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Neither a borrower nor a lender be;
For loan oft loses both itself and friend.
And borrowing dulls the edge of husbandry.
This above all: to thine own self be true,
And it must follow, as the night the day,
Thou canst not then be false to any man. – Hamlet I.iii.79–841
In the last seven chapters, we have examined microfinance from more angles than ever before in
one place. We have shared the points of view of the user at the metaphorical teller window and
the manager behind it. We have placed modern microfinance in the flow of history. We have
surveyed its diversity. And we have taken seriously the strongest claims for its virtues,
investigating each in turn: microfinance as reducer of poverty, enhancer of freedom, builder of
industry. It is time to sum up, draw lessons, and ponder what lies ahead.
You know the popular image of microfinance: It was invented by that guy in India (or
Bangladesh?) who won the Nobel Prize. It helps people start businesses and lift themselves out
of poverty. Without claiming much originality, part I of this book put the lie to that image. But it
also teased out a story that is more credible, more complex, and still impressive. Modern
microfinance is not, as a cynic might have it, merely another foreign aid fad foisted upon the
poor, doomed by its naiveté to fail. If it is a fad, then it must be the longest in the history of
overseas charity. What explains its persistence is its remarkable success on the market test: poor
people are willing to pay for reliable financial services. Thus microfinance is best seen as arising
organically from several sources: the real needs of poor people for tools to manage tumultuous
financial lives; a long historical process of experimentation with ways of delivering financial
services; the creativity, vision, and commitment of the pioneers such as Muhammad Yunus; and
the business imperatives of mass producing small-scale financial services.
In part II, I looked behind the mythology of microfinance. I tried, in the words of my
1
“Husbandry” might be “economy” in modern English.
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colleague Ethan Kapstein, to be critical but not cynical, to investigate the evidentiary bases of the
most serious defenses of microfinance with an eye to constructing a more realistic story. The
lessons distill to:

Credible evidence on microfinance’s success in development as poverty reduction is scarce.
We have essentially two studies of microcredit and one of microsavings. The two of credit
found no impact on indicators of household welfare such as income, spending, and school
attendance over 15–18 months. That the celebrated sequence from credit to enterprise is more
than a myth. The study of group credit in Hyderabad, India, spotted an increase in profits
among the minority (31 percent) of households that already had a business, and more
business starts among those best positioned by relative education and wealth to start one.2
Meanwhile the randomized study of a savings account in Kenya found that this service too
helped existing business owners, market vendors, invest in their businesses. And here, unlike
with microcredit so far, the boost to entrepreneurship showed up as improvements in poverty
indicators such as income and spending.

The evidence on whether microcredit in particular spurs development as freedom is
ambiguous. It stands to reason that poor people with volatile incomes need financial services
more than the global rich, in order to put aside money in good days and seasons and spend it
in bad; and that reliable loans, savings accounts, insurance, even money transfers, can help
them do this. Financial services inherently enhance agency. But credit inevitably entraps
some people through ill luck or judgment. Researchers who have spent weeks or years with
borrowers have collected some happy stories of women of finding liberation by doing
financial business in public spaces. Others have returned with disturbing stories—some mild,
as of the women made to sit in meeting till all dues are paid, some more serious, as of the
2
Banerjee et al. (2009), 17.
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women whose roofs are taken by peers in order to pay off their debts. These contradictions
are not hard to understand, for credit is both a source of possibilities and a bond. Overall, it is
hard to feel sanguine that success stories are the whole story.

The success on which microfinance can stake its strongest claim is in industry building. With
time, the microfinance industry is growing larger, more efficient, generally more
competitive, more diverse in its offerings financing. More institutions are becoming national
intermediaries, taking deposits and lending domestically. In few realms can foreign aid and
philanthropy point to such success in building industries. But this success still leaves scope
for critique. The enthusiastic supply of credit for microcredit, predominantly from public
investors, is distorting the industry: undermining the drive to take savings and spurring
overeager lending, even bubbles. Enthusiasm for credit appears inherently destabilizing in
competitive markets, where MFIs can grow fastest by poaching each other’s clients, leading
people to take several loans at once, and where no credit bureau gives MFIs the full picture.
Meanwhile, an important qualification relative to popular perception is that microfinance
rarely turns clients into agents of economic transformation and growth. It does not fill the
role Joseph Schumpeter saw for finance.
The hope that microfinance credibly offers lies in building institutions that give millions
of poor people an increment of control over their lives, control they will use to put food on the
table more regularly, invest in education, and, yes, start tiny businesses. Few lives will be
completely transformed by microfinance; few will be lifted out of poverty. Yet because poor
people are willing to pay for the services, microfinance institutions can serve many from a
modest base of charitable funds. Recently, Rich Rosenberg recalled his oversight while at the
U.S. Agency for International Development of “a few million dollars of donor subsidies in the
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mid-1990s” for Bolivia’s Prodem, which became the microfinance bank BancoSol and now
serves [tens of thousands]. He reflected on the “value proposition” of microfinance, which he
aptly diagramed this way:
Small one-time subsidies
leverage large multiples of unsubsidized funds
producing sustainable delivery year after year of highly valued services
that help hundreds of millions of people
keep their consumption stable, finance major expenses, and cope with shocks
despite incomes that are low, irregular, and unreliable.3
All varieties of microfinance—credit, savings, and the rest—ought to be seen as
prescription-strength medicines. In appropriate doses for appropriate patients, they can do much
good. In moderation, for example, credit can help people discipline themselves to put aside
money for big but manageable purchases, including stock and capital for microenterprise. But
pushed too hard, all financial services can be dangerous. People can get in over their heads with
credit, watch their savings disappear in flimsy banks, be duped by fraudulent insurance
companies, lose funds to dubious money transfer schemes. The enthusiasm right now is
primarily for credit, so that is where the danger primarily lies.
