Defeating Global Poverty

I had the opportunity to visit microfinance superstar Bandhan in Kolkata (formerly Calcutta), India last month and then had the opportunity to catch up with C.S. Ghosh, Bandhan's CEO last week in the Philippines. Mr. Ghosh handed me a pamphlet highlighting some of their latest progress.

Bandhan one of the world's largest AND fastest growing microfinance institutions. This is usually an oxymoron as most the larger microfinance organizations are growing very slowly. Here are a few of their stats: over 750,000 clients, over 400 branches, over $120M disbursed, over 2000 staff. And they are growing at something like 30,000+ clients per month!! Five years ago they didn't even exist and now they're serving 750K families or about 3,750,000 people!

But, what I found the most interesting was a study of the impact of microfinance services on their clients by Mr. Ranesh Buswas and Mr. Soumik Ghanta of the Indian Institute of Forest Management, Bhopal, India, April-June 2007.

Here is a chart of the impact on their clients through 3 loan cycles (each 1 year)


Here are a few of my observations:

• By the third loan almost all of the women (90%) have access to a savings facility (critical to help with unforeseen or special expenses)
• 100% have reduced their dependency on moneylenders by the 3rd loan (moneylenders charge at minimum 100% and often 300-500% interest with daily repayment required)
• 90% have increased their income by the 3rd loan (meaning that they've pretty much all figured out how to run a business which provides enough income for them to repay their loan plus interest and have surplus)
• Many (60%) of them have started to grow their liquid assets by the 3rd loan (owning productive animals are one of the key methods for doing this)
• Some (30%) are starting to be able to acquire (or buyback) more land by the 3rd loan, but it will take longer for the majority.
  

What do you observe? [post a comment]

Oh, and a bonus... a short video I made while visiting a group of Bandhan borrowers in September. Look at their beautiful saris!

Labels: bandhan, microfinance, poverty, poverty impact

Very good question from KT on post of my recent interview ... just the kind of questions I like to ask! We need to have an open dialog on the outputs/results we are expecting/hoping for.

Dave, in the interview you mentioned: "microfinance has demonstrated, and it’s one of the few tools that I’ve been able to find historically that has had a large impact on actually lifting people out of extreme poverty on a sustainable basis and at a large volume". Do we have any hard evidence of that? In 2006, Economist magazine concluded that while "heart-warming case studies abound, rigorous empirical analyses are rare". Bangladesh is not one of the development success stories by any standards. Out of 7,000 MFIs around the world, fewer than 100 claim self-sufficiency.

I am not trying to criticise microfinance as such but it looks like the claims that it as a successful development tool are really exaggerated.

Here are a few thoughts:

• There have been a dirth of studies documenting the long-term impact of microfinance. I did write about one I read titled Measuring the Impact of Microfinance commissioned by Grameen Foundation. This has some data.
• I think there are a few reasons that there are few studies on microfinance impact:
1. Microfinance is a relatively new service. There have been a few organizations offering microfinance for 30+ years, but the huge growth in microfinance has occured in the past 5 years and so long-term results aren't available for most of MFIs.
2. Most of the successful (in terms of # of clients) MFIs have focused on growth, not impact research. For many of them the impact is just obvious to them on a daily basis as they see their clients' assets growing and lives improving. They'd rather invest their resources in opening new branches, raising more and cheaper capital and improving their internal efficiencies than running impact analyses.
   
3. Long-term impact studies are expensive with little return-on-investment value for the MFIs. Increasingly, the large MFIs have access to non-subsidized capital, so they aren't required by capital sources to invest in these kind of activities, so most don't.
   
• While I agree that ultimately for microfinance to help the poor long-term it needs to be sustainable (see my definition/criteria) ... and as you note most MFIs are not currently financially self-sustaining ... I'm not sure this has as much impact/relevance in the short-term. The reality is that there is subsidized capital available for many of the MFIs and so they are able to provide microfinance services for some time while running at a loss. Some might call this a "bubble" in financing.
  
