Preface

Many big new ideas in global development elicit barely a ripple of interest beyond the community of practitioners, policy analysts, and researchers who are development professionals. Microfinance is different: it has burst beyond these confines, capturing the imagination of people from a huge variety of backgrounds, including many in the rich world who have little or no exposure to developing countries or other aspects of the development policy debate.

Since its inception in small experiments three decades ago—the Grameen Project in Bangladesh in the late 1970s, Acción International's trials in the Dominican Republic in the early 1980s—the business of providing formal financial services to poor people has blossomed into a global movement, and a global industry. It began with microcredit. But in time the word microfinance was coined to convey that other financial services, such as savings and insurance, could also be delivered economically and in bulk to the poor. In this respect, the success of the microfinance movement is indisputable and goes far beyond the estimated 150 million people, primarily in developing countries, who use it.

But in other respects, the success of microfinance is being questioned. Microfinance has succeeded as a movement by developing a reputation for stimulating microenterprise, empowering women, and lifting families out of poverty. Determining whether it is living up to that reputation is much harder than most people realize. In the last few years, high-quality randomized trials have begun to fill in the blanks, supporting some of the claims and challenging others. Meanwhile, the microfinance movement has been thrown on its heels by credit bubbles, government crackdowns, and a rising chorus of critics.

Into this controversy David Roodman has ventured with an analytical style that is at once open minded, as he hears out the arguments of the proponents and opponents, and intensely demanding of evidence and sound reasoning. This book provides a thorough review of microfinance: its history, its business logic, its impacts and prospects. And by assessing microfinance against three conceptions of development—that is, by asking what we mean when we question whether microfinance “works”—Roodman ends up providing a new way of evaluating a large class of development interventions. On this score, his work has implications well beyond the provision of small-scale financial services to the poor.

Roodman concludes that microfinance does not live up to its popular image. At the same time, though, 150 million people cannot all be wrong; financial services, like clean water, sanitation, and electricity, are essential components of the prosperous life. Though unlikely to end poverty, microfinance provides those services to the poor and it can be considered a success in the aid community. In what other sector has public and private aid helped build such businesses and business-like nonprofits at the bottom of the pyramid, which grow by meeting the market test every day? The principle challenge going forward is to help microfinance play to its strengths in delivering useful services in bulk while guarding against the dangers of ample credit.

This book is an invaluable contribution to understanding what may be the most celebrated development idea of our time. It is trailblazing too in the way it was written: Roodman authored the book in public, through an “open book blog,” seeking feedback on drafts and questions from an international readership. I am aware of no other fusion of old and new media quite like this one. Read on to see the results.

NANCY BIRDSALL
President
Center for Global Development