The Effects of Causes
One lesson of part I is the one emphasized in its last chapter (chapter 5), that microfinance as we
observe it is the outcome of an evolutionary process. This helps explain the emphases on credit,
groups, and women. The evolutionary perspective also explains a trait little noted in chapter 5:
the mythology that promoters have woven around the workaday business of disbursing and
collecting loans. Almost no development project holds such strong and multidimensional appeal
as microcredit. It appeals to the left with talk of empowering women and to the right by insisting
on individual responsibility. As the cliché goes, it offers a hand, not a hand-out. And because the
3
Rosenberg (2010), 5.
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currency of microcredit is currency itself, not textbooks or trainers, investors feel that what they
contribute—money—goes directly to the poor. To this extent, the intermediary disappears in the
mind of the giver, creating a stronger sense of connection to the ultimate recipient. Peer-to-peer
lending sites such as Kiva feature pictures and stories of borrowers to make the bond even
stronger.
Just as it hardly matters from the evolutionary point of view whether joint liability was
invented, discovered, or copied from earlier models in the 1970s, it hardly matters whether
microfinance promoters believe the mythology, what Pankaj Jain and Mick Moore have called
the “orthodox fallacy.” What matters is that investors—again, understood broadly to include all
who provide finance for microfinance—have often rewarded those who tell certain stories,
creating a selective environment that favors the microfinance groups best at telling them. This
should not surprise. Partly in order to raise funds, all of us who believe in our work tell the best
stories we can to illustrate our theories about how we help. Jain and Moore put it well:
We are not suggesting here that the leaders of the big [microfinance institutions (MFIs)]
perpetrated some kind of fraud….The picture is far more complex than that and notions of blame
or of individual responsibility are irrelevant to our objective of obtaining practical understanding
of why and how [MFIs] have been so successful. Our limited evidence suggests that the orthodox
fallacy blossomed and spread in large part because that is what people in aid agencies wanted to
hear, thought they had heard, or asked [MFI] leaders to talk about and publicise. To the extent
that [MFI] leaders did foster a particular image, this could be seen simply as targeted product
promotion in a “market” of aid abundance…
…to justify the continuing flow of that money to their own particular organisations and to
the microfinance sector as a whole, [MFI] leaders and spokespersons have gradually found
themselves, through a combination of circumstances and pressures, purveying a misleading
interpretation of the reasons for their success. They emphasise a few elements in a complex
organisational system, and are silent on many key components.4
Ironically, microfinance succeeded in part by obscuring the businesslike nature of its success.
Though the mythologizing of microfinance is understandable, even inevitable, and
though it has done a phenomenal job of promoting financial services for the poor, it has also
4
Jain and Moore (2003), 28–29.
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harmed the movement. As studies emerge that contradict the high-flying myth, suggesting
instead that microcredit is not a reliable weapon against poverty, public support may dive, like
Icarus after he flew too close to the sun. Investors may turn against all of microfinance. And
even if it escapes this fate, the mythology threatens to keep distorting the movement in favor of
one service, microcredit, delivered in ways conceived at one time, about three decades ago. The
mythology has spread the dangerous idea that investing in microcredit, putting the poor in debt
on a large scale, is automatically good for the poor. In 2004, for example, the U.S. Congress
acceded to lobbying from U.S. microfinance groups to require that half of all U.S. microfinance
aid go to “very poor” people, despite the lack of much evidence that this was a practical and
good idea.5 This book is an attempt to develop a more honest story of microfinance, so that
Icarus will neither fly too close to the sun nor brush the waves, so that the movement will realize
its fullest potential to serve the poor. To start the construction of this new story, we need to
synthesize the lessons on the impacts of microfinance from part II.
You can’t have it all
Economics is sometimes defined as the study of the optimal allocation of scarce resources. In
truth, there is more to it than that (resources are rarely allocated optimally anyway) but the
definition is apt in that dismal scientists often think in trade-offs. Rejiggering a factory to alter
the allocation of labor and capital means more toasters but fewer microwaves. Part II labored to
think and gather evidence about each kind of success, one at a time. But that evaluation is only
input to judgment, which is necessary for wise action. Having built our evidence base by scoring
microfinance against various standards, we now need to think across them, and here it is helpful
think in terms of trade-offs.
The law defined “very poor” as less living on less than $1,000 per annum in Europe and Eurasia in 1995 dollars,
under $400 in Latin America, or under $300 elsewhere. U.S. Congress, Microenterprise Results and Accountability
Act of 2004, Public Law 108–484, §252(c).
5
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Trade-offs await us on at least two levels: in comparing microfinance to other charitable
projects, and in comparing styles of microfinance. On that first, broader level, the notion brings
us to the grand questions of this book: Does microfinance deserve all that praise and funding? Or
should microfinance investors channel their charity elsewhere? Microfinance is not unusual in
the degree of our ignorance about its impacts. So our limited understanding of microfinance in
particular is not a strong argument against it. I think that financial services for the poor do
deserve a place in the world’s aid portfolio, for two reasons. First, microfinance has compiled
impressive achievements in building institutions that enhance the freedom of millions. These
achievements come with caveats, especially about the dangers of credit, but because
microfinance is more than microcredit, and because microcredit is generally safe in moderation,
the caveats are not fatal. Second, a principle of diversification applies in charitable investing just
as it does in conventional investing: given the achievements and the inevitable uncertainties
about the impacts of microfinance, school-building, road-building, or anything else, it is wise to
invest in several strategies at once. Diversification reduces risk. That said, I will argue below that
from the point of view of delivering appropriate financial services to the poor, microfinance’s
slice of the portfolio has effectively grown too large, dominated as it is by credit for microcredit.
Microfinance would do better on its own terms if there were less money for it. To this substantial
extent, then, there is no trade-off between microfinance and other kinds of aid. Less money for
microcredit and more for bednets would be a double win.
