15 June 2011

Microfinance: Angel or Devil?

Microfinance has been in the news a lot recently, so I invited my IDS colleague Anton Simanowitz, who has deep knowledge of the field both as a researcher and a practitioner, to do a guest blog reflecting on the debate.

In the same week I happened to come across a systematic review of 15 studies on the impacts of microfinance, led by Ruth Stewart at the Institute of Eduction in London published late last year. The review is hard hitting with conclusions such as "Some people are made poorer, and not richer, by microfinance, particularly micro-credit clients", "The emphasis on reaching the ‘poorest of the poor’may be flawed–particularly if it just makes them poorer", "There is some evidence that microfinance enables poor people to be better placed to deal with shocks,but this is not universal" and "We recommend avoidance of the promotion of microfinance as a means to achieve the Millennium Development Goals".

Anton's commentary echoes these points (e.g. microfinance is difficult to evaluate as a stand alone intervention -- the Stewart study found only 4 high quality evaluations in more than 20 years of microfinance operation!) but he also says the current swing of the pendulum away from microfinance represents an opportunity to make it truly pro-poor.

Angel or Devil? The truth about microfinance - Anton Simanowitz

Last week I presented to the All-Party Parliamentary Group on Microfinance, as part of their launch of a new report “Helping or hurting: What role for microfinance in the fight against poverty?” The report recognises that in many cases microfinance has been over-hyped and failed to deliver on its potential, and makes a number of recommendations to make microfinance more effective.

I joined what is often termed the microfinance ‘movement’ in 1997, working for three years for a local organisation in South Africa to help deepen their poverty outreach and impact. Spending time talking to the women clients, I could not help but be impressed by the lack of paternalism compared to my experience with other development interventions. Microfinance provides a service for a fee. My salary was paid for by the women I was interviewing, and when after a meeting I failed to find a single volunteer to stay behind to talk to me, I learnt the practical meaning of the term ‘time is money’.

The focus of my work was critical. I quickly recognised the business imperative of an organisation dependent on reaching scale, drive down costs and ensure virtually 100 per cent repayment rates for its very survival. This creates a tension with the need to tailor services to the individual needs of clients, for staff to provide a supportive and attentive service. When it works well, the support and facilitation of a staff member is a key aspect of ensuring that the clients productively invest their loans, re-invest profit, and that problems are dealt with in a supportive way by group members. I’ve often heard these field agents referred to as ‘angels’. More recently I heard a story of clients who told a survey team that their loan officers were devils, “all they care about is getting their money back”.

These tensions between commercial and social objectives – inherent in any social business – get to the heart of the current crisis in microfinance.

In recent months we’ve reached a tipping point and the pendulum is swinging with amazing force and speed. Microfinance is turning from angel to devil. In India, a seasonal phenomenon of suicides amongst over-indebted farmer has been blamed on microfinance; in Bangladesh the political elite has seen the opportunity to oust the Nobel Peach Prize Laureate and Founder of Grameen Bank, Muhammad Yunus. And academic studies that question the blind belief in the universal good of microfinance are being picked up by journalists eager to join the frenzy of anti-microfinance rhetoric.

Microfinance has been over hyped for many years, and I’ve been part of a small and mostly ignored group of practitioners and academics who have been saying for the past 10 years and more that microfinance is not just about access to financial services. Not all microfinance is the same and the benefits are not automatic. To achieve impact requires a thought through process that starts with an understanding of the complexity and multi dimensional nature of poverty.

There is no answer to the question “what is the impact of microfinance on poverty”, because this is the wrong question. Microfinance organisations vary hugely in terms of their methodology, their products/services, their productivity levels, management systems, and the context in which they work. The livelihoods of their clients are complex and vary, and its hard to pinpoint the direct impact of one intervention in a complex financial portfoloio.

It's this complexity that makes assessing the impact of microfinance so difficult. Over the years many there have been many impact assessments, and they have been consistent in their inconsistency. Microfinance benefits some of the people, some of the time, in some contexts. A new wave of randomised control trials (RCTs) is confirming the same thing.

