Interview: Transforming Banking for the Poor: A Q&A With Jonathan Morduch
Wednesday, April 1, 2015
Microfinance was once heralded as a key weapon in the fight against global poverty. Yet some 2.5 billion impoverished people across the world still don’t have access to basic financial services, according to the latest World Bank data.
Economist and authorJonathan Morduch has been thinking deeply about the conundrum for nearly three decades. A professor of public policy and economics at New York University and managing director of the Financial Access Initiative, he has co-authored two books on the topic: “Portfolios of the Poor: How the Poor Live on $2 a Day,” and “The Economics of Microfinance.”
He recently spoke to The Wall Street Journal about the limitations of microfinance, the promise of new technologies, and the need for quality, not just cost effectiveness, when it comes to financial services for low-income groups. Edited excerpts:
There were big hopes for microfinance a decade ago. What’s your take on it?
In many ways, microfinance has been a stunning success. In 1997, the first global count of microfinance customers netted about 13 million borrowers. Twenty years later, the tally found 200 million customers. If we assume that each borrower is part of a family of five, the tally implies that 1 billion people are touched by microfinance. The push to scale has been spectacular.
Why didn’t this push solve the problems of financial exclusion and widespread poverty?
The biggest constraint to further growth is that microfinance remains locked into a vision in which lending is restricted to finance for small-scale entrepreneurs. That box traps most microlenders.
The fact is that half the world’s adults—some 2.5 billion people—lack access to basic banking services. And most of these 2.5 billion are not small-scale entrepreneurs. They are construction workers, shop clerks, drivers, nannies, factory laborers and other kinds of wage earners. Many live in cities. They have the income to be reliable customers, and they desire loans to manage expenses, but the microfinance sector has little to offer them. Another share of the 2.5 billion comprises farmers, who microlenders have largely avoided for fear of the risks in agriculture.
When it comes to poverty reduction, the evidence shows that access to finance alone is insufficient. There’s much to learn from microfinance, but the next steps require going beyond the strategies that have driven its success.