But within microfinance, trade-offs are harder to avoid. In the late 1990s specialists hotly
debated the importance of serving the poorest, even if that required subsidies (including through
wholesale finance at submarket rates), relative to the importance of weaning MFIs off subsidies
so that they could grow to serve more people. Economist Jonathan Morduch called the split
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between the “poverty” and “sustainability” advocates the “microfinance schism.” Within this
breach, however, a line of thought grew that questioned the inevitability of the trade-off:
business-like sustainability, the argument went, need not cost much in depth of outreach” to the
poorest. Bangladesh was Exhibit A. True to his training, Morduch doubted that the choices could
be dodged so easily.6 With coauthors, for example, he demonstrated that increasing a microcredit
interest rate 1 percent (not 1 percentage point) in Dhaka, the capital of Bangladesh, reduced
borrowing by slightly more than 1 percent on average. The implication: even in Bangladesh,
cutting interest subsidies at an MFI might make it more self-sufficient, but would also put formal
financial services beyond the reach of some poor people.7 With other coauthors, Morduch
examined data on MFIs around the world, looking for relationships between profitability and the
shares of clientele that were poor or female. While hardly uniform, the overall correlations were
negative. “[I]nvestors seeking pure profits,” they concluded, “would have little interest in most
of the institutions we see that are now serving poorer customers.”8
The evidence gathered in this book also hints at trade-offs, especially between
development as freedom and development as institution building. Recall the end of chapter 7:
“There is a margin at which convenience for the institution and the needs of the client conflict.”
MFIs can do credit more easily than savings or insurance, yet it is credit that by nature curtails
freedom more. Layering non-financial services on top of financial ones may enhance women’s
agency but also takes subsidies. Higher interest rates may boost the profitability of MFIs and the
dynamism of the industry—and flirt with “usury.” Likewise, the trade-off between development
as poverty reduction and development as industry building is so direct as to almost escape
mention: higher prices make clients poorer.
6
Morduch (2000).
Dehejia, Montgomery, and Morduch (2009).
8
Cull, Demirgüç-Kunt, and Morduch (2009a), 169.
7
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If it is easy to point out choices, it is harder to make them. The consequences of
subsidizing microfinance vary over place and time in ways we cannot gauge any more than we
can predict the precise consequences of a one-percent interest rate cut on a hundred different
borrowing families. Even if we knew exact consequences, ethical imponderables would raise
their heads. How are we to weigh the benefits of cheaper services for a smaller group against
those of more expensive services for a larger one?
In the face of such unknowns and imponderables, I suggest two principles of judgment.
First, that microfinance (or anything else) is mostly likely to achieve its potential when it follows
its natural constructive tendencies. If your daughter were a piano prodigy, you would probably
try to nurture her talent even at the expense some growth along other dimensions. Note the
“constructive”: you would probably not nurture her tendency to sociopathy. By this principle,
microfinance is likely to do the most good when it plays to its strengths. Going by the review
above, the microfinance project’s real talent is for turning modest amounts of aid into substantial
businesses and industries that provide reliable services. Among charitable projects, it is in this
respect truly prodigious. To echo the previous chapter: “There is no Grameen Bank of
vaccination. One does not hear of organizations sprouting like sunflowers in the world of clean
water supply, hiring thousands and serving millions, turning a profit and wooing investors.” In
contrast, client-for-client, microfinance does not stand head and shoulders above other forms of
aid in reaching the poorest, let alone lifting them out of poverty. The evidence suggests the
contrary in fact, that microcredit is more likely to reduce poverty among those who already have
businesses or who, because they are better off to start with, can start a business more easily. With
respect to Morduch’s “schism,” I therefore favor those who seek to do microfinance in a selffinancing, businesslike way in order to maximize reach.
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The second principle of judgment is: don’t give up hope on dodging trade-offs. The
dictatorship of hard choices is only absolute if microfinance institutions are squeezing every
possible ounce of productivity from the capital and labor they consume. Such perfect firms
reside only in textbooks. No real firm operates at what economists call the technological frontier,
where every gain in one respect must come at a sacrifice in another. Indeed, the most important
economic developments occur not when people figure out how to get close to the frontier, but
when they push it back, as Yunus and his students did. Thus the choices in microfinance today
are not entirely dismal. The chief opportunity I see is in savings, including through advanced
technologies.
Deliberately seeking savings
Shifting toward savings and away from credit should help microfinance perform better on all
three of the senses of success considered in this book. A randomized trial found savings reducing
poverty. Savings, if it is safe, does not impinge like debt on freedom. And MFIs enrich the local
financial fabric most when they interface with the poor bidirectionally, taking savings and giving
credit. Experience and common sense say that the poorest are more willing to save than to
shoulder the risk of credit. Recall that BRI in Indonesia has twelve times as many savers below
the poverty line as borrowers.9 Meanwhile, as we saw in chapter 2, savings can do almost
anything credit can. People save to start a business, pay tuition, finance a funeral.
To achieve its full potential, savings must be offered in a variety of forms. Where credit
disciplines with mandatory weekly payments, for example, commitment savings accounts can
levy penalties to enforce agreed contribution schedules and withdrawals rules. Liquid savings
accounts, in which money can be moved in and out at any time, can approximate the flexibility
9
Johnston and Morduch (2007), 29.
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of a line of credit. Where loans for the poor generally charge more interest than loans for the
better-off, savings accounts for the poor can pay less, and even charge interest through fees. An
interesting credit-savings hybrid is Stuart Rutherford’s “P9,” which he is piloting through
SafeSave’s rural sister in Bangladesh, Shohoz Shonchoy. It is designed to eliminate two barriers
to saving: lack of discipline and lack of a periodic lump sums of income, such as a paycheck,
from which to set aside money. P9 morphs oddly, see-saw–like, from credit to savings. A client
starts with a zero-interest loan of 2,000 taka ($29), of which the bank disburses just two-thirds
while putting the rest in a zero-interest savings account. She pays back the full 2,000, then
repeats with larger amounts, so that after a few cycles her savings exceed her credit balance.10 At
that point, she can continue to borrow in order to save, or just save conventionally.
Those wanting to offer various kinds of savings accounts on a large scale face two major
challenges. One is ensuring that the deposit-taking institutions deserve the trust of savers.
