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December 31, 2009

The Most Important 2009 Microfinance Post You Didn’t Read

Posted by David Roodman in Uncategorized Tags: ,

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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September 2, 2009

More Bubble Kerfuffle

Posted by David Roodman in Uncategorized Tags: ,

Jonathan Morduch blogs passionately on how the Wall Street Journal got it wrong in confidently calling a bubble in Indian microcredit:

The WSJ purports that microfinance clients are being “carpet bombed” by loans. The fact is that the typical low-income person (with a profile like that of microfinance customers) lives a life involving multiple loans: some from informal sources (family, friends, moneylenders) and—if they’re available—from microfinance or formal-sector banks. The evidence from Portfolios of the Poor suggests that most people manage a handful of financial devices at any one time, patching the pieces together to get the timing and volume as close to what is needed as possible. This is normal.

This is the most penetrating take I’ve seen on this little controversy.

Jonathan’s post makes me wonder if I was too dim before on the ease with which group microcreditors could track borrowers with a credit bureau in order to detect and prevent multiple- and over-borrowing. The essence of group credit is to keep costs and interest rates down by delegating the job of monitoring borrowers onto borrowers themselves. To this extent, group microcreditors are flying blind. But group credit is a technology (in the economist’s sense) that largely predates the ongoing revolution in digital technology. Perhaps today we can do better. Microcreditors are increasingly computerized, so that it ought to be possible to bring down the marginal cost of sharing information about clients. (Though I can’t resist chuckling at the ASA branch I visited last year in Bangladesh, which housed a brand new HP computer running a high-powered custom MySQL database under Linux—and was connected to the outside world by a printer and a courier. Monthly reports were mailed to the central office. Multiply that by 3,300 branches.)

A major prerequisite for a credit bureau is a way to identify people in order to match up records from various lenders and prevent fraudulent use of multiple names. India, for one, has no national ID system. But it has just launched an ambitious project, with Infosys cofounder Nandan Nilekani at the head, to create one. The ID card system will reportedly use biometric technology such as digital fingerprinting. (A bit more on that in Fingerprinting Malawian Paprika Farmers.) As it happens, Karnataka State, site of the WSJ’s reportage, has been selected for the pilot. It will be interesting to see how quickly or slowly the national authority IDs the state’s tens of millions of poor people—and to see how easy or hard it is for microcreditors to latch on to the system.

Separately, N Srinivasan, a leading observer of Indian microfinance, blogs for CGAP on the subtleties of the troubles in Karnataka. “For the large MFIs, the problem is very small, while some small MFIs have a large problem.”

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July 6, 2009

High-tech Microfinance: The Business Case

Posted by David Roodman in Uncategorized Tags: ,

A theme I have hardly blogged is what the business perspective teaches us about how microfinance does and can work. A few years ago ABN AMRO commissioned CGD to write a report on why some microfinance institutions (MFIs), including non-profits, manage to cover costs, attract capital, and grow to serve more people—in a phrase, to succeed as businesses. Chapter 5 of the book (draft due soon) is based on that paper. Having worked this seam already, I think about it less now.

In writing that report with Uzma Qureshi, I came to appreciate that microfinance as we observe it today is the outcome of an ongoing Darwinian process. Aspects of microfinance that seem almost definitional in the public imagination—credit, women, groups—originally arose for pragmatic reasons: they helped young organizations serve poor clients in volume without going broke. Joint liability lending through groups, for example, shifts the jobs of selecting borrowers and enforcing repayment away from the lenders onto the borrowers. It seems to work better with women because they are more sensitive to peer pressure. And it lowers the lenders’ costs and interest charges. Through this lens, I see Muhammad Yunus as a Henry Ford, a Schumpeterian agent of creative destruction.

Uzma and I swiped this insight from a provacative paper about Bangladeshi microcredit by Pankaj Jain and Mick Moore called “What makes microcredit programmes effective? Fashionable fallacies and workable realities.” It concludes thus:
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