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3ie-LIDC Seminar Series 'Microfinance - a Comprehensive Evaluation'

Wednesday, February 22, 2012 - 17:30 to 19:00

Time: 5.30 - 7 pm
Venue: Manson Lecture Theatre, London School of Hygiene and Tropical Medicine

Speaker:
David Roodman, Senior Fellow, Centre for Global Development

Discussant:
Ruth Stewart, EPPI-Centre, Social Science Research Unit at the Institute of Education, University of London, UK; and the Centre for Culture and Language in Africa, University of Johannesburg, South Africa

‘Relative to expectations, the impact of microcredit on poverty is basically zero over short timeframes.’– argued David Roodman, Centre for Global Development, at the 3ie-LIDC seminar ‘Microfinance – a Comprehensive Evaluation’. - ‘Focus needs to move towards other financial services such as savings and insurance.’

 
The seminar, part of the 3ie-LIDC series ‘What works in International Development’  featured a presentation by David Roodman followed by comments from Ruth Stewart of the Institute of Education, and a public signing of Roodman’s new book  ‘Due Diligence - an impertinent inquiry into microfinance’.
 
When Roodman began his work a few years years ago, the leading study of the impact of microcredit was by Mark Pitt and Shahidur Khandher, published in the Journal of Political Economy, USA. Pitt and Khandher had asserted through their findings that microcredit did reduce poverty in Bangladesh in the early 1990s, especially when the loans went to women. Muhammad Yunus, the 2006 Nobel Peace Prize Laureate Professor and Founder of Grameen Bank, claimed that the bank was ‘lifting 5% of borrowers out of poverty each year’.
 
Roodman subsequently came across a critique of Pitt and Khandher’s research by  Morduch who pointed out that the loans being referred to were intended for ‘landless’ people, defined as owning less than half an acre of land. In actual fact the rule was not being enforced which meant that many people who owned more than half an acre of land were accessing the loans. Pitt soon replied that Morduch had ‘misunderstood and mischaracterised the methods’ of their findings.
 
Roodman concludes that debate by advocating for more transparency in research, stressing in particular the importance of replication and the value of sharing data and code of studies, suggesting it ought to be more common to publish these on the web.
 
Randomisation is crucial - ‘a roll of the dice should ascertain who gets microcredit’. Non-randomised studies cannot be seen as reliable. – said Roodman.
 
Financial services are fundamentally ones that give people more control over their lives by helping them to perform basic functions. They should be considered as necessary as clean water and electricity.- argued Roodman. Poor people need financial services more than those on salaries, making them more susceptible to the negative aspects such as debt traps and unusually high interest rates. Roodman also expressed concern with the ‘group borrowing’ initiatives claiming that individual lending seems to work better. 
 
Finally, the speaker pointed out that not all growth of microfinance was a successful development. Morocco, Nicaragua and Bosnia had bubbles 'pop' due to being inflated with too much money from 'do-gooders'.
 
So how can we make microfinance work?
• build dynamic institutions to mass-produce inherently useful services for poor people
• understand and serve customers
• discourage efforts to lend to the poorest
• generally reduce the amount of funds going into microcredit which make up 85% of all funds in microfinance
• avoid risk of bubbles
• increase incentive for microfinance institutions to take savings as an alternative source of capital for lending
• provide insurance services, particularly life insurance look to potential of new technology - eg. Kenyan mobile phone initiative for money transfer.
About the speakers

David Roodman is a senior fellow at the Center for Global Development focusing on microfinance, debt relief, and climate change. His book Due Diligence asks bottom-line questions about what we know about the benefits of microfinance, and what that implies for how it should be supported. He wrote the book through a pathbreaking Microfinance Open Book Blog, where he shared questions, discoveries, and draft chapters.

Ruth Stewart works for the EPPI-Centre, Social Science Research Unit at the Institute of Education, University of London, UK; and the Centre for Culture and Language in Africa, University of Johannesburg, South Africa.
Ruth Stewart’s work combines evidence-informed decision-making and participatory approaches and spans the boundaries between research, policy and practice across development, health, education and the environment. Based in London, she has collaborated with colleagues in South Africa since 1998. She is now focussing on building a Centre for Environmental Evidence in Africa (CEE Africa).

 

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