Savings must be safe. In informal, small-group savings arrangements, trust can be built through
witness. In a Village Savings and Loan Association (VSLA) of 30 women, everyone can watch
as the three key holders secure the group’s lock box. But when clients are too numerous for
direct witness, government supervisors usually need to become involved. They can require banks
to store deposits into relatively safe places, such as accounts at major commercial banks and
short-term government bonds. Or if the deposits are put to riskier uses such as microcredit,
regulators can require the banks to build up reserves from investor’s capital and retained profits
in order to cushion deposits against loan losses. They can also require independent audits. Your
typical fledgling non-profit cannot meet such rules, impeding entry into the savings business.
This is why many MFIs have entered lending first to build scale, competence, and reputation,
then branched into savings. (See Table [7] in chapter 8.) On the other hand, among the exemplars
10
Stuart Rutherford, “Product rules,” sites.google.com/site/trackingp9/home/product-rules, viewed April 24, 2010.
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of microsavings, the largest and smallest, BRI’s unit desa system and Stuart Rutherford’s
SafeSave, both took savings from the start and so far have vindicated their clients’ trust. And
ProCredit banks in many countries took savings from birth or moved into it quickly, exploiting
the financial muscle of their parent organization. At any rate, accepting the credit-then-savings
path as reasonable, it follows that at any given time not every MFI should do microsavings.
In fact the reverse follows too by a sort of doctrine of comparative advantage: if MFIs are
not all suited for savings, then not every organization that does microsavings needs to be an MFI.
Sometimes institutions of different form, with a comparative advantage in reliability, can do the
job better: candidates include VLSAs; credit cooperatives and their more formal and regulated
cousins, credit unions; private savings banks and postal savings banks; and state agricultural
banks. If the end is expansion of savings, we should be ecumenical about the means.
Along with earning trust, another major challenge for microsavings is controlling cost. A
careful study by the Inter-American Development Bank of MFIs in Latin America found that for
microsavings accounts, defined as those under $100, harboring $1 in deposits cost an astonishing
$2 per year, mainly in bank tellers’ time taken up with tiny deposits and withdrawals.11 Clearly
the economics of banking impose limits on how small the accounts and how poor the people that
can be served. Happily, the situation is not as bleak as this statistic suggests. Just as microcredit
is most expensive in Latin America—because adequately skilled employees earn a lot more than
those they serve—so should we expect microsavings to be. The economics are probably better
elsewhere. Meanwhile, despite the high costs, the Latin MFIs accepted the small accounts, and
for interesting reasons: a sense of mission to serve the poor, backed by cross-subsidies from
larger, profitable accounts; an expectation that many balances would rise over time; and use of
the savings relationship as a platform to sell insurance, money transfers, and credit. And as I
11
Maisch, Soria, and Westley (2006).
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discuss below, modern technology may cut administrative costs and raise revenues. Technology
makes it easier to charge clients by the transaction, even if only pennies at a time, rather than by
the month. Such tariffs encourage clients to economize on transactions while guaranteeing the
provider a profit at every step. Ignacio Mas, who jumped from Vodafone to the financial services
program of the Bill and Melinda Gates Foundation, explains that charging by the transaction “is
analogous to prepaid airtime for mobile operators: a card bought is profit booked.”12
Along with that for microsavings, a similarly principled but less practical case can be
made for microinsurance. If the chief financial problem of the poor is managing unpredictability,
insurance seems tailored to help. When I asked myself in chapter 2 which financial services I
prize most, I chose life and health insurance because they blunt some of life’s worst traumas.
However, insurance is inherently more complex than credit and savings, which cuts against the
intense imperative in microfinance to streamline in order to keep expenses in line with the tiny
sums at stake. To prevent fraud, it sometimes takes work to confirm insurable events as
seemingly obvious as death. Moral hazard (insurance encouraging irresponsible behavior) and
adverse selection (only those at greatest risk taking the insurance) further compromise the
economics. So does the skepticism of prospective clients: many people will not buy insurance
even when it is in their interest to do so, which is why insurance is so often bundled (property
insurance with a mortgage, credit-life insurance with credit) or mandated by law (car and health
insurance in many countries). Why put your money into an insurance policy and risk never
seeing it again, some people think, when you could save the money and keep it yours? So that
customers do not feel that their money is simply disappearing, insurers sometimes offer to cover
common events such as mild droughts and monthly prescription fulfillments. That drives up
premiums—and makes insurance more like savings.
12
Mas (2009), 57.
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Any progress on microinsurance is extremely valuable. Exploratory efforts to insure the
poor should be supported and successes should be applauded. The prospects are best in South
Asia where, just as with microcredit, skilled staff are cheapest relative to the incomes of those to
be served. But on balance, microinsurance for the billions appears a less practical ideal than
microsavings for the billions.
Too much credit for microcredit
The financial devices that are channeling billions of dollars a year into microfinance are marvels.
Yet because it goes mostly into microcredit portfolios, this ample and cheap finance has at least
two downsides. It has dulled the initiative to take savings as an alternative source of funds for
lending. And it has allowed and thus—in competitive markets--driven MFIs to grow faster than
they can safely manage. Recognizing these risks while accepting that credit for microcredit has
its place forces hard questions. How should investors collectively define and enforce Aristotle’s
golden mean with respect to credit for microcredit? Can they legislate collective moderation?
And if moderation cannot be enforced, would the next-best option be a more extreme solution,
such as browbeating certain classes of investors into withdrawing?
Consider first the concern about undermining deposit-taking. Most MFIs cannot emulate
the purity of BRI, which as a century-old government-owned bank circa 1990 was stout enough
to resist the World Bank’s repeated offers of credit. Nor should they necessarily. Even mature
MFIs should diversify across funding sources, including loans and equity (ownership stakes)
from investors. Each source has its costs and risks. Subsidized loans might disappear if the
whims of donors shift. Deposits might plunge in a recession. Equity is the most pliable, but by
the same token most expensive (investors expect higher returns when they take greater risks,
when they buy stocks instead of bonds). In light of such complexities, it is hard to pinpoint the
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right amount of submarket lending to MFIs. Should the amount of cheap money made available
to MFIs taper as they grow, to wean them off pure credit? According to what formula?
