Microfinance is one of those small ideas that turn out to have enormous
implications. When Muhammad Yunus, an economics professor at a
Bangladesh university, started making small loans to local villagers in
the 1970s, it was unclear where the idea would go. Around the world,
scores of state-run banks had already tried to provide loans to poor
households, and they left a legacy of inefficiency, corruption, and
millions of dollars of squandered subsidies. Economic theory also provided
ample cautions against lending to low-income households that
lack collateral to secure their loans. But Yunus vowed to one day make
profits—and he argued that his poor clients would pay back the loans
reliably. Today, Muhammad Yunus is recognized as a visionary in a
movement that has spread globally, claiming over 65 million customers
at the end of 2002. They are served by microfinance institutions that
are providing small loans without collateral, collecting deposits, and,
increasingly, selling insurance, all to customers who had been written
off by commercial banks as being unprofitable. Advocates see the
changes as a revolution in thinking about poverty reduction and social
change, and not just a banking movement.
The movement has grown through cross-pollination. Muhammad
Yunus’s Grameen Bank has now been replicated on five continents.
Approaches started in Latin America have found their way to the
streets of El Paso and New York City; experiments in Bolivia have given
birth to institutions in Uganda and Azerbaijan; and policymakers in the
world’s two most populous countries, India and China, are now developing
their own homegrown microfinance versions. Recognizing the
energy and activity, the United Nations designated 2005 as the International
Year of Microcredit.
This book is about the ideas that have driven the movement. It is also
about lessons that the movement holds for economics and, more
Preface
specifically, for thinking about why poor people stay poor—questions
that, at some level, go back to Adam Smith’s inquiry into the wealth
and poverty of nations. Microfinance successes force economists to
rethink assumptions about how poor households save and build assets,
and how institutions can overcome market failures. In telling the story,
we draw on new developments in economic theories of contracts and
incentives, and we also point to unanswered questions and ways to
reframe old debates.
There is a great deal already written on microfinance, both by practitioners
and academic economists, but the two literatures have for the
most part grown up separately and arguments have seldom been put
into serious conversation with each other. Both literatures contain valuable
insights, and both have their limits; one of our aims in this book
is to bridge conversations, to synthesize and juxtapose, and to identify
what we know and what we need to know. In this way, this book is
both retrospective and prospective.
Combining lessons from the classroom and the field is natural for us.
Armendáriz de Aghion, apart from contributing to the theory of
banking in her academic role, founded the Grameen Trust Chiapas in
Mexico in 1996, the first replication of the Grameen Bank in Mexico.
While writing this book, she devoted much time to the Chiapas project
as it went through major reorganizational changes. At the same time,
Morduch was carrying out research in Bangladesh, advising projects at
Bank Rakyat Indonesia, and analyzing financial data he had helped
collect in Chinese villages.
The result is a book on the economics of microfinance that we hope
will be useful for students, researchers, and practitioners. We hope that,
in different ways for different readers, the book will challenge received
wisdom and provoke richer understandings of economic institutions.
Familiarity with economics will help, and we use mathematical notation
where it clarifies arguments, but the main points can be understood
without the math. We have especially tried to make the book
engaging for undergraduates and graduate students in economics and
public policy. Aset of exercises can be found at the end of each chapter,
written for advanced economics students with a knowledge of calculus
and a desire for analytical challenge.
We have been thinking about this book since 1998, when Morduch
was visiting Princeton University and Armendáriz de Aghion was visiting
the Massachusetts Institute of Technology. Our common concern
at the time was that our respective field experiences in Asia and Latin
America did not seem to accord well with the growing theoretical
x Preface
literature, with its focus on group lending contracts to the exclusion of
most else. Broader ideas were needed to create workable microfinance
institutions in sparsely populated areas, in urban areas, and in the
Eastern European countries that were making the transition from Communism
to capitalism. Even in the densely populated rural and semirural
areas where microfinance had first taken root, we saw a variety
of mechanisms that were already at work and that economists had so
far ignored. This prompted us to undertake our first joint project,
“Microfinance Beyond Group Lending” (Armendáriz de Aghion and
Morduch 2000).
Although we had written drafts of the opening chapters in 1998,
good intentions were displaced by other research projects and travel.
Two events made us return to the book. One was a grant from the ESRC
to Armendáriz de Aghion, and another was Morduch’s research leave
at the University of Tokyo in 2001–2002. We then resumed writing the
book and started rethinking what we had learned.
In doing this, we have been exceedingly fortunate with our collaborators.
From the start we had the luck of counting on the intellectual
support of Philippe Aghion. Our views have also been shaped and
challenged by many colleagues, including Abhijit Banerjee, Patricia
Armendáriz Guerra, Tim Besley, François Bourguignon, Anne Case,
Maria Leonor Chaingneau, Jonathan Conning, Angus Deaton, Mathias
Dewatripont, Esther Duflo, Bill Easterly, Maitreesh Ghatak, Christian
Gollier, Charles Goodhart, Denis Gromb, Dean Karlan, Michael
Kremer, Jean-Jacques Laffont, Valerie Lechene, Malgosia Madajewicz,
Maria Maher, Lamiya Morshed, Mark Pitt, Jean Tirole, Robert
Townsend, Ashok Rai, Debraj Ray, Lucy White, and Jacob Yaron. We
have accumulated many debts in writing this book. Syed Hashemi,
Stuart Rutherford, Mark Schreiner, Richard Rosenberg, and five anonymous
reviewers provided detailed comments on an earlier version of
the manuscript, and their suggestions greatly improved the manuscript.
We also thank the many policy analysts and practitioners who
have taken time to share their views and experience. Armendáriz
de Aghion gratefully acknowledges collaboration from the Board of
Grameen Trust Chiapas and, in particular, from Rubén Armendáriz
Guerra, Maricela Gamboa de Lecieur, Karina López-Sánchez, Francisco
and Virginia Millán, and Regis Ernesto Figueroa. Morduch thanks
especially Asif Dowla, Chris Dunford, Syed Hashemi, Don Johnston,
Imran Matin, Lynne Patterson, Marguerite Robinson, Jay Rosengard,
Stuart Rutherford, and Muhammad Yunus. Morduch also gratefully
acknowledges financial support from the Ford Foundation.
Preface xi
We are grateful to Minh Phuong Bui from the Midi-Pyrénée School
of Economics at the University of Toulouse for having written the challenging
exercises that accompany each chapter of this book—and for
her very useful feedback on several chapters. Sarah Tsien provided
expert research assistance on the early chapters as well as facilitating
research travel in China.
Last but not least, we have no words to express our gratitude to
Philippe Aghion, Amy Borovoy, and our respective children for their
patience and endurance, and for having made this book enjoyable to
write. Without their support, the book would not exist.
Beatriz Armendáriz de Aghion
Harvard University and
University College London
Jonathan Morduch
New York University