Due Diligence is a new book on microfinance by David Roodman. We are fans of Mr. Roodman’s work in general (we’ve previously interviewed him for our blog, discussed his research and quoted him for a testimonial), so we were eager to read this book. We weren’t disappointed: it’s thorough, it examines the case for microfinance from multiple different angles, and (in our view) it is consistently – and refreshingly – driven by an evenhanded search for the full and complex truth of the matter, rather than by a particular agenda.

I found the strongest part of the book to be from Chapter 6 onward, where Mr. Roodman reviews the case for (or against) microfinance based on different conceptions of “development.”

• In Chapter 6, he reviews the literature on whether microfinance directly reduces poverty. His discussion is similar to the one in More than Good Intentions (which we reviewed previously), though it covers earlier non-randomized studies in more detail; as an aside, we’ve found his work on one of the better-known early microfinance studies to be an extremely interesting case study in the problems that can arise with complex studies. Mr. Roodman concludes that (as we have written previously, largely relying in his work) any direct poverty-reducing effect of microfinance remains undemonstrated, even after substantial attempts to demonstrate it.
• In Chapter 7, he examines the question of whether (and to what extent) microfinance “empowers” clients, giving them more control over their own lives. (There is some conceptual overlap here with our key questions for microlending institutions.) Mr. Roodman discusses interest rates (particularly their transparency to borrowers), the dynamics of group lending (both positive and negative), and some of the qualitative research that attempts to look informally at how microfinance impacts people’s lives. He concludes that (a) there are valid reasons to worry about microfinance as reducing freedom (by increasing debt), particularly when it comes to the traditional “stripped-down South Asian solidarity group loan” model; but (b) microfinance can also empower people by providing an additional tool for managing their financial lives, and the latter effect should be presumed to be the most prominent and basic one.
• In Chapter 8, he argues that the most impressive thing about microfinance may simply be the way it has proliferated, and led to the creation of self-sustaining institutions. Even without direct proof of the connection to poverty reduction or empowerment, this “industry building” effect could in itself be considered evidence that microfinance contributes to development.

Though Mr. Roodman praises the early role of aid in leading to the development of microfinance, he believes that the large donor subsidies currently going into the area could as easily be distorting/undermining it as helping it. He concludes that

from the point of view of delivering appropriate financial services to the poor , microfinance’s slice of public aid and private charity—about $3 billion in 2009, as noted in chapter 8—has grown too large. Microfinance would do better on its own terms if less money went into it. To this substantial extent, then, there is no trade-off between microfinance and other kinds of aid. Less money for microcredit and more for bednets would be a double win.

“Less money for microcredit and more for bednets” matches our conclusion on the matter, though our recommendation to individual donors is less tentative and conditional: we believe that individual donors are poorly positioned to support (and hold accountable) the kind of risk-taking that has been successful in building microfinance institutions, and that the simpler, more evidence-based case for something like bednets is a better fit for what these donors have to offer.

Microfinance is a complex topic whose public discussion has unfortunately been dominated by simplified myths. We recommend Mr. Roodman’s book as an antidote to these myths; it would be at the top of our recommended reading list for anyone interested in microfinance, and we also recommend it to people who are generally interested in what we consider to be thorough, evenhanded investigation of controversial topics in aid.