As for the second concern about ample, cheap finance—that it will cause dangerous
credit expansion, even bubbles--deciding how much finance is also difficult, notoriously so. To
ground my thinking about this challenge, my research assistant Paolo Abarcar and I set out to
answer an impertinent question about the microcredit bubbles that popped in 2009 (see chapter
8): Who inflated them? We combed through the annual reports of the largest MFIs in the four
bubble-popped countries.13 In Bosnia, Nicaragua, and Pakistan, it turned out, foreigners supplied
most of the air for the bubbles. And most of them lend public money. Number one in Bosnia was
the European Fund for Southeast Europe, a conduit for European government donors. In
Pakistan, the Asian Development Bank loomed over the scene; second there is the Pakistan
Poverty Alleviation Fund, which passed through a World Bank loan. Some of the big creditors
are private companies that manage funds from both public and private investors with social
missions. Blue Orchard, for example, is number one in Nicaragua and number two in Bosnia.
(See Table 1.)
One important message of Table 1 comes from its novelty. Laboring to answer the
question of who inflated the bubbles, I realized: almost no one knew. The data summed here are
incomplete, uncertain in some respects, and at 1–2 years of age, ancient next to the tempo of
hypergrowth. But they are the best that were publicly available. In the years before the bubbles
burst, hardly anyone saw the big picture because hardly anyone had tried.
Where one institution, such as the U.S. government’s Overseas Private Investment Corporation, had guaranteed
another’s loan—promising to pay it if the borrowing MFI did not—we attributed the amount to the guarantor.
13
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Table 1. Top five creditor/guarantors to top five microfinance institutions with data
This story should sound familiar: A set of borrowers, microcreditors in this case, are
taking loans from many sources. Total borrowing is expanding rapidly. No one is tracking all
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this activity, much less whether the borrowers can reasonably be expected to handle all the debts
they have contracted. The easy credit is hiding the very problems it creates, since unpayable
loans are quickly refinanced with new ones. In other words, the cross-country microcredit
financing scene resembles the within-country microcredit market in some places, with untracked
multiple borrowing creating the risk of overborrowing and bubbles. Ecological economist
Herman Daly once wrote about the need to move from an “empty world” mentality that treats
natural resources as inexhaustible to a “full world” one that recognizes limits.14 In remarkably
short order, the ecological footprint of microfinance finance has swelled from empty to full. Not
that everyone who would want microcredit has it; rather, the bottleneck is no longer wholesale
finance. In the mid-1990s, Alex Silva struggled to raise a few million dollars for the first
microfinance investment vehicle, Profund. (See chapter 8.) Now microfinance investment
managers are struggling to absorb millions per day. For the sake of the industry’s health,
investors must adapt to the new reality. If they do not institutionalize collective limits, they may
finance further unhealthy lending.
Within the microfinance world, the dominant public response to aggresive lending has
been to attack its surface manifestations. One example is the Smart Campaign, which is a joint
production of CGAP and ACCION’s Center for Financial Inclusion. It has signed up more than
250 MFIs to endorse six principles of responsible lending: avoidance of over-indebtedness;
transparent and responsible pricing; collection practices; proper staff behavior; mechanisms for
redress of grievances; and privacy of client data.15 Nice words may do little in themselves, but
they give investors a benchmark with which they can hold MFIs accountable. Recently, for
example, an MFI that had endorsed the Smart Campaign quietly increased the forced-savings
14
15
Daly (2005).
smartcampaign.org/about-the-campaign/campaign-mission-a-goals.
17
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/31/2016
percentage on its loans. Continuing to charge interest on the full loan amount while reducing the
portion that clients could take out increased the effective interest rate in a way that violated the
principle on transparent and responsible pricing. Two microfinance funds that financed the MFI
wrote a pointed letter to its management expressing displeasure with the change.16
But the history of financial manias teaches us that a heavy tide of capital will overtop or
sweep away all but the sturdiest of embankments. In the United States, for example, the trilliondollar build up to the financial crisis of 2008 tossed aside ratings agencies and central bankers
and economic prognosticators—supposed agents of restraint—like so much flotsam. Only
localities with the firmest restraints on lending, such as North Dakota and Canada, held off the
tide. Efforts such as the Smart Campaign, while constructive, don’t seem made of stuff strong
enough to fundamentally address the problem of overeager lending. Indeed, they could
exacerbate it by preserving the public image that draws the capital in the first place. Something
else is needed to attack the problem closer to its source: a campaign aimed directly at credit for
microcredit, with the goal of restraining it.
But what would be the demands of such a campaign? How would moderation be defined
and enforced? Together, the two concerns about easy money for microcredit—undermining
microsavings and overstimulating microcredit—pose a complex problematique. It is not obvious
how the social investors who dominate finance for microfinance should decide how much to lend
as a group (or what price for their credit is too low), nor how they should keep themselves within
such limits.
Within nations, one standard corrective for overeager lending is the credit bureau. By
analogy, investors in microcredit need at a minimum to establish ways to share information at
high frequency on the financial obligations of MFIs in which they invest. This can happen
16
Rozas, op. cit. note 17.