I’ve recently completed researching and writing a paper - “Challenges to the field and solutions” - that will be presented in plenary to the great and the good of microfinance in November this year. I’ve been impressed by how much knowledge and experience there is in the microfinance community about the needs of clients and how to design services to make an impact, but this is not applied in practice. I have come to realise that I’m part of an industry that devotes 95% of its effort into how to reach more people as efficiently and profitably as possible. The institutional needs take priority over client needs.

The current crisis in microfinance is a huge opportunity. With the benefits no longer assumed, perhaps people will start to focus more on working out how to realise the potential of microfinance.


Ruth Stewart said...

Lawrence and Anton,
Many thanks for this interesting blog. I authored the review Lawrence highlights, working closely Carina van Rooyen and Thea de Wet at the University of Johannesburg and I just wanted to add a few points of clarification.

Our review focussed only on evidence from sub-Saharan Africa (so although the numbers of good studies were small, perhaps not as bad as you imply).

Secondly we did find some evidence of positive impacts of microfinance, and strongly believe that there is a need to identify the circumstances in which microfinance interventions can and do work in order to maximise the positive outcomes as well as minimising the negative ones. (So, whilst hard-hitting, our findings were not all negative).

Thirdly, Anton, I do take on board your comments about complexity. I believe there is always a balance between systematically reviewing the evidence of effectiveness across contexts, and understanding the issues within contexts in order to interpret the wider evidence base and apply it in individual decisions about specific programmes.

Lastly, we have been asked by DFID to extend our work more broadly exploring the worldwide evidence on the effectiveness of micro-credit, micro-savings and micro-leasing to enable poor people, especially women, to engage in meaningful economic opportunities. More details on this latest project are available here http://www.ruthstewartresearch.org/worldwidemicrofinance/ and our full protocol for this broader review should be published on the EPPI-Centre website by the end of the month.


Ruth Stewart said...

Technology must be getting the better of me... my previous response to this is lost in the ether. Here's take 2:

Lawrence and Anton,

Many thanks for this interesting post. I am the author of the systematic review you refer to and conducted the work along with Carina van Rooyen and Thea de Wet at the University of Johannesburg. I just wanted to add a few points:

- We focussed on sub-Saharan Africa, so although we only found only 15 relevant good quality studies, there are others available from elsewhere in the world.

- We did find some evidence of positive impacts, as well as negative ones. Our message isn't one of gloom, but of caution.

- Anton, I agree completely that this is a complex area and there is a need to identify evidence of impact and to draw on other contextual information to inform decisions. Furthermore there is a very real need to understand when, how and for whom microfinance can work so as to maximise the potential benefits and minimise the negatives.

- We're very pleased that DFID have just funded us to complete a second broader review which aims to do just this. We will be reviewing the worldwide literature to assess whether and how micro-credit, micro-savings and micro-leasing enable the poor to engage in meaningful economic opportunties, with a particular focus on women. Details are available here http://www.ruthstewartresearch.org/worldwidemicrofinance/ and the full protocol for the study will be published by the EPPI-Centre by the end of the month. Any comments welcome.

Thanks, Ruth

Ruth Stewart said...

Okay, technology has repeatedly defeated me and I see my comment still hasn't appeared... third time lucky perhaps?

Lawrence and Anton,
Many thanks for this interesting post. I am the lead author of the microfinance systematic review you refer to and just wanted to add a few points:
- First I just want to acknowledge my colleagues at the University of Johannesburg who were a key part of this team - Thea de Wet and Carina van Rooyen.
- I think it's important to point out that the evidence we reviewed was limited to sub-Saharan Africa so although there is scant evidence, it's not quite as bad as you might think. We found four randomised controlled trials within that region alone.
- We found evidence of positive as well as negative impacts of micro-credit and micro-savings on the lives of the poor. It's not all bad news.
- Absolutely microfinance in complex and varied and we hope that the debate will move on from whether or not it works, to focus more closely on who it works for and in what circumstances, with the aim of maximising the potential benefits and minimising the negatives.
- We're just embarking on a broader review looking at the impacts of micro-credit, micro-savings and micro-leasing. We will be drawing on the worldwide literature and exploring context in more detail. We'll also be exploring in some depth issues of women's financial inclusion and whether targeting female-headed microenterprises is a good thing. (Our review protocol will be published on the EPPI-Centre site very soon).
We look forward to ongoing discussions about microfinance, and about what systematic reviews can do to help answer these difficult questions.