This is the final post in a series of excerpts from a conversation between Jonathan Morduch and Marc Labie, published in Mondes en Développement.
In this concluding excerpt, Morduch and Labie discuss the continuing relevance of microfinance, and re-assess an influential paper authored by Morduch in 1999 called “The Microfinance Promise.” While much has changed since the paper came out, Morduch says he’d keep the title— “The sector can count incredible successes, but the biggest economic and social ambitions remain as promises.”
ML: Over the last decade, the support that microfinance had received in previous years has clearly diminished. Many donors and international organizations have reoriented their priorities believing that the impact of microfinance was overstated. But at the same time, the industry keeps growing and financially excluded customers remain numerous. Could you explain to us how these elements may get together? And at the end of the day, do you think that microfinance and financial inclusion have a major role to play in development?
JM: In the end, we should see microfinance and financial inclusion as an enabler. For some customers, it enables business. For others, it enables housing and nutrition. For others, it enables transportation. And so forth. That to me, is one essence of development: the spread of reliable tools to achieve basic goals.
The impact of microfinance was overstated. On the other hand, there is a case to be made that the possibilities for microfinance have been under-stated. The evidence shows clearly that household finance has an important role to play in development, even if the world is not full of capital-starved entrepreneurs as early pioneers asserted. Recent work, both theoretical and empirical, shows the diversity of people who need financial liquidity (Shahe Emran et al., 2021; Bahety and Ngoma, 2021).
ML: You are the author of “The Microfinance Promise,” the most cited academic paper in the microfinance literature (Morduch, 1999b). This paper has clearly played a major role for all those who are or were ever interested in microfinance. What can you tell us about the way this paper was born and how do you look at it nowadays?
JM: The paper was born quite a long time ago. The paper was published in 1999, and I started working on it during a year at Stanford University in 1997-98. The paper consolidated a series of ideas and projects on microfinance that had been brewing.
Before I started writing on microfinance, I worked on issues connected to poverty and risk. I felt that the pieces were not adding up to something bigger, and few people outside of academia seemed to notice any of it.
Amidst uncertainty about how to proceed, Jeffrey Sachs encouraged me to focus more heavily on microfinance. Sachs was at Harvard then and was running the Harvard Institute for International Development (HIID). He was perhaps the world’s best known economist at that point, and he thought a lot about the world beyond academia—to an extent which made him a bit of an outsider in the Harvard Economics Department. His view was that microfinance seemed interesting but that no one within economics was pulling the pieces together, so he urged me to consolidate a research agenda. It was a short conversation, but it helped me see a way forward.
A lot had been written on microfinance in the decade leading up to “The Microfinance Promise,” but it was a jumble. Research was often combined with advocacy, and the most lively conversations were taking place outside of academia, or on the edges. So there was plenty of material, but it was undisciplined.
There had been fundamental academic work for sure. By that point, Tim Besley, Abhijit Banerjee, Joseph Stiglitz, and others had written economic theories explaining group lending in microfinance. Mark Pitt and Shahidur Khandker had circulated a draft of their impact evaluation of Grameen Bank and BRAC, which Pitt presented at Harvard.
Much of the activity, though, was in applied research outside of the main economics journals. Stuart Rutherford had written his biography of ASA and had published The Poor and their Money, with its attention to the importance of the cadence of cash flows. Maria Otero and Elisabeth Rhyne had released The New World of Microenterprise Finance in 1994, taking a commercial view. David Hulme and Paul Mosley had put together the case studies in the two-volume, Finance Against Poverty, again with a pro-business message on impact. JD von Pischke, Dale Adams, Claudio Gonzalez-Vega, and colleagues at Ohio State were also hammering away against subsidized finance.
Academic economists did not engage much, if at all, with that work. But I read as much as I could. Over time I got to know many of the leading voices on microfinance policy, helped by the fact that much of the buzz was in Washington, DC, which was easily accessible by train. I wasn’t convinced by everything, but it was helpful to see how arguments were framed and to piece together underlying assumptions (Morduch, 2000).
At the same time, HIID was heavily involved in microfinance at Bank Rakyat Indonesia. My graduate school friend, Don Johnston, had worked at BRI for years, and I got an inside view during a visit to Jakarta in 1996. I visited Grameen and BRAC in Bangladesh, learning from Syed Hashemi and Imran Matin, and returned to India. In China, I visited Grameen replications and was involved in household surveys. I spoke with loan officers and members of the community. All of that became part of my microfinance education.
There is a joke that economists are people who see something that works in practice and wonder if it works in theory. That was me. I lived that joke. “The Microfinance Promise” was an attempt to take the scattered observations back into the formal framework of economics. I’m sure that I missed a lot, but I also saw much that was new and interesting—and that went in different directions from accepted views. I wanted to provide a way to think about microfinance, not just to summarize the literature.
What do I think of it now? It is both too much and too little.
“The Microfinance Promise” foreshadows most of the elements of The Economics of Microfinance, my book with Beatriz Armendáriz (2010). Among other contributions, Beatriz greatly improved on my attempts at mathematical theory. The discussion of impact evaluations in “The Microfinance Promise” took place well before the new wave of randomized controlled trials, but the discussion in the paper still holds up well after 20 years. My sense, even then, was that the wild claims for huge impacts were at odds with the evidence, and that average impacts on headline outcomes were bound to be modest. That is a mainstream view today, but it was not then. So too is the idea that group lending is not elementally important to microfinance. There is also greater recognition of the role of subsidy today.
But much has changed in a quarter-century. Technology now drives innovation; behavioral economics has brought psychology into finance; and there is much more experimentation than before. But we remain limited, even now, by narrow understandings of people’s financial lives. If I were to write “The Microfinance Promise” today, I would be tempted to keep the same title. The sector can count incredible successes, but the biggest economic and social ambitions remain as promises.
ML: Finally, I would like to quote Richard Patten, one of the old gentlemen who built that industry; he once told me in class – at a time when microfinance was still too often perceived as the magic bullet it is not - « If microfinance is the answer, what is the question ? ». For you, what is the question to which microfinance is the answer?
JM: I once met Richard Patten in Indonesia. He had seen so much in his career and had little patience for overly bold claims and hyperbole (Patten and Rosengard, 1991). He was skeptical of me too – a young assistant professor without much practical experience.
Taking his question seriously, here is my try at a response, borrowing from Stuart Rutherford: Can a simple financial service be delivered reliably and help poor households spend their very scarce resources more effectively?
Microfinance is neither more nor less than that.
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Read parts 1, 2, 3, and 4 of the series, on how the birth and evolution of microfinance was shaped by broader currents in anti-poverty thinking, microfinance buzzwords, women’s empowerment, and trends in how microfinance has been funded and delivered over the years. You can also read the full article (gated).