18
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/31/2016
informally. In fact, managers of private microfinance investment vehicles are now sharing
intelligence in the countries whose bubbles have popped. The investors recognize that they must,
indeed, all hang together—collectively providing financial breathing room for MFIs on the brink,
monitoring their moves closely—or most assuredly they shall all hang separately. For if one
investor calls in its loans, that might precipitate a bankruptcy that would damage the others.17
Or the credit bureau analogy can—and should—be taken more literally: investors should
construct a formal body that would collect and publish high-frequency, high-quality data on the
liabilities of microcreditors (what they have borrowed wholesale) and assets (what they have lent
retail). Popular enthusiasm for microcredit and the resulting politics—public investors such as
the World Bank’s International Finance Corporation have long relied on investment in
microcredit to burnish their public image—are nearly irresistible forces that drive the continuing
flow of money. They can only be stopped by a nearly immovable object such a credit bureau that
publicly draws a line. In effect, the body would professionalize what Paolo and I did. It could
also gather data relevant to the question of when credit for microcredit undermines the initiative
to enter the savings business. It could analyze whether a given MFI could realistically obtain
permission to take savings; study the cost of doing so; and compare that cost to that of external
capital in order to gauge the distortion from cheap credit. It might issue warnings of various
severity levels based on these indicators.18 These external reference points would help
microfinance investment managers resist higher-ups, politicians, customers, and citizens who are
eager for them to pour more money into microcredit. External reference points would also help
managers contain their own eager inner demons.
Like ordinary credit bureaus, such a centralized brain for the microcredit investment
17
18
Daniel Rozas, microfinance consultant, Brussels, e-mail to author, March 29, 2010.
Liliana Rojas-Suarez, Senior Fellow, Center for Global Development, conversation with author, April 30, 2010.
19
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/31/2016
business would reduce but not solve problems. After all, America’s three credit bureaus did not
stop the sub-prime lending bloat. As for microfinance, investors as diverse as the World Bank,
Blue Orchard, TIAA-CREF, and Kiva might not find common ground on mutual regulation,
however light. If they did agree, the guidance issued by the regulating entity might be so muddy
as to be ineffectual against the strong institutional imperatives to keep investing. The toughest
problem might be accepting the restraint implied by a serious commitment to savings: would
microfinance investors support a body that advised them to slash their operations, to stop picking
the plum MFIs?
An alternative to regulating the sizes of the flows is to regulate who can emit them,
favoring those more apt to act with care. The key may be to distinguish between generalists such
as the World Bank and Catholic Relief Services (CRS) and specialists such as microfinance
investment vehicles and microfinance network groups. Among generalists, microfinance is one
of many lines of business, and staffers often rotate to another country or department before
consequences of their decisions in the previous arrive. Among specialists, one debacle can
jeopardize their reputation and entire funding base. That risk focuses the institutional mind.
Notably, CRS withdrew from microcredit in 2005, recognizing that it lacked enough competency
and focus.19 CRS decided to leave surgery to the surgeons.
A campaign to remove generalists from funding microcredit might however be
impractical. The line between generalist and specialist might be hard to draw in some cases. And
it is not clear what agency could ban private generalists such as CRS. A more practical
distinction is that between public and private investors. In a 2007 report called Role Reversal,
Julie Abrams and Damian von Stauffenberg argued that public investors ought to exit MFIs
when private ones enter. The job of public investors (which they call International Financial
19
Wilson (2007).
20
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/31/2016
Institutions, or IFIs) is to “go where the private sector does not yet dare to tread; to assume risks
that private capital would find unacceptable.” Yet public investors often fall down on the job:
Whether top decision-makers are aware of it or not, there are powerful incentives for IFIs to
maximize their microfinance exposure, and to do so by concentrating on the largest and safest
borrowers. Microfinance has acquired such a positive image, that a sizeable exposure in this
sector has become a sign of a IFIs commitment to development. This is reinforced by an IFI’s
need to disburse its microfinance budget each year. Since IFIs are not primarily profit-driven their
success is often defined by the amounts that have been lent. If a budget has been allocated to
microfinance, that budget must be spent—and spending it on a few large loans to top MFIs is far
quicker, cheaper, and less risky than lending to, and nurturing immature institutions.20
On its face, “public should exit when private enters” is a blunt rule with a fuzzy rationale. It is
not obvious why private investors pursuing that “positive image” should behave more
responsibly than public ones doing so. But given the dangerous surfeit of investment in
microcredit, and 90-percent dominance of public investors within it, following the rule would
make the world a better place because it would guarantee a throttling back in the flow of credit
for microcredit. And it is in a sense practical: legislatures could mandate it.
If the microcredit investment industry cannot be run in a way that minimizes harm to the
twin goals of responsible lending and deposit-taking, then perhaps it should be shut down
altogether, save for a catalytic role in developing new MFIs through seed capital and training
grants. Because of the dangers of aggressive lending, too little direct financing of microcredit
portfolios is better than too much. A fundamental problem here is that the evidence on the
overall impact of microcredit on poverty and freedom is ambiguous, while harm to a minority of
users is a certainty. If the sign on microcredit’s impact was more clearly positive, we would not
need to engage in such mental contortions to define a limited, healthy role for investment in
microcredit. If it is this hard to assure that such investment does more good than harm, that
suggests we are barking up the wrong tree.
20
Abrams and von Stauffenberg (2007), 1.
21
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/31/2016
The technological frontier
The flavors of microcredit that powered the microfinance revolution—solidarity and village
banking, individual microcredit (see chapter 5)—are what economists call technological
breakthroughs Although they were low-tech in the everyday sense of the word—involving
meeting in person, paying in cash, keeping records on paper—they were nevertheless new ways
to extract more value from a given amount of labor and capital. They pushed back the
technological frontier. Since then, microfinance has not changed so much as a retail product.
SKS in India does group microcredit much as Muhammad Yunus and his students invented it
(albeit with a computerized back office). Compartamos in Mexico does village banking more or
less as John Hatch and FINCA refined it.
It appears though that the future of microfinance is not merely the past with a high-tech
add-on—group meetings with Palm Pilots—but something or somethings radically different.
Advances in computing and communications are triggering a revolution here as in so many
spheres. In the mid 2000’s, Brazil used satellite links and barcode readers to extend its banking
system into all of the country’s 5,561 municipalities, including 2,300 that before were unbanked.
