Posted on December 10, 2009 - by James

Microfinance “no big deal”?

Official Financial Times Posting and Accion response:

http://blogs.ft.com/undercover/2009/12/perhaps-microfinance-isn%E2%80%99t-such-a-big-deal-after-all/

Perhaps microfinance isn’t such a big deal after all

By Tim Harford

Published: December 5 2009 00:10

Last December, I showed some unwitting prescience by worrying about a backlash against microfinance, the practice of providing small loans – or perhaps savings products or insurance – to poor people. I fretted that there was little compelling evidence that it worked.

A year later, the evidence is arriving and the backlash has begun. The Boston Globe published an article in September, subtitled, “Billions of dollars and a Nobel Prize later, it looks like ‘microlending’ doesn’t actually do much to fight poverty.” Other media have weighed in on all sides, with The Wall Street Journal concerned about a microcredit bubble. What is going on?

Three important randomised controlled trials were unveiled this year. In one, economists Dean Karlan and Jonathan Zinman persuaded a lender in Manila to tweak a credit-scoring computer program so that it randomly awarded or denied loans to marginal borrowers. The results were disappointing, considering that an earlier Karlan-Zinman study of a consumer-finance lender in South Africa had shown more substantial benefits from microcredit, despite annual interest rates of 200 per cent. In Manila, male-owned businesses tended to become more profitable after a loan, and female-owned businesses did not. This runs counter to a strong focus on women in the microfinance culture. The loans produced no improvement in diet or income about 18 months down the line.

A second trial, by Abhijit Banerjee and three other MIT economists, studied a more traditional scheme in India, which lent to groups of women. Spandana, a leading microfinance operator, agreed to randomise the way it entered the Hyderabad market. The company chose 104 suitable areas of the city but at first only marketed loans in 52 of them. Again, the results were modest. Households seemed to use the loans to buy more expensive goods and then cut back on everyday spending to repay the loan, but income did not rise, nor were there improvements in health or women’s empowerment. Business owners did manage to improve profits. The time horizon, again, was less than two years.

A third trial, of a micro-savings scheme in rural Kenya, was more encouraging. Economists Pascaline Dupas and Jonathan Robinson found that the savings accounts were popular among women and helped them save, invest in businesses, spend more and cope with bad luck. All this was despite the fact that the accounts paid no interest and charged hefty withdrawal fees.

Microfinance fans should not feel too defensive about these mildly positive results, especially when microfinance itself has passed a market test by growing very rapidly, often without subsidies. All such trials are context-specific and have other limits: the Manila study targeted marginal borrowers, while in the Hyderabad study, Spandana was not the only microfinance lender in town.

The reason for the backlash is obvious: microfinance was supposed not just to be a useful financial product, but to emancipate women, create millions of entrepreneurs and get rid of stubborn stains on your collar. Such claims were always going to be difficult to justify – even if donors tend to lap them up in the search for the next development panacea.

David Roodman, a microfinance expert at the Center for Global Development, sums it up well: “Suppose microfinance is not having much average impact on poverty, but is giving millions of people a modicum of greater control over their lives … is that so bad?” Other serious studies are in the pipeline. If microfinance is to thrive under the microscope, perhaps its practitioners should establish more realistic expectations.

Response from Michael Schlein
President & CEO
ACCION International

Tim Harford’s article “Perhaps Microfinance isn’t such a big deal after all” is right – and wrong.

He’s right that microfinance has been oversold and is often described as the panacea that will bring an end to global poverty. He’s right to see the backlash coming. But he’s wrong to say it isn’t a big deal. It is.

There are two key problems with the recent microfinance impact studies.

First, if you want to understand football, you need to study the World Cup. You would draw very different conclusions if you study a high school team instead of the big leagues. There are nearly 10,000 microfinance institutions in the world today. Most of them are fledgling. Only a small percentage have reached genuine scale and sustainability. To draw conclusions on microfinance’s potential impact, you need to look at the best. So far, that has not been the case.

Second, because of expense, the studies must ask narrow questions over short periods of time. The results are fragmentary. More often than not, the real impact may take years to measure.

For the last three and a half decades, ACCION’s work has regularly brought us face-to-face with clients – in 25 countries, across four continents. We know microfinance works because we’ve seen it in action, first-hand. We track individuals and families over a period of years, recording and bearing witness to the improved quality of their lives. We see it empower women, giving them access to the material, human and social resources necessary to make strategic choices in their lives; to establish or strengthen financial independence; to transform power relationships; to improve the stability and prospects of their family by directing more income toward education; and, particularly, to engender dignity and pride.

There is no question that we need to be reasonable and measured in our claims for what microfinance can accomplish. It is one weapon – albeit, an important one – in the arsenal we have to combat poverty. Microfinance has clearly demonstrated scale, sustainability and enormous potential. Without government subsidies, the microfinance industry has touched and improved the lives of tens of millions.

That’s a big deal.

Center for Financial Inclusion Post:

Not a big deal? Microfinance is about inclusion.

http://centerforfinancialinclusionblog.wordpress.com/2009/12/07/not-a-big-deal-microfinance-is-about-inclusion/

Posted by Elisabeth Rhyne

Tim Harford’s Financial Times blog post “Perhaps microfinance isn’t such a big deal after all,” is missing the point. Microfinance’s purpose is not to cure the world’s poverty ailments. Its purpose is to include otherwise ignored people into the financial sector. You don’t need an impact evaluation to tell you what a valuable role financial services play in your own life – and it is the same for the clients of microfinance. Low income and informal individuals who would otherwise be at the doorstep of a neighborhood loan shark are instead able to find loans, savings programs, and, in some cases, other financial services to help them manage cash flow, expand their businesses, cope with emergencies, or save for the future.

Through these financial services, people can improve their quality of life. A family faced with a large medical expense can still keep the kids in school. A seamstress can purchase a sewing machine to multiply her daily output. Funeral expenses no longer mean wiping out a widow’s savings. This is success. And a big deal. Sure, it’s not THE one answer. Poverty is much too large a problem for a single solution. But, as ACCION’s CEO, Michael Schlein noted in his response, it’s a tremendous weapon in the arsenal.

As the microfinance sector grows, we at the Center for Financial Inclusion have launched the industry-wide “Smart Campaign,” dedicated to keeping the quality of services and treatment of microfinance clients foremost in the minds of microfinance institutions around the world. With already over 700 endorsers, this Campaign is one way of ensuring that microfinance remains focused on the client and serves an example of responsible banking.