Taking Stock of Microfinance: Does it really help the poor?

Posted by: Micol Pistelli

Jonathan Morduch, Janiece Greene, Richard Rosenberg and Micol Pistelli

On November 19, I was invited by the Microfinance Working Group at Columbia University to participate in a panel entitled “Taking stock of microfinance: Does it really help the poor?” This panel was valuable not only for its relevance to current discussions in the microfinance industry but also because it is rare to see academics, practitioners, donors, and supporting agencies sit around a table to share views on such a highly debated topic.

I had the pleasure to share the stage with Richard Rosenberg, Senior Advisor to CGAP; Jonathan Morduch, Professor of Public Policy and Economics at New York University; and Janiece Greene,   Director of the Women’s Market at Women’s World Banking (WWB). The panel was moderated by Louise Moretto, Vice President at Deutsche Bank, Community Development Group.

The aim of the panel was to discuss findings of recent impact evaluations and implications; over-indebtedness and exploitative interest rates that have put microfinance’s use as a development tool under scrutiny; innovative approaches that may improve the effectiveness of microfinance institutions; and the extent to which increased transparency in disclosure of social performance indicators will positively impact clients.

Dr. Morduch explained how a new generation of impact studies has opened the way to more rigorous research in microfinance regarding poverty measurement. He mentioned two new impact studies carried out in India by the Massachusetts Institute of Technology and in the Philippines by Dean Karlan of Yale University and Jonathan Zinman of Dartmouth College by using randomized control trial methodology. These two studies have been recently the object of great attention from the media due to their findings, which showed little impact of microcredit programs on the lives of clients in terms of average income and consumption, education, or women’s empowerment. What the studies did show, however, is that access to credit allowed clients to start up a business activity and that those who had growing businesses registered higher spending on consumer goods.

Dr. Morduch underlined how these two studies differ from previous research on poverty measurement because of the methodology used, which compares a group of microloan borrowers to another group who are not microfinance clients.  The findings of these studies covered a period of 15 months to better assess impact, though Dr. Morduch questioned whether we should expect to see impact after 15 months.

Dr. Morduch also stated that having access to other financial services besides credit – such as savings, insurance and remittances – are very important for the poor to deal with illnesses or other types of emergencies. However, the benefits coming from access to such financial services are unlikely to show up in the results of a randomized control trial. Nevertheless, Dr. Morduch emphasized the importance of this research method to obtain more credible data and he exhorted the donors to invest more in this new generation of impact studies.

Ms. Greene reminded the audience that microfinance is a powerful tool against poverty but not the only tool. To help clients move out of poverty we need to find ways to offer better services to clients to be associated with other forms of financial and non financial products and services. MFIs act as distribution centers for other services such as health, insurance, and literacy. Therefore, we need to be sure we define the intended impact of each microfinance program and then find an appropriate means of measurement.  WWB is using indicators developed by SPTF/MIX to measure the social performance management of their affiliates and they have also come up with other specific indicators tailored on their specific mission, which are more specific to depth of outreach to and empowerment of women.

Mr. Rosenberg pointed out that there are two different questions on the debate around poverty outreach:

1) Does microfinance help the poor escape poverty?

2) Does microfinance help the poor?

According to Mr. Rosenberg, the strong value proposition of microfinance is that extending access to financial services allows people to deal with poverty. He shared an anecdote of how a female microfinance client in Bolivia – to whom he asked whether participating in a microcredit program helped her move out of poverty – replied: “At least now I eat every day.”  Mr. Rosenberg said that when we hear that microcredit is not impacting the poor in the sense of moving them out of poverty, we tend to be disappointed. However, this reaction is due to the fact that we in the developed world rarely see our consumption threatened. Poor people, on the other hand, see consumption very differently.

On another note, Mr. Rosenberg talked about the importance of client protection and the issue of over-indebtedness. He said that more research on clients over indebtedness is needed, however he does not think that microcredit is generally over-indebting clients, since eventually this would show up high default rates. Mr. Rosenberg pointed out the important role of governments in regulation and supervision of microfinance and the need to shift from a ‘prudential behavior’ to a ‘perform better behavior’ to make microfinance sustainable.

Mr. Rosenberg said that if he could choose between microfinance and good sustainable policy reforms he would certainly go for the second one, since microfinance cannot help the poor as much education can, for example. However, microfinance costs much less than subsidies needed for social services deliveries. Moreover, with one initial subsidy, a microfinance program can deliver social services to very large numbers of people.  To reassert the value proposition of microfinance, Mr. Rosenberg spoke about the tremendous leverage of donor funds in Bolivia, where something between $10 or $20 million in donor subsidies to foster the microfinance sector in the 1990s created a situation where there are now 300,000 clients and $200 million loan portfolio.

Mr. Rosenberg agreed that we need further donor investment on impact research; however, he asserts that the observed behavior of millions of microfinance clients have already proved that the benefits they received through financial access more than justify the investment in microfinance. Moreover, we only have had two rigorous impact studies up to now, which means we still know little about the impact of microfinance programs on clients and how to measure it. He finally exhorted to extend research on new areas of innovative approaches that may improve the effectiveness of microfinance in a sustainable way, in areas such as education and health.