Post offices and corner stores now operate as “correspondent banks,” agents who can handle
transactions on behalf of regular banks far away. Most importantly, they handle the conversion
between paper and electronic money, so that customers can, for instance, pay water bills. The
system has handled trillions of dollars in payments.21 In South Africa and Namibia, a company
called Net1 delivers welfare payments to nearly 4 million people by charging their smart cards.
Cardholders can convert balances to cash at any store with the appropriate point of sale (POS)
card reader. On the outside, the cards and the readers resemble ordinary credit cards and the
Terence Gallagher, Consultant, presentation at “Expanding Financial Services to the Poor: The Role of ITC,”
International Finance Corporation, June 9, 2006.
21
22
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/31/2016
machines through which they are swiped. But inside, the technology is more advanced. For the
cards and readers are designed to operate in decentralized fashion to accommodate unreliable
power and communications infrastructure. They contain chips that store encrypted transaction
histories of their owners and the owners of other cards or readers that they have recently
touched, allowing them to pass around transaction histories like ants passing chemical signals.
When the readers do connect by phone to central computers, they synchronize everything they
have. And because the cards are computers, they can, when passed through readers, provide extra
services. They can extend a loan on the fly, based on on-card data about the card holder’s history
of welfare payments and servicing of past loans.22
But perhaps this one fact suffices to make high-tech microfinance revolution inevitable
worldwide: some 5 billion people, including half of all people in developing countries, now tote
mobile phones. And the community of the connected is growing fast even in the poorest
countries.23 Put otherwise, there are now 5 billion people with globally networked computers in
their pockets. What can they do with those besides talk and text? Accessing financial services is
a leading candidate. In the Philippines, the country with the highest use of text messaging per
capita, mobile phone users can pay for milk at a store or send a friend money by pulling out a
phone.24 In South Africa, the upstart WIZZIT Bank expanded rapidly to bring financial services
to the poor by phone, and provoked all the large banks into following suit.25
The most successful phone-based money system so far was created not by a bank, but, as
in the Philippines, by a phone company. Called M-PESA, it was launched in 2007 by Safaricom,
22
David Schwarzbach, Vice President, Business Development, Net1 UEPS Technologies, Palo Alto, California,
presentation at Center for Global Development, June 14, 2006, cgdev.org/content/calendar/detail/8069.
23
ITU (2010), ix.
24
[Ibid.]
25
Brian Richardson, Chief Executive Officer, WIZZIT Bank, presentation at “Expanding Financial Services to the
Poor: The Role of ITC” conference, International Finance Corporation, June 9, 2006.
23
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/31/2016
a joint venture of global mobile giant Vodafone and the government of Kenya. It was initially
developed with a grant from the U.K. Department for International Development. In just three
years it reached more than 9 million, or 40 percent, of Kenyan adults. M-PESA now handles
more transactions than Western Union. Interestingly, as a matter of history, it was born out of the
microfinance movement, for it began with the idea of doing microcredit transactions by phone.
But people in early focus groups said they wanted to use it for something else: sending money
home. In Kenya, many rural families send a husband to Nairobi to work and support the family
from afar. Before M-PESA, physical transport of cash was costly and dangerous. One could
spend a day or so taking it home oneself. One could get robbed on the way. One could pay
informal money carriers, again exposing oneself to robbery as well as fraud. So a safer way to
send money home, not electronic microcredit, became the “killer app” that drove M-PESA
forward.26
All this high technology might dazzle you into thinking that poor countries are
leapfrogging the rich into the age of electronic money, leaving cash behind. Not quite. In fact,
the first thing that people in Kenya usually want to do when they receive electronic money is
encash it. This they do by visiting any of the 17,000 M-PESA shops which, like Western Union
stores, convert between the old and new forms of money for a fee.27 The shops are businesses in
themselves, run by individual entrepreneurs in agreement with Safaricom. Almost all the shops I
visited during a trip in 2010 were run by women. For these business people, providing the ondemand conversion between paper and electronic money takes work and involves risk. They
must staff their shops as much as possible, project cash demand, keep enough cash on hand, and
transport it between the shops and the bank (absorbing the risk of robbery). In return, these
26
27
Mas and Radcliffe (2010).
Ibid., 1.
24
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/31/2016
entrepreneurs keep 70–80 percent of the commissions, the rest going to Safaricom.28 As that split
suggests, the M-PESA shopkeepers, and not the phones, are the heart of M-PESA. The phones
are the skin.
But the phones do hold the system together; and understanding how gets to the core
departure from traditional microcredit. For one, the phones allow real-time aggregation of
transaction information so that the managers behind M-PESA can anticipate cash demand more
efficiently.29 As well, the phones make e-money seem real and trustworthy. The instant a
customer deposits cash into his phone account, Safaricom verifies his new balance with a text
message. More generally, the phones let customers hold Safaricom and its agents accountable for
promises of service to a degree impossible in informal ways of sending money. That
accountability in turn allows the professionalization of cash transport. Before M-PESA, village
women might have gone individually, by foot or by bus, to the nearest market town to pick up
cash sent home by husbands. Now an M-PESA agent can do it for all of them, all at once, saving
time.30 When I visited Kenya to see M-PESA, my fellow travelers and I were taken to the market
at the crossroads in Holo, not far from Lake Victoria. Before M-PESA, we were told, people
trekked to the Kisumu, on the shores of the Lake, to get their cash—and spent much of the cash
in the market there. Now the cash comes to them through M-PESA, and they spend it locally.
And so the Holo market is bustling as it once was not.31 Ironically, a major impact of the new
mobile money technology has been increased access to the old mobile money technology, cash.
The M-PESA experience shows how information technology can create new efficiencies
and empower clients. In M-PESA, we see an alternative to the power relationships of traditional
28
Eijkman, Kendall, and Mas (2010), 3.
For more on the management structure behind M-PESA, see blog post “Make New Media of Exchange, But Keep
the Old,” j.mp/c3tbXx, and
30
Eijkman, Kendall, and Mas (2010).
31
Frederik Eijkman, Co-founder, PEP Intermedius, Kisumu, Kenya, conversation with author, May 18, 2010.
