The Economics of Microfinance.

Author:Gallaway, Julie H.
Position:Book review
 
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The Economics of Microfinance by Beatriz Armendariz de Aghion and Jonathan Morduch. Cambridge, Massachusetts: The MIT Press. 2005. ISBN: 0-262-01216-2, $45.00 352 pages.

The most common story about what we now think of as microfinance involves Muhammad Yunus using $27 of his own money to make 42 small loans in 1976. This became the foundation for what is now known as the Grameen Bank in Bangladesh (Yunus 2002). Microfinance programs are well known for providing small loans to people who would not otherwise have access to credit because they are considered high risks by the commercial banking community (through lack of collateral or credit history). Moreover, microfinance institutions are increasingly providing additional financial services, e.g., savings deposits and insurance, to the poor. The awarding of the 2006 Nobel Peace Prize to the Grameen Bank and its founder, Muhammad Yunus, recognized the importance of microfinance as a tool for economic development and aiding the poor. Beatriz Armendariz de Aghion and Jonathan Morduch provide an extensive overview of the microfinance revolution in their book The Economics of Microfinance. The book aims to serve multiple purposes and appeal to multiple audiences. It could be used as a textbook for academics or a reference book for practitioners.

The book consists of ten chapters. Chapter 1, "Rethinking Banking," is crucial to understanding why modem microfinance is needed. For example, the authors explain that while the principle of diminishing returns suggests that capital should flow to the poor and theoretically microfinance should not be necessary, the reality is that risk, asymmetric information, high transactions costs, and legal institutions all work to undermine the provision of microcredit by commercial banking industries. This chapter also outlines the aims of the book: 1) describe the innovations resulting in modem microfinance, 2) discuss the current debates about and insights from microfinance, and 3) dispel commons myths about microfinance.

Chapters 2 and 3 continue the discussion about why microfinance exists and its historical roots. Chapter 2, "Why Intervene in Credit Markets?" presents detailed explanations of the asymmetric information problems of adverse selection and moral hazard. Chapter 3, "Roots of Microfinance: ROSCAs and Credit Cooperatives," then gives a brief history of two types of financial institutions that preceded what we now think of as microfinance institutions.

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