Roodman microfinance book. Chapter draft. Not for citation or quotation

Conclusion

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  By decoupling when something is bought from when it is paid for, financial services inherently give people more control over their financial lives—more “agency” or “freedom” in Amartya Sen’s terms.
  
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  Savings and insurance services do so without imposing future obligations the way credit does, so they seem more benign in the development-as-freedom perspective if they are provided free of fraud, price-gouging, and recalcitrant disbursement. (Of these, we found in chapter 4, savings appears simpler and more practical.)
  
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  Thus loans threaten the freedom of the poor most, a truth embedded in the ancient proscriptions on usury. Yet the traditional referent for the definition of usury, the interest rate, is not the only characteristic of credit that determines its effects on borrowers’ agency. Transparency, reliability, flexibility, group dynamics, and systematic forbearance from overlending appear to matter at least as much in practice.
  
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  Reliable evidence on how microcredit affects people’s freedom is fragmentary and emanates mostly from Bangladesh. It supports a few generalizations: First, doing financial business with poor women empowers them mainly through any economic success they achieve rather than in parallel to it. Women gain more autonomy from successful investment or spending management than they do from entering into solidarity with jointly liable borrowers. Yet programs such as Indian self-help groups that go well beyond pure financing, running activities dedicated to organizing women to fight oppression, can leave a stronger imprint. The same may hold for the “credit plus” programs of BRAC and Freedom from Hunger, which train and teach as they lend (see chapter 4). Second, the more a microcreditor pursues financial self-sustainability the more it imposes on the freedom of its clients. The financially loose SHGs and the subsidized SEDP program that Kabeer studied seem to score best on empowerment. Finally, collateralizing one’s reputation through group credit may be more oppressive than a more conventionally collateralized individual loan—for those who can afford the latter.
  

This reality confronts the charitably minded investor with a conundrum: should she support an activity that might help 90 percent of the people it touches while making 10 percent worse off—perhaps much worse off? The Hippocratic dictum to “first, do no harm” comes to mind. Taken literally, it is impractical in fighting poverty: every effort to better a society trods on someone’s toes. But the old doctor’s oath is food for thought. Done right, savings and insurance approach the ideal of minimal harm more surely than credit. Since, as chapter 2 explained, savings especially can substitute for credit for many purposes, the pursuit of development as freedom seems best served by supporting savings more than credit.. People rarely get caught in savings traps.

While I would hesitate to support microcredit—group credit especially—I would never say never to lending. Absolutism is rarely credible in social policy. I am convinced that millions of poor people live better because of microcredit. And it is much easier to set up an institution to disburse funds on credit than to collect them as deposits. Granting microcreditors a place in the portfolios of the poor, we should ask that they maximize their flexibility and transparency with respect to clients and take all reasonable steps to prevent overlending. And we should do everything we can to give the poor stronger alternatives to borrowing.

The need to deemphasize microcredit and the institutional challenges to doing so—institutions that would take savings and sell insurance properly face high legal hurdles—leads us to a quite different perspective on the contribution of microfinance to development. The next chapter looks at microfinance operations in terms of how they enrich the institutional fabric of societies by growing, competing, and innovating to serve the customer. That perspective tends to valorize businesslike operation, financial independence, and freedom from subsidy.