An Interview with David Roodman (Part 1): Credit Bureaus and Microfinance
This is the first part of a three-part interview series. Recently, I had the opportunity to have a discussion with David Roodman, who works at the Center for Global Development where he spends most of his time trying to understand the ins and outs of microfinance. He is trying to take a rigorous look at the space to understand what works, what doesn’t and how microfinance can be improved. David is best known for his blog posts about Kiva and about a potential repayment problem at Grameen.
David Roodman is writing a book on microfinance which is likely to be published in the fall.
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Bryan Farris, NextBillion.net: You’re in the process of writing a book about microfinance; what is the goal you’re trying to accomplish in writing your book and what’s the main message that you’re trying to get across?
David Roodman: The goal is to inform people who are interested in supporting financial services for the poor, whether that be somebody at the Gates Foundation or somebody interested in going on to Kiva and making a contribution. I aim to take a critical perspective of microfinance to understand how much it really helps people. There is certainly a lot to be impressed about in the field, but I want a to encourage a balanced investigation.
Next Billion.net: You’ve advocated for introducing credit bureaus in the bottom of the pyramid; what would these credit bureaus look like and how would they even track credit?
David Roodman: I’m concerned about the phenomenon of multiple borrowing; that is when poor people are taking loans from several places at once. The situation is analogous to when people get into trouble in the United States with credit card debt and they start juggling credit cards. On the other hand, multiple borrowing could be a good thing if the loans that are on offer from micro-creditors and elsewhere are individually too small to be adequate. Since loans are provided with rigid terms and have to be paid back over, say, one year before another loan can be taken out, borrowers may be better off if they weave together loans from several sources. The fact remains, we do need to be concerned about multiple borrowing and over borrowing.
There aren’t easy answers, but where credit bureaus are practical, they are definitely good things to create. It makes perfect sense that lenders need complete information about how much borrowers really owe.
To track credit, there are some hurdles that must be overcome. Establishing identity can be a problem – you don’t want to have one person making several identities to hide his or her true indebtedness.
Traditionally, the way that’s solved is with a national ID system which a lot of developing countries don’t have. Fortunately, new technologies may change the equation, such as cost effective finger printing or retina identification. One of the countries that is leading the way here is India, which has set its sights on developing a national ID system involving advanced technology. Such a system would make credit bureaus much more practical in poor countries than they used to be.
Data sharing standards would be key to the success of a credit bureau; lenders should have obligations to provide data in a timely way and there should be strict terms under which creditors would have access to the data at the credit bureau. There are also privacy issues to deal with.
NextBillion.net: That brings up another point: Microcredit can sometimes be challenging due to restrictions, such as set term limits and standardized repayment schemes which are not as flexible for the borrowers. Given that, do you think that it’s possible that adding a credit bureau into the process would dissuade healthy borrowers from using micro-credit and instead resort back to using money lenders and informal tools more frequently?
David Roodman: It’s certainly possible although one would hope that lenders set a reasonable credit threshold for borrowers; it’s in their business interest to extend credit to people who can use it well. A good study in Guatemala (The Supply and Demand Side Impacts of Credit Market Information) found that a credit bureau, by improving information available to lenders, helped lenders focus on the best borrowers, improving their efficiency. In time that should lead to lower interest rates for people who can handle credit well.
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This concludes the first part of the series. In the next part, David and I discuss the impact of modern technology, such as mobile banking, on the microfinance industry. In the third section of the series, David shares his opinions on forms of microfinance beyond microcredit including microsavings and microinsurance.