DOES MICROFINANCE WORK?
Dan Murray, CEO, Opportunity International Canada
(Author's Note: I am deeply indebted to Calum Scott, Global Impact Director, Opportunity International, for much of the content of this blog.)
The 2019 Nobel Prize for Economics was recently awarded to Abhijit Banerjee, Esther Duflo and Michael Kremer. It was awarded for their contributions in using randomized controlled trials (RCT) to better understand gaps in development.
As The Economist put it in their article on this event, “It is…a practical award, celebrating work that offers ways to improve lives.” The Economist, Oct 17, 2019
From my perspective working with an organization whose vision is “a world in which all people have the opportunity to achieve a life free from poverty, with dignity and purpose”, I am very encouraged by these world class efforts to better understand the challenges of ultra-poverty.
In articles reporting on this, including The Economist and The Globe and Mail, there was a short paragraph that appeared to call into question the impact of microfinance in bringing about meaningful change in the lives of the poor.
As The Economist put it, “They showed that microloans—small-scale lending to the cash-strapped poor—were less transformative than had been claimed, but could help ambitious entrepreneurs.” The Economist, Oct 17, 2019
The Globe And Mail went on to add, “Mr. Banerjee and Ms. Duflo, who are married, also have found that microcredit programs, which provide small loans to encourage poor people to start businesses, did little to help the poor in the Indian city Hyderabad; studies in Bosnia-Herzegovina, Ethiopia, Morocco, Mexico and Mongolia, produced similar results.” The Globe And Mail, Oct 14, 2019
Naturally this caught my attention, and that of some of our supporters, since the mission of Opportunity International Canada is poverty alleviation through financial inclusion, anchored on microfinance.
Now, I’m certainly not going to even attempt to take on three Nobel Prize winners, and I don’t doubt their data, the analysis or even the conclusions they have drawn. And, in fact, our Social Performance Management team, under the leadership of Calum Scott, Global Impact Director, Opportunity International, is keen to learn what we can from these reports.
In response to my questions to Calum Scott on this issue, he responded, “My reading of the Nobel prize winners’ work on microfinance is not that they conclude that microfinance is ‘positive’ or ‘negative’ per se – this is an undue simplification (though the simplified story is unfortunately the one being reported in the media) – but rather that they emphasise the need for studies focused not simply on increasing income, but looking for other effects of microfinance. They emphasise a need to be 'relentlessly empirical and open to different strategies in different places'.”
Scott went on to add that, “Microfinance itself is not homogenous, but instead is widely different in different markets. Studies should look for differences between programs. They are more helpful when they show that certain programs have notably larger impacts of certain types, compared to others. Or that certain combinations of interventions are more likely to be effective.”
Most researchers generally agree that poverty is being reduced over time. According to the same article in The Economist, “In 2015, 10% of the world’s population lived on less than $1.90 per day, down from 36% in 1990. But more than 700 million people remain in extreme poverty, and the number grows every day in certain parts of the world, in particular sub-Saharan Africa.”
One of the questions researchers are trying to address is the role played by microfinance in this progress. Notwithstanding the excellence of the Nobel Laureates’ research, there remain significant theoretical and practical barriers to understanding the role of microfinance in poverty reduction, making it unlikely that definitive results will emerge.
However, it turns out, in fact, that a significant amount of microfinance impact research has been carried out and continues to be. Some of the most comprehensive work is being undertaken by Kathleen O’Dell (see Measuring the Impact of Microfinance: Looking to the Future, Paper no. 3 in the Grameen Foundation Publication Series), and by David Roodman in his book, Due Diligence: An Impertinent Inquiry into Microfinance.
Scott’s commentary on Roodman’s work is that “while concluding that funding for microfinance should be reviewed due to the lack of evidence of microfinance lifting people out of poverty (he is clearly not a microfinance apologist or supporter), he also finds good/mixed evidence that microfinance empowers clients, and excellent evidence that the sector has built an extremely powerful, sustainable platform for assisting the poor.”
Scott notes that, “These studies and other work have shown many other significant benefits from microfinance - security, empowerment, better access to services, reduced stress, increased welfare, especially through the cash flow smoothing that microfinance enables”.
Scott highlighted a few key points made by O’Dell. She observed that “the question is not so much ‘Does it work?’ but rather, ‘In which circumstances do certain financial products work best for low-income people, why does performance lag in some places, and what can this teach us about improving policy and practice?’.”
O’Dell goes on to say that most comprehensive recent studies “show that in most contexts, access to credit leads to business expansion, although this often does not translate to increases in business profits or changes in income and/or spending in the business owners’ households. On a range of social measures, the results are mixed……but in a variety of contexts, credit serves to provide households with increased freedom of choice and flexibility, helping to manage uncertainty and reduce the effects of negative shocks.”
Finally, O’Dell adds “A common characteristic of these studies is their focus on credit as an isolated intervention. Today, most international development organizations with a focus on poverty alleviation and social outcomes provide clients with a range of financial services and educational opportunities.”
This last comment gets to the core of the work of Opportunity International Canada. We are an International Development charity, not a microfinance bank, and our focus is on the transformation of our clients, their families and communities. We try to capture this with phrases like “Microfinance Plus” or “Microfinance 2.0” or “It's more than a loan” to explain that we wrap training, infrastructure and other supports around each loan. A good way to explain it is financial inclusion leading to sustainable livelihoods.
The mission of Opportunity International Canada reads as follows: “By providing financial solutions and training, we empower people living in poverty to transform their lives, their children’s futures and their communities.”
I don’t doubt that as the global poor have emerged as a significant market for financial services, there is a risk of over-indebtedness, high interest rates and failed enterprises. In this there is little difference with the rest of the world, and it is perhaps paternalistic to suggest that the poor shouldn’t have access to these services.
As this Nobel Prize emphasizes, we can be better, smarter and more impactful in our work. We must be ever vigilant to avoid engaging in toxic charity, and as a minimum to do no harm. We must strive towards providing the most positive impact we can in the work we do with our partners around the world to affect our clients lives for the better.
This is the basis of The Smart Campaign – it’s about keeping clients first in financial inclusion. Some of the goals include: appropriate product design and delivery that does no harm; prevention of over-indebtedness; transparency; responsible pricing; and fair and respectful treatment of clients. Opportunity will only work with local Partners that are aligned with our values to treat each client with dignity.
As I have written elsewhere, microfinance is not a hand-out, nor even a hand-up, but rather a hand-shake – a transaction of dignity between equals. We are committed to ever improving the impact of our programs so that even more people can be freed from the trap of grinding and dehumanizing poverty.
To that end, the final word in this Blog goes to Calum Scott:
“It's critical to emphasise that a lot of the research and strategy work we do at Opportunity International will not persuade skeptics that 'microfinance works', but it does help us improve our impact – it’s the sort of evaluation effort that we think our donors would expect us to spend our time and effort (and their money) on.
From my work area specifically, I’d note that Opportunity works with our partners to promote best practices in client-focused microfinance – applying lessons learned from across the industry about what works best in promoting positive impact on clients – including collection, analysis, use and reporting of client data at a local level, to understand what is (and is not) working and how local microfinance services and their delivery can be improved. This is the work of the Social Performance Management team.”
Dan Murray, CEO