubilee 2000 movement’s call to “break the chains” of third world debt:
Jubilee USA logo

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May 1, 2009

AIG Uganda’s Micro-Life Insurance

Posted by David Roodman in Uncategorized Tags: ,

In 1996–97, FINCA Uganda, a village banking microfinance institution (MFI), approached the local subsidiary of AIG (yes, that AIG) to develop a life insurance product that FINCA Uganda could sell to its borrowers. That collaboration led to what I think is considered one of the major successes in microinsurance worldwide. The AIG plan covered the cost of paying off outstanding microcredit loans and a payout for accidental death of the borrower or a family member. (Regulatory barriers prevented payouts for death from illness.) I just read an intriguing 2005 study of the case by Michael McCord, Felipe Botero, and Janet S. McCord. Looks to me like Michael McCord, now head of the MicroInsurance Centre, ran FINCA Uganda in the late 1990s and may well have initiated to whole story.

By the numbers, Ugandan microinsurance is a big success. In 2005, the plan insured 1.6 million lives through 24 MFIs in Uganda and one each in Tanzania and Malawi. AIG grossed $800,000 on the plan in 2004, 20% of that profit. It shows how an insurance company, which has the financial strength to absorb risks (yes, that AIG!) can partner with MFIs, which can broker insurance through their retail operations.

But the study also finds that many customers are unaware of, confused by, or angry about the insurance. Because the insurance was almost always compulsory, MFI workers had little incentive to understand and explain the policy to customers. The paperwork for filing claims was burdensome and expensive. The MFIs acquitted their role as intermediaries between customers terribly when processing claims, sometimes introducing delays longer than 6 months. (Some details below.)
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March 26, 2009

Four Great Microfinance Books

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Savaging Dambisa Moyo’s Dead Aid yesterday left an ugly aftertaste. To cleanse my palette, I offer a list of fantastic books on microfinance. All are written by intelligent and deeply thoughtful people who have immersed themselves in their subject. They think and write with clarity and sensitivity. In no particular order:
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March 1, 2009

Gemeinschaft, Neoliberalism within a Modernist Developmental Discourse, and All That (What I’m Reading)

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Helen Todd, Women at the Center; Thomas Dichter and Malcom Harper, eds., What's Wrong with Microfinance?

Here are quotes from and a few thoughts on things I’m reading.

Thomas Dichter, “Can microcredit make an already slippery slope more slippery? Some lessons from the social meaning of debt,” in Dichter and Malcolm Harper, eds., What’s Wrong with Microfinance? (2007). Two contributors to this edited volume pointed me to it in response to my announcing this blog. In the opening chapter, Dichter writes:

Microfinance today makes a mistake in thinking that it is about financial services, plain and simple, with the main concerns being the technical ones surrounding operating costs, transaction costs…and the like. Those MFIs [microfinance institutions] that work especially close to the poorest borrowers…need to be especially aware of the symbols and layers of what is going on behind the mere transaction. Looking at the deeper social meaning of debt can provide insight, for example, into why joint liability works or does not work, give more depth to the issue of drop-outs, help explain misunderstandings about interest rates, uncover unexpressed hopes about further larger loans, or about what happens when women give their loans to their husbands.
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