The Economics of Microfinance

by Beatriz Armendáriz (Author), Jonathan Morduch (Author)

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ISBN-13: 978-0262512015

ISBN-10: 0262512017

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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 Armendariz founded a microfinance bank in Chiapas, Mexico, and Jonathan Morduch has done fieldwork in Bangladesh, China, and Indonesia.

The authors move beyond the usual theoretical focus in the microfinance literature and draw on new developments in theories of contracts and incentives. They challenge conventional assumptions about how poor households save and build assets and how institutions can overcome market failures. 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.

The Economics of Microfinance can be used by students in economics, public policy, and development studies. Mathematical notation is used to clarify some arguments, but the main points can be grasped without the math. Each chapter ends with analytically challenging exercises for advanced economics students.

Review

"An excellent analysis of the evolution of microfinance and of the economic theory behind it."
— Huw Dixon, Times Higher Education Supplement

"The single best book on the economics of banking and finance, period, and certainly the most encompassing book I have read on microfinance. My copy is covered in notes and dog-eared from use."
—Thomas Easton, New York Bureau Chief, The Economist

"The microfinance movement is bringing hope, prosperity, and progress to many of the poorest people in the world. It is necessary to use critical economic reasoning to understand why the movement is such a success and how its exact achievements can be assessed and scrutinized. This book is a splendid contribution to that goal, and will be a great help to students, teachers, and practitioners in economics and the social sciences."
—Amartya Sen, Lamont University Professor, Harvard University, Nobel Laureate in Economics (1998)

"A great place to learn how and why microfinance really works, and where it hits its limits. The book, written by two leading young economists, brims with new evidence and provides fresh perspectives on old debates. Clearly written and sharply argued, it revisits and transforms important ideas about poverty reduction, finance, and incentives. The authors describe what we know and what we need to know in order to move forward."
—Joseph E. Stiglitz, Professor of Economics and Finance, Columbia University, Nobel Laureate in Economics (2001)

"Microfinance is playing a key role in the economies of many developing countries, providing small-scale entrepreneurs with the access to financing that is so often unavailable from commercial and state banks. This book provides an accessible, analytical roadmap for understanding this important trend. The authors tackle central debates and provide new evidence, giving readers tools to create future innovations."
—George Soros, Founder and Chairman, Open Society Institute

"The promotion of microfinance is one of the most significant innovations in development policy of the past twenty-five years. This timely book provides a guide to its main ideas and reviews the evidence in a way that is both accessible and rigorous. It will be a valuable resource for students, researchers, and practitioners."
—Timothy Besley, Professor of Economics and Political Science, London School of Economics and Political Science

"This is an important book by two of the leading economists in microfinance, detailing what we know and don't know about the subject. It is an accessible book laden with examples, but it doesn't sacrifice intellectual rigor. It should be of great interest to students, researchers, and practitioners with an analytical bent."
—Raghuram G. Rajan, University of Chicago and the International Monetary Fund

About the Author

Beatriz Armendáriz is Senior Lecturer in the Department of Economics at University College London and Research Affiliate at Harvard University. She is coauthor of The Economics of Microfinance (MIT Press).

Jonathan Morduch is Professor of Public Policy and Economics at New York University's Wagner Graduate School of Public Service. He is the coauthor of The Economics of Microfinance (MIT Press) and Portfolios of the Poor: How the World's Poor Live on $2 a Day.

Product details

Publisher ‏ : ‎ The MIT Press (August 24, 2007)
Language ‏ : ‎ English
Paperback ‏ : ‎ 360 pages
ISBN-10 ‏ : ‎ 0262512017
ISBN-13 ‏ : ‎ 978-0262512015
Item Weight ‏ : ‎ 1.12 pounds
Dimensions ‏ : ‎ 6 x 1 x 9 inches

Best Sellers Rank: #4,461,405 in Books (See Top 100 in Books)
- #1,036 in Microeconomics (Books)
- #3,795 in Business Finance

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Beatriz Armendariz de Aghion
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Jonathan Morduch
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Jonathan Morduch is an economist at New York University. He writes about the financial lives of low-income families and how they connect to poverty and inequality.
Morduch teaches on international development economics, but his most recent book, The Financial Diaries (with Rachel Schneider), tells the stories of families in the United States.
Morduch is Executive Director of the Financial Access Initiative at NYU, and a professor of public policy and economics at NYU's Wagner Graduate School of Public Service.
website: https://wp.nyu.edu/jmorduch/
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Beatriz Armendariz
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Lehigh History Student

Microfinance at its finest

Reviewed in the United States on December 20, 2006

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Microfinance is one of the newest strategies for development and Princeton economist Morduch takes a look at how it impacts societies. While he only looks briefly at the social issues he makes several compelling economic arguments for why we should consider microfinance as a viable option. The book is very well written although I think it does leave out some of the long term structural and institutional changes that need to be addressed. This is a field where new research comes out every day but Morduch's book is likely to be a staple for a very long time. This is a must have for anyone studying microfinance and will be for a long time to come.

10 people found this helpful

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J. B. S. Wise

Great book for self-teaching

Reviewed in the United States on May 8, 2007

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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.

4 people found this helpful

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Stephen R. Shulman-Laniel

From microloans to microsaving and beyond

Reviewed in the United States on April 21, 2008

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.

11 people found this helpful

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Chakriya Bowman

Essential reading for development economists

Reviewed in the United States on January 5, 2006

Microfinance has become one of the most important mechanisms for the development of informal business in developing economies. As such, it has attracted attention from development practitioners, economists and politicians. Disappointingly, most books on the subject can be best described as infomercials - rarely do they go beyond success stories of happy women in brightly coloured clothes who are now running home enterprises. But practitioners know that there is far more to microfinance than simply providing loans - just as there is far more to development than simply pouring money into a country. There are pitfalls to microfinance: it can crowd out local business, it can catapult poor people further into poverty if incorrectly adminstered, and there are a host of governance issues surrounding it.

