What's the impact of microfinance? A question with 150 million answers, one for every client around the world who receives microfinance services.
Academics who wield sophisticated statistical tools to assess complex social phenomena like microfinance give answers with more precision, but they don't always spend much time explaining their results to a broader public. And the press likes to give stories hard-hitting headlines whenever they can. Outcome: much of what the public reads in the press does not accurately reflect the studies. The press take on the most recent raft of studies about microfinance caused heartburn among both microfinance promoters and academics, as Nicholas Kristof reported in his New York Times blog.
Into the fray comes Grameen Foundation with a paper by Kathleen Odell, an economist from Dominican University. Odell's paper, "Measuring the Impact of Microfinance: Taking Another Look," provides a guide to ten of the most important studies on the impact of microfinance in the past five years. The Grameen Foundation paper helps the non-academic reader understand both how the impact studies were conducted and what they are finding. While the author is clearly sympathetic to microfinance, she reports both positive and negative findings faithfully, making an important contribution to an often-contentious conversation. I won't go into the complex methodology arguments here; instead I'll look at the study findings.
No one study gives a definitive answer to the impact question. Each one tells us something about how microfinance is affecting clients of a particular provider in a specific time and place. As Odell writes, "Each impact study must be interpreted as a small piece of a growing body of knowledge about how microfinance, in all its forms, functions in the world and how it affects the lives of the poor." Through many studies one can piece together a rich, complex picture. Here are some of the most important findings from the batch of studies covered in Odell's report, ordered roughly from most to least positive.
- Microcredit in southern India and Mexico contributed to the start-up and/or growth of tiny businesses operated by low income people.
- Microfinance in Thailand allowed people to manage day-to-day and seasonal variations in their incomes; such fluctuations are a big part of being poor.
- Introducing savings accounts to women in Kenya contributed to business growth.
- Loans in India and Mexico helped people make major purchases they would otherwise have a hard time making.
- Men in Manila and Sri Lanka expanded their businesses and increased profits while women didn't. (I speculate that perhaps the women used their business proceeds to meet family needs. That's exactly why many microfinance providers prefer to focus on women.)
- Microloans in Thailand and the Philippines that were targeted toward the very poor actually reached the near-poor and moderately poor.
- In India, loans provided without empowerment or other social messages had no significant empowerment or social effect.
- During the first year and a half after a provider began offering microcredit in new villages in India, the average villager did not experience a significant increase in family income.
These moderate results might be disappointing if you were expecting microfinance magic to cure poverty. But they are just what you'd expect if you think microfinance is about bringing financial services to people who never had them before -- and hence the kind of incremental, supportive, and occasionally transformational benefits that effective financial services bring to people at any wealth level.
As the impact picture grows into sharper focus, it's time to think about action. After all, the purpose of the studies is to guide the actions of the people and organizations making decisions about microfinance. What do the results tell microfinance professionals and supporters to actually do?
Two things, both of which reinforce trends already at work in the microfinance sector.
First, microfinance providers should strive to improve the products they offer, for example by adding savings and other services to basic microcredit. When the studies reveal that people used microfinance in different ways depending on their needs, and that savings is as useful as credit, they give a strong endorsement for providing a full suite of financial services, flexible enough for people to use them for whatever they need most.
Second, supporters of microfinance should demand scale and sustainability when they make charitable contributions. The finding that microfinance plays a facilitating role and has mostly incremental effects on customers should signal supporters of microfinance to be cost-conscious. They should seek to bring the benefits of microfinance to many people at low cost so that the benefits outweigh the costs. Fortunately, microfinance offers very high leverage on aid. When subsidies are used to create microfinance institutions capable of serving many people on an ongoing basis, or to develop a new kind of product, a small contribution goes a long way. The aim of aid, in other words, should be to build self-sustaining microfinance organizations that provide excellent services to their low-income clients without the need for ongoing charity.