September 21

Saurabh Lall

Anecdotes and Analysis: The Microfinance ?Bubble?

An article in the Economist, ’Froth at the bottom of the pyramid’ brought to my attention an interesting ongoing debate about the possibility of an emerging ’bubble’ in microfinance. While news of a bubble is in itself extremely interesting, the argument also highlights a fundamental weakness we currenty face in analyzing the BoP space. The lack of large scale quantitative data and analysis to back our arguments.

The debate is as follows: Based on the findings of a research study in the silk making town of Ramanagaram, in the south of India, a reporter from the Wall Street Journal wrote about a groundswell of discontent among microfinance borrowers in the town and warned of an emerging ’bubble’, as lenders chased potential borrowers who would not have the ability to repay their loans. Based on interviews with residents of the town, academics and investment funds, she finds evidence of a ’credit crisis’ brewing, as over-indebted borrowers find it difficult to pay back their loans. She talks about poor neighborhoods in India being ’carpet-bombed’ with loans, which are mostly being used to pay for weddings, purchase goods and pay off other lenders, rather than for any income enhancing purposes.

Vikram Akula, founder of SKS Microfinance, one of India’s largest microfinance lenders, strongly refutes the WSJ article in a letter to the editors. According to Akula, the anecdotal findings from a particular town in India about the over-indebtedness of some of its residents can hardly be generalized to the entire microfinance industry. He goes on to point out that the data suggest a very different story, and microfinance institutions in India, which now serve over 22 million clients, have consistent repayment rates of 95% and above. He goes on to argue that the research study cited in the WSJ article used a small sample of 20 clients in a 3 month period. He also highlights the fact that the authors of the study qualified their findings by stating that it was difficult for them to answer the question whether it was excessive supply or surging demand that was driving the rise in credit.

Akula’s rebuttal is compelling, and he backs it up with data and findings from statistical studies of the microfinance sector. While the question of a microfinance ’bubble’ is an important one, and certainly merits further analysis, this debate really underscores the importance of having valid data and the use of appropriate analytical methods to back your arguments.

The BoP space has so far relied largely on anecdotal evidence and case studies for analysis. It would be extremely wrong to say that case studies and qualitative research are not valuable tools in BoP evaluation, but it is important to understand their strengths and limitations. Case studies are useful for answering ’how’ and ’why’ questions about a particular situation, but their findings cannot be used to draw generalized conclusions about a larger population. A case study can help you understand how a particular process achieves a particular outcome, and why it works in a particular way, but it cannot tell you if the process will work in other situations, under different conditions. Without reliable, accurate quantitative data collected from a reasonably large sample of respondents, it is impossible to draw generalizations of the sort made in the article.

As the BoP movement matures, there will be increasing scrutiny from businesses, funders, the academic community and traditional development practitioners for credible data and analysis. As it grows to scale and opens itself up to outside inspection, BoP practitioners and theorists must start collecting quantitative data and measure their impacts in objective ways.

As for the bubble? It may still happen, but the doomsday predictors will need to make a more convincing argument.