• Ultimately, I think that for-profit microfinance is going to win-out and this will require sustainability. Today, most of the highest-growth MFIs are organized as for-profit. These larger, more efficient MFIs will absorb the smaller, less efficient ones and so it is likely that the financial services will have continuity.
  

Here is another post I wrote on a critique of microfinance impact.

I think that the most likely sources of impact analysis are:

• Independent specialized NGOs (or government anti-poverty agencies or university-related research initiatives) who care about this and are funded to do this kind of analysis and reporting.
• Emerging credit ratings services which are greatly needed to improve the efficiency of credit granting ... primarily to reward those who have proven themselves as credit worthy. There will be enough value that these can be run on a commercial basis.

Please post comments on what you think.

Labels: microfinance, poverty, poverty impact

I continue to be very interested in better understanding whether the globalization movement is having a net positive or negative impact on our economically disadvantaged brothers and sisters. I have a growing reading list on poverty-related literature from a wide variety of viewpoints. Bhagwati in In Defense of Globalization (read my review) argues for the net positive conclusion while pointing out numerous negatives. Sachs in The End of Poverty (read my review) argues that without a financial aid "jumpstart", globalization will continue to bypass many people.

One of the best articles that I seen written on the impact of globalization was published on the front page of the Wall Street Journal on May 24, 2007 entitled "Wealth of Nations: Globalization's Gains Come With a Price".

Here's the summary ... 100's of millions of those living in extreme poverty have been lifted out of poverty in the last 25 years AND the wealthiest 10% of the world's citizens have grown proportionately richer in that same time.

One of the most astonishing stats is that between 1981 and 2005, more than 450 million people in China (alone) stepped out of extreme poverty (based on UN's definition of < $1/day using purchasing power parity methodology.) Since China has received very little international aid, this is almost all attributable to globalization. "From 2000 to 2005, per capita income of the bottom 10% of urban households in China rose 26% ... while those in the top [10%] saw gains of 133%.

The net is that on an absolute basis, globalization has had a truly phenomenally positive impact on reducing poverty (especially in the historical context). Yet on a relative basis the wealthiest people have increased their wealth faster.

The results in Latin America have been more mixed with positive results for the extreme poor in El Salvador, Chile, Ecuador and Costa Rica while negative in Mexico, Colombia and Peru [see chart at top.]

The article also tells the story of the impact of globalization of a family in Mexico which helps personalize globalization and explain some of the complexities as new emerging markets compete for the new global economic opportunities.

Please respond in comments to this article. Is this a fair/helpful/accurate report?

Labels: globalization, income distribution, poverty, poverty impact

I am very hopeful for the potential impact of microfinance in helping the poor sustainably earn their way out of poverty. I am also a fan of listening to constructive and thoughtful critique on my ideas and perspectives. Previously, I reviewed a study which concluded that microfinance was having a generally positive impact on defeating poverty.

Another study by Thomas Dichter, long-time practitioner in the international development industry and author of "Despite Good Intentions: Why Development Assistance to the Third World Has Failed," takes a critical look at the microcredit movement and argues that it has done more harm than good.

A few highlights of arguments that Dichter makes:

• Many microfinance institutions (MFIs) are over-hyping their impact (using unrestrained superlatives) in order to continue to raise donated capital.
• Very little impact assessment of microcredit on poverty is actually being done because it is too expensive and complex to perform.
  
• It has become standard practice for many/most development-related projects to now have a microcredit component in order to be cutting edge and get funded even if a microcredit component makes no sense or is ill-conceived.
• He notes that incoming smoothing and empowerment are the only benefits consistently delivered and wonders if this justifies the cost of (monies invested in) microcredit.
• Why do we expect to find so many entrepreneurs in poor countries when (he asserts) we have so few successful entrepreneurs in developed countries?
• He argues that there are other more structural issues which need addressing (e.g. stable governance, less corruption, better schools, better infrastructure, etc.) before business credit capital can be used well.

