Critique of microfinance raises questions about efficacy ... · (/impact) 0 DEVEX IMPACT INSIDE DEVELOPMENT MICROFINANCE Critique of microfinance raises questions about efficacy,

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DEVEX IMPACT INSIDE DEVELOPMENT MICROFINANCE

Critique of microfinance raises questions aboutefficacy, donor support of the industryBy Claire Luke (/people/1047722) 16 March 2015

A savings and loan passbook. A survey revealed that microfinance does not help people’s livelihoods. Photo by: McKaySavage (http://www.flickr.com/photos/mckaysavage/6321480751) / CC BY (https://creativecommons.org/licenses/by/2.0/)

The microfinance industry is once again coming under fire for failing to deliver on poverty alleviation, incomegeneration, education and women’s empowerment impacts — this time as the result of a broad survey ofmicrofinance programs.

The survey, released recently by the Abdul Latif Jameel Poverty Action Lab(http://www.povertyactionlab.org/) and Innovations for Poverty Action (https://www.devex.com/en/organizations/innovations-for-poverty-action), looked at the impacts of microfinance using sevenrandomized control trials in different regions of the world during the course of nine years. The studyexamined a wide range of contexts and borrower types and found that while microfinance does not haveharmful effects on borrowers, it doesn’t help their livelihoods, either.

While it strongly challenged microfinance’s poverty-alleviating potential, the study also said that the industryremains a useful financial tool because it can provide low-income households with more freedom over howthey manage their money.

The report has been described as “provocative” and “sobering”and has raised questions about if and howdonors should continue to invest in the $68 billion industry that serves approximately 300 million people.

Critique of microfinance raises questions about efficacy, donor sup... https://www.devex.com/news/critique-of-microfinance-raises-quest...

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Though others, including Alex Counts, Grameen’s president and CEO, encouraged addressing how to makemicrofinance work better rather than leaving the industry behind.

The notion that microcredit lifts people out of poverty is, “putting the bar unrealistically high,” said Dirk Elsen,director of emerging markets at Triodos Investment Management, adding that while microfinance may notincrease income on its own, it can give people choice in how they manage their daily lives. Microfinance canalso help develop financial sectors in lower-income countries, he said.

“The promise of microcredit should never have beenthat it was the best way to bring people out ofpoverty,” Justin Oliver, director of global outreach atInnovations for Poverty Action, told Devex.

Microcredit supporters hoped it might have someeffect on poverty but it was particularly attractivebecause it offers a viable business model, he said.

Grameen President Alex Counts said he thought thesurvey was “unfair” because no one said thatmicrocredit would transform clients’ lives, and urgedindustry leaders to focus on how to makemicrofinance work better instead of asking whether itworks.

“Microcredit didn't cure cancer, cure the common coldor find Bigfoot. There's many things that it failed to dobut why not talk about what it succeeded in doing andthen [the] top line message would be moreconstructive,” Counts said.

If you look at the research, he said it consistentlyshows microfinance brings significant though modestbenefits. “But modest benefits times 200,000 families— that’s not so modest. Five to 10 percent doexperience transformative benefits, so shouldn’t webe looking at how to expand this with applied research for better financial products?”

Moving forward: Continue model or invest in new innovations?

With the latest evidence further challenging the notion that microfinance can help the poor, it begs thequestion of whether donors should change their strategies or redirect their funds.

Elsen said donors should still invest in the standard microfinance model even if it does not boost economicstatus because it helps the poor deal with income shocks that arise such as paying for a wedding or illness.

In addition, several people said that the sustainable business model and the size of the industry make it tooeffective to dismiss.

“We could start new investments in new things, but I don’t see other business models with promise toreplicate the reach and sustainability microfinance has achieved,” said Paul DiLeo, president of GrassrootsCapital Management. “Not to minimize the shortfalls, but we should be careful about tossing out somethingthat exists instead of making it more effective.”

Others have advocated that it is time to abandon the old model and find innovative ways to usemicrofinance effectively for poverty alleviation, such as investing in digital transfers to increase credit accessand lower transaction costs for the poor.

“We must think beyond the standard microcredit model,” said IPA Founder Dean Karlan. Modernmicrofinance- savings and insurance, and more flexible credit products have generated larger impacts thansimple credit, he said.

J-PAL director Esther Duflo echoed the need to look beyond credit and shift a greater focus to new productslike insurance, savings and mobile money that groups concerned with the link between credit and financialinclusion have explored.

But Esther Duflo emphasized the importance of testing these new microinsurance products to provesuccess from the start in a way that was lacking in the earlier, more optimistic days of microfinance.

“We need to be careful not to jump from one fad to the next: it will be important to evaluate those


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“Microcredit didn't cure cancer,cure the common cold or findBigfoot. There's many things

that it failed to do but why nottalk about what it succeeded in

doing and then [the] top linemessage would be more

constructive.”— Alex Counts, president of Grameen

innovations and get evidence of impacts before we go through the cycle of enthusiasm, despair, and finally,evidence that has characterized microcredit,” Esther Duflo said.

But for some improving research and evidence is notenough. If poverty reduction is the main goal, aiddonors should not finance microfinance lending, saidIPA Executive Director Annie Duflo.

“Given that microcredit has not led to transformativeimpacts on poverty, donors and private investorsinterested in increasing the social impact of creditcould use philanthropic money to encourage thedesign, piloting, and testing of more flexible creditproducts,” Annie Duflo said.

Donors and governments should also focus efforts oncreating supportive regulatory frameworks forfinancially viable and responsible products for theunder-banked and the unbanked, she said.

Counts, from Grameen, agreed that donors should not be investing in MFIs because MFIs can sourcemoney through impact investors and commercial sources.

The infrastructure that microfinance has helped build touches millions of people and can be tapped by newproducts including solar or healthcare innovations that are looking for a means of distribution, he said.

“There are some really exciting high impact opportunities to do that and it would be silly to say we shouldn’tput philanthropic dollars to use this infrastructure that’s been built up and users have paid for,” Counts said.

In international development “we go through fads,” he said, and should think carefully before turning andsaying that something that has been worthy of development suddenly is not.

Should donors continue to invest in microfinance or leave it to the private sector and invest in newinnovations for financial inclusion?

Read more international development news (https://www.devex.com/en/news) online, and subscribe to TheDevelopment Newswire (https://pages.devex.com/newswire-signup.html) to receive the latest from theworld’s leading donors and decision-makers — emailed to you FREE every business day.

About the author

Claire Luke (/en/people/1047722)

Claire is a journalist passionate about all things development, with a particular interest inlabor, having worked previously for the Indonesia-based International Labor Organization.

She has experience reporting in Cambodia, Nicaragua and Burma, and is happy to be immersed in theaction of D.C. Claire is a master's candidate in development economics at the George Washington ElliottSchool of International Affairs and received her bachelor's degree in political philosophy from the College ofthe Holy Cross.

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Critique of microfinance raises questions about efficacy ... · (/impact) 0 DEVEX IMPACT INSIDE DEVELOPMENT MICROFINANCE Critique of microfinance raises questions about efficacy,