The Economics of Microfinance.

• Author: Barnett, Bryan
• Position: Book review

The Economics of Microfinance

Beatriz Armendariz and Jonathan Morduch

Cambridge, Mass.: MIT Press, 2007, 360 pp.

It is one of the sad facts of recent human history that the economic prosperity enjoyed by so many remains unknown to most of the rest. The causes of poverty have long been debated and much has been spent in the effort to ameliorate it. Reliable estimates suggest as much as $2.3 trillion has been spent over the last several decades, most of it in the form of sponsored aid programs conceived and pursued by governments and large foundations in developed countries. Despite this investment, however, poverty remains widespread and has worsened in many places, especially in Africa. These basic facts now fuel a vigorous debate over the scale and ultimate value of traditional aid programs and a search for more effective solutions.

Against this backdrop microfinance stands out as a private sector market-based strategy to improve the lives of the poor. Predicated on the assumption that even the poorest have the ability to improve their own circumstances given appropriate resources, microfinance seeks to overcome the barriers that deprive them of access to critical financial services taken for granted elsewhere. What began more than 30 years ago as microcredit for the poor has since grown into a large industry that increasingly seeks to offer savings and insurance products as well as unsecured loans to those otherwise overlooked by established financial institutions. The Economics of Microfinance offers a comprehensive exploration and analysis of the underlying theory of and research into the business of microfinance, covering a range of issues relevant to investors, managers, and researchers. The book looks broadly at four sets of issues: barriers that prevent established banks from providing services to the very poor, innovations that microfinance institutions (MFIs) have relied upon to overcome these barriers, the potential and consequences of MFIs becoming fully commercial enterprises, and the ultimate impact of microfinance on poverty and gender equality.

The poor have always borrowed and saved. They borrow from friends, employers, family, and village money lenders. They save by hiding cash or depositing it with friends. And in most parts of the world they can join one of a variety of informal rotating savings and credit associations. At the same time commercial banks face significant obstacles to serving poor customers. Where legal...