This book provides a comprehensive analysis of the economics of microfinance, as the title suggests. It is a technical book: it expects a high level of economic understanding, but it synthesises a vast amount of information on the subject and communicates it succintly. This is without a doubt one of the best technical economics books I have read - and I have read an awful lot of them.

I've given this book to my PhD students working in this area as essential background reading before they commence research. I commend this book to any economist or development practitioner who is interested in the economics behind the stories and photos, who want to find solutions that will really catalyse economic development, who want to see successful projects implemented and who want to learn from the expertise of others to make sure they do the best for their clients.

27 people found this helpful

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BookwormMin

Straightforward yet in-depth

Reviewed in the United States on July 3, 2008

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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マイクロファイナンス研究の到達点。読まなきゃ、損。

Reviewed in Japan on March 9, 2008

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マイクロファイナンスについて、初めて包括的かつ詳細な検討を加えたものであり、まさに待望の書。取り扱うテーマの広さ、それぞれについての事例の豊富さ、理論的視座の堅実さ、議論の緻密さ、視野の広さ、地に足のついた提言、そして著者の手際よい叙述センス等は、すべからく想像以上である。マイクロファイナンスに関するテーマを、ほぼ完全に網羅しつつ、そのひとつひとつについてきめ細やかに議論しており、まさに、現時点でのマイクロファイナンス研究の決定版である。
原書の刊行は2005年であり、よって、使用されるデータは2000〜2003年のものが多く、2008年の今日から見れば、最新のデータに基づいた検討とはいえない。しかし、1970年代中葉から約30年間の近代マイクロファイナンスを巡る議論、研究、実務の内容と議論をほぼ全て網羅しており、2000年代後半の現在の目から見ても、本書で議論されることのいささかについても、古びているものはひとつとしてないことは保障できる。いや、やはり実際、本書は世界で初めて、マイクロファイナンスの古今東西の議論と疑問を整理した書であり、本書で指摘されているもののすべてが、こんにちのマイクロファイナンスの実務及び研究の世界において、依然として最先端の問題意識であり続けているのだと言える。この意味で、本書は初の体系的な「マイクロファイナンス実務史・マイクロファイナンス理論史」であるとも言え、その点について（史上初に）成功している点だけに注目しても、本書は、現時点で唯一無二の意義を有する。著者のふたりは、それぞれに開発経済学者、開発金融論の専門家としての学術的なキャリアを積み上げながら、現場でのマイクロファイナンスのオペレーションに深く関与してきたというユニークな人物であり（モーダックはアジアのマイクロファイナンスに深く関与し続けてきており、アルメンダリスはメキシコで自らマイクロファイナンス組織を経営している）、このふたりであるからこそ、本書を著しえたのだと言える。
グラミン銀行の10年以上前の姿を、こんにちの「マイクロファイナンス（マイクロクレジット）」と理解している向きが多い（!!??）日本の読者にとっては、現在の世界におけるマイクロファイナンスの最前線、つまり「いまの現場」に、丁寧に誘導してくれる最良の「ガイド本」といっても良い。その意味では、本書によって初めて、日本における本格的な「マイクロファイナンスへの理解」が進むのではないかと期待される（日本語翻訳版の出版も、2008年前半を予定しているようである）。
経済学にとってのマイクロファイナンスにおける発見の重要性、マイクロファイナンスそれ自体の重要性と意味、のふたつが本書のテーマとされているので、全10章中、3章までが既往の経済学理論とマイクロファイナンスとの総論的な対話に費やされ、残りの7つの章でマイクロファイナンスの現場の姿を常にイメージさせつつ、それと経済学との対話が展開される。第5章の「グループ融資を超えて」は、グラミンで有名となったグループ融資は実はマイクロファイナンスの代名詞などではないと正確に指摘しつつ、ではグループを介さない小規模融資がなぜ機能するのかについて、現場の知恵と工夫、それに対する理論的妥当性の検討を交互に加えながら整理している。本章だけでも、日本の読者の多くには、衝撃的ではないかと思われる。他に、「貯蓄と保険」、「ジェンダー」、「インパクト測定」、「補助金問題」、「経営問題」についても、バランスのいい、切れ味鋭い論考が展開されている。繰り返すが、本書は、待望のマイクロファイナンス研究の集大成として、関係者必読の書である。
なお、著者のひとりであるモーダックは、2007年12月に来日しており、円借款の実施機関である国際協力銀行等にて、最新の発見等について講演している。国際協力銀行等のホームページにて、当日の模様やモーダック及びその他の（これまた、マイクロファイナンスの世界の第一線で活躍している）パネリストの当日配布資料等が入手できる。

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GoodなSurvey book

Reviewed in Japan on June 23, 2006

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マイクロファイナンスについて、研究者、実務家に向けて書かれた本。マイクロファイナンスの本格的な議論は4章からなので、最初から読むと、ちょっと冗長に感じるかも。4章では、スタンダードなグループ貸付の議論と、最新の研究、今後の研究の方向性を示しており、5章で、グループ貸付が最近行われなくなってきた背景にも考慮して、マイクロファイナンスのグループ貸付以外の要素に焦点を当てる。6章は最近ちょっとはやりのMicroinsurance。8章で、これも最近はやってるプログラム評価と、マイクロファイナンスにおける評価研究の問題点について簡潔にまとめられているので、実務家の人にもお勧め。

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