What ails microfinance? Bad journalism, for one

Writing in Forbes India, N.S. Raman recently published a piece on what ails microfinance. The article, which reviews David Roodman and Jonathan Morduch’s research on the industry, starts provocatively by challenging the assumption that microfinance is a force for good. It then sprinkles in a few anecdotal comments about greedy for-profits that have overreached and exploited the very people microfinance is supposed to help. Beyond that, the author provides very little evidence that microfinance is not a force for good. Raman’s conclusion seems to be, “If you take microcredit in moderation, it can be helpful, but if you take it in excess, it can actually reduce your freedom.”

Problem is, that’s just common sense. Just like the middle class, the poor can borrow too much, and then find themselves dangerously hyper-extended. The other problem is that Raman seems to deliberately misrepresent – or at least wildly oversimplify – Roodman and Morduch’s findings.

What’s actually more interesting than Raman’s article is Roodman and Morduch’s take on the impact of microfinance. I did a little bit more digging around and came upon Roodman’s response to critics of his research in his Open Book blog. It’s a long response, and a lot of it is econometric gobbledygook, but his final conclusion is much less dramatic than Raman posits. What Roodman found was that the causality link between microfinance and poverty alleviation is not as strong as previously claimed by others. Numerous economists weighed in with a lot of passionate back and forth in the comments section of the blog. But for me, the big takeaway is one of Roodman’s comments: “I think it would be a mistake for funders to flip their views about microfinance based on one paper.”

Understanding the impact of microfinance on poverty is a complex task and the kind of analysis needed is even more complex.

Exactly! Understanding the impact of microfinance on poverty is a complex task and the kind of analysis needed is even more complex. Simplifying the situation by looking at a single study and saying, “See? It doesn’t work” is just as damaging. So, while I differ with Raman on what Roodman and Morduch’s research shows, I definitely agree with him that we need a lot more “evidence-based analysis” to understand what tools work for what people.

So what does ail microfinance? Lack of regulation; lack of diversity of products; regulations hindering diversity of products; products that are too confusing; products that are not customized enough – I could go on and on. Unfortunately we have to add bad journalism to that list as well.

Full disclosure: Jonathan Morduch was my advisor in grad school.