Critical Look At Challenges and Successes En Route to Further Financial Inclusion

This blog post is based on the notes taken during the debate by Tiffany Morris and Theodora Higginson from Ashoka as well as by Katherine Oglietti from the SEEP Network. Microlinks would like to thank them for their contributions.

On January 30, USAID and the Financial Inclusion Forum DC (FIFO DC) hosted a debate between David Roodman, of the Center for Global Development and Milford Bateman, freelance consultant on local economic development policy, on the subject of “Moving Financial Inclusion Beyond Microfinance.” This was the first debate between Roodman and Bateman in United States. It attracted great interest with about 80 people participating in person and 170 via webinar. The debate was moderated by Chuck Waterfield, founder and CEO of MFTransparency. Before the event, Microlinks asked registered participants to submit six questions and then to vote on a question that would be addressed during the debate. At the start of the debate, both Roodman and Bateman were asked to address the winning question: If microfinance has not achieved its objective in substantially reducing poverty, what are the pathways to financial inclusion that will contribute to this objective?

Roodman began the debate by discrediting the notion that microfinance has “failed” because it has not lived up to what started out as “impossible expectations.” The basis on which one should evaluate microfinance is the net costs and benefits, as well as the concrete impacts. According to Roodman, it has not yet been proven that microfinance has a negative impact on development. People, especially the poor, need financial services, and those currently available to them are insufficient.

Bateman, on the other hand, fervently argued that the costs of microfinance far outweigh its benefits; and therefore, resources should be diverted to other alternative solutions. By way of illustration, Bateman drew a comparison between Vietnam and Bangladesh. He pointed out that Vietnam considered Dr. Muhammad Yunus’s model but decided not to proceed with it because the Vietnamese decided to focus on a “local model” that they believed would better contribute to “sustainable development and poverty reduction.” Roodman disagreed that Vietnam’s success could be attributed solely to the differences in the countries’ social policies. Bateman also highlighted neo-liberal capitalism and its agenda in the 1990s which pushed sustainability of microfinance at what he believed was “the expense of consumers’ needs, resulting in overheated markets.”

Roodman agreed that in fact, microcredit markets have overheated, but that should not be the absolute argument for abolishing microfinance. Microfinance is more than microcredit and includes such services as microsavings and mobile financial services, which are important and have achieved great results. These alternatives should complement and enhance microfinance because we need to recognize that no solution is a “silver bullet.” We need to set realistic expectations moving forward and work with a diverse mix of services in order to achieve sustainable results. Instead of doing away with microfinance completely, Roodman advocated that we should focus on improving regulations and supervision to make microfinance work well.

Bateman returned to his original premise that microfinance does not work, and so it follows that we should start moving resources to other areas and not support the industry that does not work. He then referred back to the argument on financial inclusion, where he stated that there still has been no proof that offering such services as microsavings or mobile financial services is better than other interventions. He further noted that “simply because providers are already geared up for offering such services,” it is not a good argument to advocate expansion of these services. Instead, providers should focus on conducting more rigorous analysis and evaluations to not repeat mistakes made with microfinance. In conclusion, Bateman stated that we need to start allocating resources away from microfinance programs and instead focus on such mechanisms as financial cooperatives, community-owned funds, state development banks and such interventions as conditional cash transfers and cash grants.

The moderator Chuck Waterfield then gave concluding remarks about how we can successfully move forward. According to Waterfield, donors, investors and networks created a large industry that now has a life of its own and which they no longer control. Microfinance is a profitable business, and it will continue operating as long as there is profit, regardless of whether or not donors and investors decide to allocate resources elsewhere.

Given this reality, he asked the two presenters: how can we fine-tune and correct the course of this industry? Bateman emphasized that now we should look at specific examples of what does works. We have data now that we didn’t have five years ago. Roodman’s greatest hope going forward is that we capitalize on the technological revolution that presents opportunities to help the poor through tools such as low-cost financial services.