Thursday, July 7, 2011

Banerjee and Duflo on microcredit and repayment

The Philanthropy Action website has an extended interview with Abhijit Banerjee and Esther Duflo. "Over the course of the interview we discuss microcredit, microenterprise funding and growth, labor markets in developing and developed countries, the evidence for focusing on women and girls with aid programs, the debate over RCTs [randomized controlled trials] and how they think about their own impact on changing the world." I found their thoughts about the crisis in microfinance, and how microfinance institutions get 90% repayment rates, to be especially provocative.
Esther Duflo: The Grameen Bank has been around for many many years and their loans are still very very small. Just forget about subtle impact evaluation or whatever; it’s been staring us in the face that these businesses are not growing, and the vast majority of people are not growing out of poverty or anything like that. If we had not been obsessed by the romantic idea of microcredit then maybe there would have been an earlier realizing of what microcredit does and what it doesn’t do. I think people are coming to that, to a small extent maybe because of our work stirring the pot. To be honest, it maybe would have happened anyway. But there’s been a lot of delay given that the facts were pretty obvious.
Abhijit Banerjee: I just gave a talk at the World Bank on exactly this topic. The crisis in microfinance is a result of the 3 C’s: credulity, cupidity and corruption. The politicians were corrupt, we were all credulous, and the microfinance people were greedy. Put them together and you get the crisis. Our credulity was significant. Somehow we believed that all repayment happens in microfinance due to some magic which made no economic sense. We knew it didn’t make economic sense. And then suddenly one day wake up to the fact that the actual loan officers would come to your house, maybe they don’t beat you up, but they do harass you.
You don’t need to do an evaluation to start asking questions. You just need to think about it for 10 minutes. These are desperate people with lots of financial demands. People in the family are sick, people lose jobs, the daughter needs to get married.
ED: But they repay anyway. Someone must be very convincing.
AB: But 90 percent repay. What is going on? How could we believe this was because of some tweaking of economic incentives? As economists I think we were basically inept in thinking about it or we would not have believed it. The core fact was staring us in the face. There was some amount of—I won’t say coercion, I think they are careful not to actually threaten—but there’s a lot of harassment. They come to your house, they call up your friends. I don’t think there’s anything wrong with it. It’s a moneylending business, it’s risky. But if the rest of the world thinks these are awful things to do, then you can’t expect better than a 90% repayment. And we didn’t look at this, we evaded the gaze of these facts that were looking back at us.