Over the past couple of years microfinance has gone from being praised as the miracle-cure to poverty globally, to being seen as the source of poverty by maliciously capturing loan takers in loan-addiction. In an attempt to bring some objectivity to this debate David Roodman, a researcher at the Center for Global Development in Washington, recently released his much anticipated book Due Diligence: An impertinent inquiry into microfinance. In it he offers one of the most extensive and ambitious attempts at studying the impact of microfinance to date. He focuses mainly on three questions; does microcredit reduce poverty, does microfinance increase the control poor people have over their lives, and does microfinance contribute to build sustainable economic institutions.
At first glance his findings might leave the reader doubting whether microfinance matters at all. He concludes that the evidence for an impact of microcredit on poverty reduction is weak and he rejects most previous studies on the topic as unreliable and lacking reliable research methods. Furthermore, regarding the issue whether microcredit emancipates poor people, the evidence he finds is inconclusive. He instead argues for focusing on the offering of savings, insurances, and other financial services, but not on microcredit.
These were the points that have been highlighted in many reviews of the book, among these a review in TIME magazine entitled “Does Microfinance Work? A New Book Says No”. However, this title is misleading. Firstly, the book has had to withstand some heavy critique from a number of prominent researchers and practitioners within the microfinance field, such as Grameen Foundation CEO Alex Counts(read the review here), and founder and CEO of FINCA, Rupert Scofield(read the review here). The main criticisms voiced are that Roodman’s standards for what makes a reliable study are set too high as he ignores hundreds of qualitative and quantitative studies made simply by calling them unscientific. Furthermore, his high standard for what makes a good study leaves him with only four studies to examine, one of them conducted in Kenya with only 122 people. This is a weak basis for drawing conclusions regarding an industry of 150 million people. Add to this that of the four studies he does deem good enough, two are made of MFIs that does not apply best practice to their operations.
Secondly, the book does contain a number of points where Roodman himself admits the importance of microfinance. Especially on his third focus, the long-term industry-building capability of microfinance, he does believe in the positive impact of microfinance. Further, Roodman admits that reliable financial services are just as important for poor people in developing countries as for people in developed countries. He also finds some evidence of the ability of microfinance to empower women in respect to their role in their families. Finally, he does admit that: “the absence of proof is not the proof of absence”. Given the number and extent of the studies he actually does take into account in his conclusions, this point is important to keep in mind.
In the final sections of his book, Roodman makes a number of recommendations such as the promotion of microsavings, regulation and monitoring of the microfinance industry limiting the access to “easy” money, and promoting the use of information technology, such as mobile money.
Reflecting upon the book and its findings, it must be mentioned that there does not seem to be a clear distinction between microcredit and microfinance in Roodman’s book, the correlation he investigates is mainly focused on micocredit, while the book claims to be investigating all of microfinance. This distinction must always be made clear as many MFI’s of today offer a full range of services, not one or the other, and any study of the impact of microfinance needs to take this into account.
It is obvious for us at MYC4 that access to finance is a cornerstone in the development of any economy. One need only to imagine how life in developed countries would be if banks suddenly chose to stop offering loans to individuals and businesses. But it is crucial to remember that microfinance is not charity, and should not be. The loans and services offered need to be fair and sustainable, and the process of giving them needs to be supervised. We believe that the way we do business at MYC4 truly fulfills these conditions. It should be mentioned that a majority of our African partners not only focuses on microcredit.
For example, one of our most recent partners, KEEF in Kenya, offers their clients a number of services, such as savings and insurances, all of which contributes to improve the financial infrastructure for many poor people in rural areas (see example in the screenshot above). We also believe and promote the use of new technologies to make this process easier and to include even more people financially in the global economy. However, as in any situation it is important to be self-reflective and constantly question ourselves and the way we do things. This is the only way to improve and to ensure that our work truly contributes to making this world a better place.