29
25
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/31/2016
microcredit, in which bank employees lean on clients to lean on each other (in group credit), and
in which the ultimate sanction is the loss of future access to loans (in individual and group
credit). Looking ahead, technology makes possible cheap, reliable identification, through
fingerprint or retina recognition, which may pave the way for credit bureaus for the poor.
Technology can even nudge people into saving through automated reminders.32 In May 2010,
while I was in Kenya, Safaricom launched a partnership with Kenya’s dominant MFI, Equity
Bank. With a few key presses, Safaricom users can now move electronic money into an Equity
savings account that pays interest. They can apply get automatic loans too, just as with Net1’s
system. And they can buy personal accident insurance. High-technology microbanking looks set
to bring formal financial services to millions more people, and perhaps break microfinance’s
traditional structural bias toward credit.
Coming full circle
I began this book with two opposing stories, one of Murhsida, who climbed out of poverty on a
ladder of microcredit, one of Razia, who slipped down a rung. I did so to expose how storytelling
forms the public image of microfinance, and to make the case for serious research. We need
good research not to move beyond thinking in stories, but to test stories, to inform us about
which are most representative. That is as close as we can come to the truth about something as
diverse as the microfinance experiences of 100 million people.
Though this book examines services other than credit and notions of success other than
proven poverty reduction, there is no denying that the grain of sand that seeded this imperfect
pearl is the common belief that microcredit cuts poverty. As a child of bitterly divorced parents,
it goes against my nature to choose sides. I see the world in grays and it is those who see it in
32
Karlan et al. (2010).
26
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/31/2016
black and white, whatever side they choose, who most stir my ire. So I cannot dismiss traditional
microcredit as nothing more than hype. But it is hard for me to defend it as a good way for aid
agencies, philanthropists, and social investors to help poor people. Consider:

While microcredit gives people a new option to manage their complex and unpredictable
financial lives and helps some build businesses, it also leaves some worse off and has an
addictive character, with the need to pay off one loan often feeding the need for the next.
Overborrowing becomes more likely as creditors multiply and compete, often by lending to
the same clients.

Although good studies show microsavings and microcredit stimulating microenterprise, those
on microcredit have so far found no impact on poverty.

Qualitative studies by people who immersed themselves in a village for a month or year
corroborate this ambivalence. Some women find liberation in doing financial business in
public. Others find entrapment in the peer pressure.

Enthusiastic flows of money into lending are inherently dangerous. They can reward overlyrapid lending and, in competitive markets, nearly force it through a vicious cycle in which
each lender strives to keep up with its peers.
Credit is undoubtedly useful in moderation, as a way for people to discipline themselves
into setting aside money for big purchases. It becomes dangerous when it is pushed too hard.
And it is here that the mythology that has grown up around microfinance is not just deceptive but
destructive. How much support for microcredit is too much? Incomplete evidence cannot support
a certain answer. But choices today must be made on the evidence available today. To the
practical question of whether social investors ought to keep pouring billions of dollars per year
into microcredit, I say no. Seed money for start-up MFIs is one thing; large-scale, submarket
27
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/31/2016
financing of microcredit portfolios is another. Since such flows currently account for the
majority of money going into microfinance, it follows that finance for microfinance should go
down. The priority should not be building giant machines for indebting the poor.
It should be to create balanced, self-sufficient institutions that offer credit in moderation,
helping people save and move money safely, and push the envelope of practicality on insurance.
While such a path may superficially contradict the mythology advanced by some of the founders
of microfinance, it is in fact the truest realization of their vision: businesses serving the bottom of
the pyramid, giving millions of poor people more leverage over their difficult financial
circumstances. Nimble social investors have helped build such institutions with money and
advice, and can do more. But the scale of funding needed is an order of magnitude less than what
is seen today in microcredit. The U.K. government helped bring M-PESA into being with a
matching grant of just £1 million.
At the end of day, I cannot dismiss the story of Eva Yanet Hernández Caballero, who
Compartamos featured on its web site until her knitting business unraveled and she began
missing payments on her 100-percent-interest loans.33 I cannot dismiss the story of Jahanara, the
microcredit borrower and moneylender who boasted “that she had broken many houses when
members could not pay.”34 I cannot dismiss the story of families in Andhra Pradesh who lost
wives or fathers to suicide after falling into debt—debt that included microcredit.35 I cannot
dismiss these stories, that is, as immaterial to the morality of pushing credit.
But neither can I dismiss the manifest hunger of poor people for reliable tools to manage
their money; nor the extraordinary success of some microfinance institutions in creating and
serving this market over the last third of a century. The best way forward is to celebrate this
33
Epstein and Smith (2007).
Karim (2008), 23. See chapter 7.
35
E.g., see Biswas (2010) and Lee and David (2010).
34
28
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/31/2016
achievement and build on it. The success of the microfinance movement to date has proven the
viability of businesslike provision of financial services to the poor. The need now is to diversify
more aggressively beyond microcredit. But if savings, money transfers, and insurance can also
be done through institutional forms less associated with traditional microcredit, let them be done
so. At this writing the village savings and loan associations appear to be particularly promising
for the poorest of the poor, such as the millet farmers in the drylands of Niger.36 For people
wealthy enough to own phones, high technology may forge the link to the formal financial
system.
Over the next third of a century, a global industry could arise to deliver to a billion or
more poor people the tools they need to master the vicissitudes of their financial lives. Better
banking will no more end the poverty than more clinics a more schools or more roads ever have.
Most poverty reduction has arisen from profound processes of economic transformation nearly
impossible to push from the outside. But the poor rightly value financial services, enough that
they are often willing to pay the costs of delivery. There is good reason to hope then that modest
outside support can catalyze the needed innovation and growth. If this vision is made real, that
will be a mighty achievement. And it will cast the last third of a century, however dominated by
credit, as essential to the ongoing discovery of ways to help the poor manage their wealth.
36
See chapter 4.
29