David Roodman reflects on his exchange with Lant Pritchett on microfinance. One of the two points of debate was about what Roodman calls the ‘Schumpeterian success‘ of microfinance. In Roodman’s words, one of the arguments Pritchett was making was as follows –
microfinance should be seen as an unfortunate work-around for the failures of mainstream financial systems to serve the poor, like private water sellers in New Delhi who sell water to slumdwellers without piped water at far higher prices than the rich pay (for piped water systems subsidised using public funds)
For Roodman’s response, see the last paragraph of his post.
I found Prof Pritchett’s views really interesting. There has been a lot of debate on the effectiveness of microfinance – often starting with the acknowledgment that (mostly private) microfinance players have succeeded in expanding access to financial services in a way that formal financial institutions (mostly in the public sector in a country like India) have been unable to, so far. The consequent debate focuses on the impact of microfinance on its clients. One of the dimensions of gauging the success of microfinance has to be its impact on existing formal financial infrastructure. But we mostly refrain from making an idealistic pitch for affordable and inclusive finance through formal banking channels and find (often justifiable) reasons for why microfinance (both savings as well as credit services) are so costly for its clients (although often cheaper than existing informal alternatives), who paradoxically are among the poorest in the developing world.
Pritchett’s reference to water supply in New Delhi makes the same point. It is true that the poor neighbourhoods in Delhi who don’t have access to piped water are serviced by private tankers and small water purifying and packaging businesses. In the absence of anything better, millions in Delhi use their services too. One can also be almost certain that a randomised trial would show striking impact of such an alternate water supply system. However, only after giving up on the state for provision of essential services such as water can one justify the existence of the private water suppliers.
At the same time, here is Dean Karlan making the point about usage – why assume that usage automatically translates into positive impact? While Karlan uses this argument to make the case for rigorous evaluations, I want to draw a tangent to argue that we ought move beyond hailing the miracle of microfinance on the basis of the stupendous numbers it has stacked up; that we be idealistic in sticking our necks out demanding that poor clients deserve finance on much better terms than what the microfinance industry currently offers them. I know I am being idealistic when I say this and that there are a million steps we need to cover before we can get there…but I have no doubt that this is the goal far out in the horizon that we need to aspire for.