He concludes with the following:

To move forward the best operators of microcredit need to become banks, move more seriously into savings mobilization, and learn to deal with banking policy and other (institutional) aspects of the enabling environment. And they need to come to terms with the constraints imposed by political correctness - by being unafraid of lending to real businesses, and unafraid of abandoning the subsistence activities in the informal sector.

My response:

• I think that many of these are fair criticisms of the industry.
• I think he is right that microcredit is by itself insufficient and wholeheartedly agree that the provision of broader financial services for the poor are required.
• From what I have observed, entrepreneurship is a matter of degree and scale. When you're talking about growing something into a large business, few people have the genes. When you're talking about running a one-person/family business which enables you to earn enough for basic necessities, I've seen almost everyone in a developing country able to succeed at this as failure = perishing.
• I don't think a MFI has to abandon the poor clients (and just serve wealthier clients) to succeed long-term. Many MFIs are now demonstrating business sustainability in serving even the extreme poor.
  
• MFI's run as NGOs and without the customer service, financial and operational discipline required of real businesses are going to quickly be eclipsed by a new breed of MFIs functioning as customer-driven banks for the poor ... and the poor are going to benefit!
• Finally, I think that this article is severely lacking in detailed examples to back up incredibly broad generalizations. I look forward to reviewing a more substantive set of objective objections ... the same challenge he is making about microfinance.
  

Labels: microfinance, poverty, poverty impact

There have been a lot of studies conducted on the impact that microfinance is having on reducing poverty. Recently, Grameen Foundation USA commissioned Nathanael Goldberg to research all of the relevant studies on microfinance in an objective manner. The summary of his research is published in a free report called Measuring the Impact of Microfinance: Taking Stock of What We Know.

Goldberg does a good job of summarizing the highlights of many impact studies so even though this is still a long read (56 pages), it focuses our attention on the core findings. He covers the criticisms of various studies and doesn’t shy away from the contradictions between studies or the negative or inconclusive results. The reality is that measuring impact on poverty – especially long-term, sustainable impact – is a very challenging research task. It is very difficult to carefully select a good control group to which you are comparing and to isolate the impact of microfinance itself (vs. other factors) on poverty reduction.

Here are a few highlights:

• Two major studies strongly suggest that microfinance works better for the poorest than the less poor. Other studies don’t find this distinction.
• There is strong evidence that female clients are empowered, though the data on increased adoption of family planning is less clear.
• Quite consistently loans provided to women (rather than men) have a significantly greater impact on poverty reduction. Often loans given to men do not help with poverty reduction.
• Even in cases where poverty reduction is not observed, having loans helps to smooth cash flow enabling improvements in quality of life (e.g. year round money to buy food.)
• There are many indications that poverty reduction goes beyond the borrower families to the larger community … that is, there are secondary local, positive impacts on poverty reduction in the immediate village/area.
  

Goldberg's Net: There is a wide range of evidence that microfinance programs can increase incomes and lift families out of poverty. Access to microfinance can improve children’s nutrition and increase their school enrollment rates, among many other outcomes.

Read the full paper

Labels: microfinance, poverty, poverty impact

The goal of the 1997 Micro Credit Summit was that in 9 years (by the end of 2005) that 100 million poorest of the poor would receive microcredit services to help them help themselves generate increased wealth with the hope that many would be on the road to sustainably being lifted out of extreme poverty.

The 2004 status report states that there is good progress towards this goal. This is being watched as one of the key movements in helping achieve the UN's Millenium Development Goals which in a nutshell are to half extreme poverty by 2015.

Here are three myths about microfinance which they address:

Myth one—microfinance institutions cannot reach the poorest because they are too costly to identify and motivate.

Myth two—if an institution does reach the very poor, it cannot become financially selfsufficient because the added cost of identifying and motivating the very poor and dealing with very small loans is too great.

Myth three—an institution that somehow manages to reach the very poor and become financially self-sufficient will only be adding a debt burden to those families.

Check out the report for how they respond to these myths.

Labels: microfinance, poverty, poverty impact