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Introduction
Stop a man or woman on the street of any city in the 'developed' world, and ask them if they can name a development policy that works. They will probably think you are certifiable, unless they happen to be one of the minority of rich world citizens with an interest in development or aid, in which case there is a very strong chance they will say 'microcredit', and tell you that they have heard it works wonders in Bangladesh. In the public eye, and according to many analysts, microfinance has been successful. The microfinance industry now has global outreach, with more than 92 million clients reported in developing countries.2 It is very difficult to find a Poverty Reduction Strategy that does not include microfinance as an element of national development.
The most common account is that the microfinance industry has its roots in Bangladesh with the Grameen Bank, and it is on Bangladesh that this chapter will mainly focus. According to this account the initial success of microfinance in Bangladesh has diffused across the world.3 If we step back to the late 1970s this seems a most unlikely scenario. The precursors of microfinance - rural credit and small farmer credit - had a history of dramatic policy failure, charted by the Ohio State School. At that time, it was widely acknowledged that attempts to provide poor people (at that time synonymous with small farmers) with small loans had been a disastrous policy (see Adams et al 1984 and others). It failed to get credit to poor people, did little to improve agricultural yields and had high rates of default so that viable rural finance institutions could not be established. Poor people were viewed as not being 'bankable'. The high unit costs of transactions, the inability of poor people to repay loans and the political manipulation of such initiatives meant that development policy should withdraw from this domain and leave all banking to the private, for-profit sector.
This paper charts the overturning of this orthodoxy. After a brief discussion of the meanings of key terms, we provide a rapid history of the development of the microfinance industry in Bangladesh. Building on this, we examine the evidence of the success of the microfinance industry in Bangladesh - in terms of outreach, economic and social effects on clients, broader national-level effects, processes of institutional development, and the export and replication of the Bangladesh experience outside its borders - and touch on critiques of the microfinance paradigm.
In the second part of this chapter, we use the framework developed by Bebbington and McCourt (2005) to explore the reasons why microfinance has performed well. On one hand, there is the innovative design and specification of microfinance policy, the ways in which it has been implemented on the ground, and the processes of learning and adaptation underlying the broader development of the microfinance industry. On the other, there are the ways in which microfinance institutions have managed a favourable demographic, infrastructural and politicaleconomic environment, and the crucial role of the exceptional ability and performance of both the leaders of the microfinance movement, and of the millions of poor people who make up its clientele. We conclude by briefly describing the 'diffusion' of microfinance around the world, and drawing out a number of general lessons about the processes that lead to successful development policy.
In this account, dvelopment policy is not seen as something solely about what governments do. Rather, as Bebbington and McCourt articulate, it is seen as any action that has - or is intended to have - large-scale developmental effects, such that it can be something involving both governmental and non-governmental organisations, as well as individuals, and their networks. As we detail below, while the microfinance industry in Bangladesh has been closely associated with the experiences of NGOs and largely remains within their domain, government has always 'participated' - to a relatively limited extent as providers and regulators, but more crucially in terms of creating an enabling environment for microfinance institutions, or at least not hindering them. Recent institutional and regulatory developments suggest that microfinance in Bangladesh has truly 'come of age' as public policy, with microfinance institutional approaches moving from 'parallel', to 'competitive substitute', to 'transforming the mainstream'.4
Footnotes:
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Corresponding author: . The authors gratefully acknowledge insightful comments from Anne-Marie Goetz, who acted as discussant at the ESRC-funded Seminar on Policy Success in Developing Countries (Institute for Development Policy and Management, Manchester, 20 May 2005) at which this paper was originally presented, as well as other participants in this seminar. Comments received from Stuart Rutherford, Malcolm Harper and others at a presentation made to the Microfinance Club (London, 5 October 2005) are also acknowledged. David Hulme's works for this paper
were supported by the ESRC's Global Poverty Research Group (GPRG).
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According to The State of the Microcredit Summit Campaign Report 2005, at the end of 2004, 3,164 microcredit institutions reported reaching 92,270,289 clients, 66,614,871 of whom were among the poorest (<US$1/day, or bottom half of those below national poverty line) when they took their first loan. Data from 330 institutions, representing 87.7% of the poorest clients, was verified by the Campaign.
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This is not to deny the importance of much earlier - often centuries old - innovations in informal and formal financial services and systems by and for low income people in, for example, West Africa, Europe and South Asia, or that today's microfinance practitioners, policy-makers and academics should not learn from these experiences (see Siebel 2003). It does argue, however, that the current global dominance of microfinance as a development intervention is largely based on the Bangladesh experience over the past three-and-a-half decades and, even more so, commonly perceived as emergent from the Bangladesh experience.
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Thanks to Anne-Marie Goetz for suggesting this terminology.
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