In the noisy echo chamber of the development community, there are a lot of arguments for (emphatically) and for (tentatively) microfinance as a tool of poverty. The debate surrounds a series of experimental studies questioning the impact of microfinance in achieving its stated goals – specifically, empowerment of women and poverty alleviation. The participants are the critics and the practitioners. The practitioners tend to dismiss the critics as having blind faith in statistics and either ignoring or being ignorant to the realities on the ground, while the critics contend that the practitioners drank the Kool-Aid long ago and refuse to admit that, while microfinance is impactful, it is perhaps not to the extent they believed. Those are both exaggerated overstatements and many people bridge the divide, but it is close enough. The debate reached a fever pitch recently, with some of the biggest practitioners – Accion, Grameen Foundation, Finca, Opportunity International, Unitus, and Women’s World Banking – jointly issuing a statement defending the impact of their trade. It is a short statement and worth a read, offering a distilled version of the practitioner argument. The authors describe what they consider to be the major flaw in the critics’ argument:
Unfortunately, it is extremely difficult for studies to quantitatively demonstrate the impact of microfinance. Such studies face two fundamental challenges: their ability to capture and analyze all the benefits of microfinance, and the duration of the study itself. To obtain quantifiable data, researchers have to ask narrow questions over relatively short periods of time–-14 to 18 months in one case–-which does not always allow the time necessary for impact to manifest itself. And because of the growing penetration of microfinance, researchers are finding it increasingly difficult to find homogenous geographical regions that contain both clients who have access to financial services and those who have none.
This is all true. Statistics give an incomplete picture and do not pick up the nuanced effectiveness of microfinance, which is manifested in individual success stories rather than a large group of people moving out of poverty. Negros Women for Tomorrow Foundation is a good example of this principle at work. It periodically measures the poverty level of its clientele using the Progress out of Poverty Index (PPI). Over the last five years, 22% have moved upward, 19% have moved downward, and the remaining 59% have remained pretty much the same. On balance, there is a net upward poverty movement, but not by much. Also, the number of clients that moved downward might have been much higher had they not been receiving microfinance services.
It is only fair to give the critics a chance to defend themselves. Randomly-controlled trials, despite their limitations, do call into question – validly – the causality between microfinance and its purported outcomes. When the practitioners bring out the anecdotes to defend their work, the critics note that these are often the exception, rather than the rule (again, 59% of clients remained the same, while 19% actually moved down on the poverty scale). Going further, they point to the fact that there are many clients that end up overburdened with debt from taking loans they cannot afford or several loans from multiple institutions. Sushmita Meka, a representative from an organization that conducted one of the studies in question, notes that the critics have a valuable role in questioning the efficacy of microfinance:
It’s essential that academics, policymakers, and practitioners both acknowledge and explore the reasons for microfinance failures, lest we keep re-inventing the wheel. Randomized control trials, the methodology by which the Hyderabad and Philippines studies were conducted, allow academics to zero in on what actually works. And yes, although each study is conducted in a highly specific context (which the principal investigators readily acknowledge), replications, which are currently taking place (not only with the same households surveyed in India, but in Morocco, Mexico and Peru), allow a synthesis of results with overarching policy implications. Rather than calling a halt to microfinance the world over, such empirical evidence calls instead for innovation, testing, and tinkering for better solutions. After all, if it hadn’t been for Muhammed Yunus’ inventiveness 30-odd years ago, we might not be having this discussion today.
These arguments are representative enough of the two sides of the debate. Of course, the critics and the practitioners are not diametrically opposed – clearly, both care about and believe in the transformative power of microfinance. In a lot of ways, they are arguing two sides of the same coin, and are doing it out of love. But in my opinion, there is something absent from both sides of the debate, a lack of acknowledgment of something that I have always felt is intuitive, even obvious. The impact of microfinance is generational – that is, the real benefits come later, because the beneficiaries are the children and the community. It is certainly critical to measure poverty movement when evaluating a development strategy. We should always be pushing for the highest return on investment – social, if not financial – and that means moving as many people as possible above the poverty line. If we can quantify the impact, then we can allocate the limited dollars most effectively – for infrastructure, for water wells, for health centers, whatever. And microfinance is no different. But some things, though logical, are not quantifiable, at least in a one-to-one causality.
Maybe it makes sense to look at the impact of microfinance in the same way we look at infrastructure investment. Practitioners say that microfinance is only one component of a greater poverty alleviation strategy. I think that is true, and we should look at it in the same way– as a capacity-builder. Material investments – roads, schools, hospitals, wells, power facilities – create the ability to do the things that are necessary to bring people out of poverty. Roads increase access to markets and supplies, schools educate children, clean drinking wells are public health benefits, and the impacts of power facilities are obvious. And like these improvements, microfinance is an indirect enabler of the things that lift a community out of poverty. Let me explain.
Both sides would agree that microfinance smoothes consumption and at least gives clients a bit more financial freedom, if not extra income. And if financial stability means that the children do not need to be pulled from school to bring in extra money for the family, that is a good thing. The impact will not be immediate or quantifiable. The poverty profile of the client and her family might look exactly the same (59% of NWTF clients, for example). But because of that loan and the stability it allows, maybe her kids can graduate high school, or even go to college. And then they can get a job in the city making more than they could in their hometown. At that point, they can start sending money back to mom and dad, who can put an addition on their home or even move on up.
Whenever I used to go to the field and talk to the clients about their kids, I wondered what these villages would look like 30 years from now. Would the houses be made of concrete instead of nipa and corrugated aluminum? Would it be electrified? And when I think about the answers to the questions, I consider that 59% of clients remaining the same on the poverty scale, based on the PPI, does not necessarily mean microfinance has had no impact. It isn’t ideal, but, in reality, it is the implications the loans have on their children that will make the difference in macro-level, country-wide poverty alleviation. I am not sure what studies have been done on the education levels and prevalence of child labor among communities served by microfinance institutions. But these could be powerful arguments for the real transformative potential of providing credit to the poor.