Reading List: Microfinancing

In preparation for my trip to Paraguay, I'm reading a book by David Roodman called "Due Diligence: An Impertinent Inquiry into Microfinance". I'm only a few chapters in, but here are some thoughts on what has stood out to me so far.

I'm sure you've heard some statistic about how many people in the developing world live on an average of $2 a day. However, that often looks like "$4 one day, $1 the next, and $0 the day after that. Or perhaps their big earnings come once a season, at harvest time". For people in that situation, it is not only a matter of getting by on a comparatively small income, but on effectively managing the uncertainties of being poor.

With all the publicity that microcredit has gotten in the last decade, many of us Americans may be holding the idea that by providing loans to the poor we are "launching them all into entrepreneurship" and out of poverty with a single loan. While creative self-employment is common by necessity, there are certainly more options than just extending credit which increases the amount of risk put on families. For the right people, the risk can pay off. But credit is just one tool, and better tools can lead to better results.

Think about the financial services you use. Many of those are to prepare for tough times. A checking account allows me to transact safely in large amounts. My savings account provides a buffer when rent is due before the next paycheck.  I have health insurance to ensure access to care. Credit cards help pay for things before I can afford them, and are especially helpful in emergencies like when a tire blows out. I have many options to fall back on.

So far, this book has emphasized how the world has shaped microfinance. It notes that because poor communities "often have scant services to choose from, they tend to use the services in ways that are not ideal. That a loan is taken in practice, for instance, does not mean that a loan is best in principle". The ultimate goal is to give families more control over their finances, and David Roodman sets out to question how they are actually impacted.