Product Description
The microfinance revolution, begun with independent initiatives in Latin America and South Asia starting in the 1970s, has so far allowed 65 million poor people around the world to receive small loans without collateral, build up assets, and buy insurance. This comprehensive survey of microfinance seeks to bridge the gap in the existing literature on microfinance between academic economists and practitioners. Both authors have pursued the subject not only in academia but in the field; Beatriz Armendáriz founded a microfinance bank in Chiapas, Mexico, and Jonathan Morduch has done fieldwork in Bangladesh, China, and Indonesia.
The book provides an overview of microfinance by addressing a range of issues, including lessons from informal markets, savings and insurance, the role of women, the place of subsidies, impact measurement, and management incentives. It integrates theory with empirical data, citing studies from Asia, Africa, and Latin America and introducing ideas about asymmetric information, principal-agent theory, and household decision making in the context of microfinance.
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 Straightforward yet in-depth ( love_is_touch )
It is well-written in a way that it present the materials clearly in words and in mathematical formula. If you don't have much apetite for quant, you can still skip those formula and won't get lost in between chapters.
The questions raised at the end of the chapter is inspiring. It really let you think beyond what you've just read.
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 From microloans to microsaving and beyond ( stevelaniel )
Microfinance is most famous as microlending, whose most famous representative is Bangladesh's Grameen Bank. Grameen, and its founder Mohammad Yunus, won a Nobel Peace Prize in 2006 for their aid to the poor. The idea, with which most people are probably familiar, is that the bank loans some of the world's most destitute people small amounts of money -- $100 or less, typically -- for some vital bit of capital. Borrowers might use the money to buy a sewing machine, for instance, which they can then use to produce far more clothing than they had produced by hand. Grameen's default rate has been remarkably low -- "the poor always pay back", to use the phrase from Grameen II.
The economic logic here is actually revealing as a study of what's unspoken in economic logic, hence how misleading economic postulates are. "All else being equal" (such a magical phrase), the first bit of capital that I get will yield more benefits to me than the second bit. Assuming I'm rational, I will spend the first money I get on more-productive capital, then spend subsequent bits on less productive capital. That is, the marginal returns to capital are decreasing (or at least nonincreasing). Hence, if I'm a rational bank and all else is equal, I should be more willing to lend to the poor than to the wealthy: I'll get a greater return from lending that little bit of capital.
Needless to say, that's not how it works: Citibank is in no rush to lend to Bangladeshi farmers. Why not? Obviously it's because all else is not equal. Among many other things, Citibank relies on the vast infrastructure provided by advanced capitalist economies: before they loan to me, they check with credit-reporting agencies that have a special competence validating people's reputations. Those credit-reporting agencies can follow me around because I was born with a number, namely a Social Security Number, which I can't escape from without some work. Hence the infrastructure beneath me makes it hard for me to default on a loan without other banks noticing. This infrastructure is missing from Bangladesh. Consequently, the cost of gathering all the necessary information about a loan applicant is much higher -- transaction costs per dollar of loan are astronomical if the loans are administered in the way that Citibank specializes in.
Grameen handles this in a novel way, for which they're justly famous. It's called "group lending": in Classic Grameen, they loan to groups of five people. If any one of the applicants defaults, the others are forbidden from ever receiving loans again. The informational burden is transferred from the bank onto the applicants.
Can't those five people conspire to default on loans together? Yes, they surely can, and here we run into another difficulty of the classic economic picture. If they cut and run on a loan, they could run to another microlender and get another loan -- and so on for as long as they want, so long as the microlenders don't share information. The more microlenders that service a given area, the more challenging this problem becomes. So competition actually works against microlenders here, by making collusion possible. To solve this problem, microlenders need a set of institutions that make validating reputations less costly. Credit-reporting agencies would help, as would the whole arsenal of Western identity policies. Which isn't to say that those are the only systems that will solve microlenders' problems, by any means; just as group lending is a novel approach to the developing world's specific problems, so we might expect them to land on different solutions to the reputation problem.
The Economics of Microfinance is filled with interesting discoveries like this. It starts with a less-developed form of microlending, namely the Rotating Savings and Credit Association, evolves through group lending, and discusses where Grameen and its ilk (BRAC et al.) are today. Most interesting for me was microsaving, as opposed to microlending. The poor often need savings accounts more than they need loans. Indeed, they are willing to receive negative interest rates on their money, just to ensure that the money stays in a safe place. Armendáriz and Morduch give a remarkable example: in certain rural villages, savings collectors will offer to take money out of the villagers' hands, hold it for a time, take a fee, and return the now-smaller pile of money. Presumably this negative interest rate is less negative than the alternative, namely theft or neighbors begging for a loan. Microsaving is most often used to keep money away from husbands, according to Armendáriz and Morduch. Indeed, microfinance generally is most associated with rural women; they constitute an overwhelming percentage of Grameen's (and other microbanks') client base.
By the end of the book, however, it's not clear that anyone can quantify the value of microfinance programs. Would those who participate in microfinance have done just as well without it? To gauge the actual impact of microfinance, one needs to answer that sort of counterfactual -- which is, for obvious reasons, difficult if not impossible. There's also a problem of what we're modeling: if we're trying to quantify, say, small-business growth before and after the introduction of a microfinance program, that's one thing, and is relatively easy to answer. If we're trying to measure empowerment of women, that's quite another, and it's not at all clear that we even know how to start measuring that. Should we measure it, for instance, by the rate of reported domestic violence? Empowerment may increase reporting rates. It may also cause a shift in the balance of power at home, which may increase violence.
The difficulties are manifest, as Armendáriz and Morduch are well aware. The great virtue of this book is that it doesn't shy away from pointing out areas of ignorance and future challenges. Anyone interested in how microfinance actually works -- and how one would actually measure its success -- cannot avoid reading this book.
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A splendid overview ( sadadone )
This book provides a splendid overview of what economists have learned so far about micro-finance. The book requires some knowledge of economics and econometrics, but most of it can be read and understood even with just the kind of background a good econ undergraduate will have.
The field is developing quickly, and so there are already several contributions which are not covered (see e.g. work that folks such as Dean Karlan and coauthors are doing), but overall the coverage is excellent for what had been done until the publication date.
Those who think that micro-finance is "clearly" the way ahead, and that its history has been only a history of great successes, will find some surprises here. I do love the idea underlying micro-finance, but it turns out that some of the media hype is not supported by careful studies.
Still the field deserves to be studied, and this book is a highly recommended overview, which will also give you plenty of references to deepen your knowledge and to identify area that need research.
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An eye opener
To those that, as i am, have an Economics background and are just grasping the all immense universe that microfinance is becoming, this book opens perspectives and clears some very important issues. Issues such as the value of interest charging or the many different ways there actually are to build a microfinance initiative or the value of professional dedication to make it an effective and efficient working and sustainable intervention ... A must have!
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Great book for self-teaching
After reading "Banker to the Poor," I was interested in getting a bit more of an unbiased view of the subject of microfinance. The authors' views are clear and concise about each topic, plus they offer lots of other sources for the information. While it is obviously intended as s textbook, this book is a great way to teach yourself about the theory and empirical studies about microfinance.
I could not have chosen a better book than this one.
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