Is microfinance really helping the poor?

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.

One thought on “Is microfinance really helping the poor?

  1. Micro Finance organizations have a major problem with showing long term outcomes because in part the clients tend to get what they need and move on. The organizations do not focus on sustainability in terms of turning their borrowers into customers of other services for the long run. You will find that financially secure organizations offer products that keep their clients long after the loan is paid back. Services such as co-op stores, websites, marketing services, tax help, etc need to be offered and growth needs to be encouraged. Many new entrepreneurs are rightfully afraid of using the little they earn for expansion. Micro enterprise organizations need to look for opportunities to continue to serve their clients and think of other services such as child care or health services that will be used long term. This can also be done by working to balance services in co-op groups to allow these entrepreneurs to help each other in the long run. Offer fee based but affordable services Meredith Gosslandwww.meshinc.org


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