January 12th Meeting Recap – A Conversation with Author David Roodman

A Conversation with David Roodman

Author of Due Diligence: An impertinent inquiry into microfinance

Hosted by SVMN

Event recap written by SVMN Volunteer Julie Menezes

The SVMN event on January 12th featured Economist David Roodman of the Center for Global Development. Roodman discussed his new book, Due Diligence: an impertinent inquiry into microfinance, and how he came to the conclusion that microfinance is not a silver bullet against poverty.

Roodman approached his book with the objective of looking at microfinance from multiple perspectives, beginning with the point of view of the client. Roodman emphasized that being poor does not just mean having lower income, but having income that is more volatile and unpredictable. Providing financial services to the poor allows them to reduce risk and manage the consequences of life’s worst.

Roodman also discussed his examination of microfinance from a historical perspective. He cited examples of people and cooperatives that provided financial services to the poor prior to Muhammad Yunus, and in some cases as early as the 18th century – including Jonathan Swift, who provided small loans, and Priscilla Wakefield, a pioneer of microcredit. In pointing out that microfinance has typically emphasized women, groups, and credit, Roodman argued that microfinance is done the way it is as a result of evolutionary imperatives, rather than because it is best for the client. Microfinance has evolved with this emphasis as a result of organizations attempting to address the issue of how to affordably mass produce financial services for the poor.

When Roodman examined microfinance from an academic perspective, he found that not all quantitative studies of the effects of microfinance can be trusted, largely due to the difficulty of distinguishing causation and correlation. While studies may find that there is a reduction of poverty amongst those given access to microcredit, the question remains: Is this reduction a result of microcredit, or can it be attributed to other factors? Roodman stated that there is a lack of evidence that microcredit reduces poverty.

Roodman described his experience meeting several borrowers at a loan disbursement event in Cairo. As they discussed what they would be doing with the loans, Roodman understood that microcredit was allowing them to get some form of control over their own lives, and these loans seemed to be a positive thing – however, this was difficult to reconcile with the lack of evidence that microcredit actually reduces poverty. This paradox is a focus point of Roodman’s book, as he discusses three different conceptions of the success of microfinance:

  1. Development as escape from poverty
  2. Development as freedom
  3. Development as industry building

In questioning the conventional wisdom that microfinance reduces poverty, Roodman emphasized the difficulty of measuring the true impact of microcredit. Questions also come up about the success of microfinance when looking at the second definition of development – development as freedom. Roodman asked, “When does microfinance enhance control over circumstances, and when does it reduce it?” Access to financial services can enhance freedom; however there are also risks involved in case of default.

When judging microfinance from the third definition of success, development as industry building, Roodman stated that the core driver of poverty reduction is industrialization. Roodman argued that the real strength of microfinance is building institutions. Microfinance is now a dynamic industry, dominated by large, dynamic institutions that are innovating and creating jobs. However, in several countries including Morocco, Nicaragua, Bosnia and India, the industry has grown too fast.

Roodman offered the following recommendations:

  • MFIs do not necessarily need to be lending to the poorest of the poor. There is a lack of evidence that this is helpful in reducing poverty, and it more dangerous for the poorest of the poor to go into debt.
  • There is a global need to reduce the money going into microcredit, due to the threat of bubbles. This does not mean reducing money to every country and MFI, but it does mean being aware of the dangers of growing too fast.
  • Deemphasize credit as it has special risks for poor people. Savings is less risky and other financial services such as insurance and money transfers will help the poor solve the same problems that microcredit does.

One thought on “January 12th Meeting Recap – A Conversation with Author David Roodman

  1. Pingback: Microfinance – does it actually work? « Learnings and Lovings

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