I finally got around to reading David Roodman’s Due Dilligence: An Impertinent Inquiry into Microfinance. My one sentence review is that, while it is an extremely well-written, well-researched and mostly balanced book, it over reaches in the sense of drawing bold, sweeping conclusions based on a surprisingly thin body (if it can be called that) of research. Interestingly, however, even as I contested his analysis, I found myself agreeing with many of his conclusions. This was the opposite of my experience with Milford Bateman’s Why Doesn’t Microfinance Work?, where I agreed with much of the author’s diagnosis of what is going on in the industry (saturation of some markets, excessive commercialization, e.g) but reacted with jaw-dropping astonishment at most of his conclusions.
Here is what I mean. In Roodman’s case, he is overly enamored of a Randomized Control Trial studies (RCTs), of which he cites four, two of which were conducted on consumer lenders (I’m sorry, a commercial bank in South Africa may choose to characterize making high interest consumer loans to low income clients as “microfinance”, but I call it predatory lending). This constitutes the primary research which leads Roodman to conclude that “On the limited high-quality evidence available so far, the average impact of microcredit on poverty is about zero. In contrast, the one high-quality study of savings does find economic gains.”
To be fair, Roodman does leaven these conclusions with many qualifiers, but he clearly wants to leave the reader with the impression that microcredit is at best an income and poverty neutral intervention, and promoting savings on the part of the poor is the way to go. Four microcredit studies on a few thousand clients in three countries, and one study on savings in Kenya involving 122 people, and we can draw a conclusion like that for an industry of over 150 million clients? I would never make such an extrapolatory leap.
Roodman himself admits that a methodology which works brilliantly in establishing causality in the pharmaceutical industry faces a more problematic application in the social sciences: “In practice, then (social science) makes simplistic generalizations about variegated experiences using incomplete data about the world as it is and untestable assumptions about the world as it would have been.” But the primary limitation RCTs suffer from in applying them to microfinance is the near impossibility in most countries of finding control groups comprised of people who have never been clients of an MFI at one time or another. Roodman even concedes that in an RCT study in India he cites “Perhaps the team failed to find impacts on poverty because the treatment groups had almost as much access to microcredit as the control groups.” Come again? Isn’t this like doing a study to determine the value of using penicillin to treat infections and having people in the control group who have received shots of penicillin?
Roodman’s conclusion that microcredit has no impact on income or poverty leads directly to his conclusion that practitioners’ claims that it can and does are “hype”. He dismisses any studies conducted in the past that demonstrated this because they did not rise to the level of rigor of RCTs (which probably weren’t available at the time) and couldn’t meet the standard of causality. He parts company with Bateman (for whom microfinance is the moral equivalent of slinging heroin and should be abolished) in arguing that there are benefits to microfinance, primarily in the areas of “income smoothing” and “industry building”, which in the prevailing industry jargon constitutes “financial inclusion”. He concedes that there could be cases of an “empowerment” impact – especially on women – but leaves us with the view that it’s probably a statistical draw (my term) with the jury still out on that one. The discussion in that section is pretty rough on the evidence of our eyes and ears, arguing that we shouldn’t really believe women who say microfinance has changed their lives for the better just because they tell us so.
All in all, Roodman sets the statistical/methodological bar pretty high – so high, in fact, you might say if there were an impact on revenues and empowerment, his approach wouldn’t detect it. At least that is my conclusion.
This said, there definitely are problems with the way microfinance is practiced by some practitioners (and profit maximizing consumer lenders, masquerading as microfinance practitioners) in some markets, and we would be foolish to minimize the threat these pose to those of us who practice “responsible microfinance”. That is why eight of the leading microfinance networks have recently formed the Microfinance CEOs Working Group (MCWG) to ensure that the millions of clients we serve are not subject to abusive practices or fall prey to deliberate indebtedness in search of outsized profits.
Roodman’s concludes that microcredit should be de-emphasized or possibly eliminated altogether as an anti-poverty intervention with very poor people, replaced by savings and micro insurance. Bateman argues that the entire industry of microfinance should be abolished, replaced by SME or “impact investing”. I find both these conclusion unsupported by the Roodman’s thin evidence base and Bateman’s one-sided analysis (he can’t find a single good thing to say about microfinance, anywhere, anytime) and, in practice, potentially very destructive if embraced by donors and investors who have supported the development of the industry. While we didn’t do RCT studies at the time, I saw many, many very poor people bootstrap themselves out of poverty on microcredit alone, and to this day using credit to “prime the pump” in a capital starved environment can be the only way a poor family can start or grow a business. I know that savings-based models can provide a means for families to amass enough capital to start or grow a micro-enterprise, but it is a much slower path than injections of microcredit – and too often the people in charge of the savings at the village level run off with the money. We ended the “internal account” at FINCA for precisely this reason: it was too labor intensive and costly for our staff to monitor thousands of these small accounts.
As far as Bateman’s assertion that funding for microfinance is responsible for hogging resources better spent on SME, no. SME is a far more complicated and difficult undertaking in developing countries where small business are often killed in the cradle by monopolies operated by the ruling elite, or by corrupt tax collectors who prey on any profitable businesses popping up on their radar. Add to this the scant legal recourse available to foreign investors, and you have a very disenabling environment, which by itself explains the dearth of investment in SME, without the need of scape-goating microfinance.