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What is the evidence of the impact
of microfinance on the well-being of
poor people?

Maren Duvendack, Richard Palmer-Jones, James G Copestake, Lee Hooper, Yoon Loke, Nitya Rao

August 2011

London: EPPI-Centre, Social Science Research Unit, Institute of Education, University of London.

A new systematic review of the evidence on microfinance, published last week, is dynamite for the world’s most popular development policy. Madeleine Bunting of the Guardian has already referred to it as “microfinance’s sober reckoning”, likening the findings to a “hangover after a big party”. Bangladeshi news calls it a “damning report”.

Being co-published by the UK Department for International Development (DFID), previously a strong microfinance supporter, this “study of studies” comes from deep within the policy community – a first for a truly critical study of microfinance. The authors (economists and medical researchers mainly based at the University of East Anglia) looked at thousands of existing studies on microfinance. Their conclusions are anything but minced words:

Our report shows that almost all impact evaluations of microfinance suffer from weak methodologies and
inadequate data, thus adversely affecting the reliability of impact estimates. Nevertheless authors often draw strong policy conclusions generally supportive of microfinance. This may have lead to misconceptions about the actual effects of programmes, thereby diverting attention from the search for perhaps more pro-poor interventions and more robust evaluations. (from the Policy Brief)

So, after 30-odd years and $ hundreds of billions of lending, there still is no proof that microfinance actually works. Read the rest of this entry »

Lamia Karim, 2011: Microfinance and Its Discontents: Women in Debt in Bangladesh. Minneapolis: University of Minnesota Press.

Microfinance has built a significant part of its reputation on the assertion that small loans empower women. The assumption that every human being has entrepreneurship potential, but only lacks access to credit, underlies this “social business” intervention. The joint appeal of entrepreneurship and empowerment has cajoled many funders and donors to invest in microfinance. But critical research has been shedding doubt on the assumptions of empowerment through microfinance entrepreneurship for quite some time. Can or cannot a direct transfer of credit rouse the dormant and innate entrepreneur which lies within every woman?

Lamia Karim’s brave new book, “Microfinance and its Discontents- Women in Debt is Bangladesh”, delves deep into the social realities within which microfinance operates, in order to answer that question. As an Associate Professor of Cultural Anthropology at the University of Oregon, she performed research among the clientele of the four major microfinance NGOs in Bangladesh (Grameen Bank, Proshika, BRAC and ASA) first between 1998 and 1999, and following up in 2007.

Norms and obligations in a rural society are tilted against women, as is demonstrated by a proliferation of ethnographic accounts in Karim’s book. Take, for example, the incident of an elderly widow in Bangladesh, who was caught by her nephew on her way back home after taking a fresh loan from Grameen Bank. He pressured her into handing over the money to him because, he said, as his aunt it was her duty to help him start his business. Read the rest of this entry »

It’s great to know that people take note of the ideas we share on this blog. In April, I posted an entry introducing a paper I had recently presented in Croatia, called “Attempting the Production of Public Goods through Microfinance: The Case of Water and Sanitation“. The argument was that water and sanitation, because they have the characteristics of public goods, cannot be provided adequately via private individual credit like microfinance loans.

In a thoughtful article on microfinancefocus.com Katya Jenkins recently re-iterated this point (and quoted the paper). Her basic argument: some organisations are reporting successes, but we have good reasons to be skeptical, and it might not work in every case.

Jenkins makes one very important point at the end, which is that there may be a better case for small self-financing in water and sanitation if we were talking about community systems. Agreed. But microfinance organisations would have to adapt their business models a lot, giving out much larger loans (€ millions rather than hundreds), being far more patient with repayments (slower repayment means slower turnover means lower profits), and actually bothering to “know” their clients’ business (instead of easy and cheap “no questions asked” lending). That’s a long shot from today’s microfinance, even if a select few organisations like ProCredit have taken the step into SME finance; and probably “microfinance” would be the wrong name for it. Read the rest of this entry »

Microfinance in India is still where it was months ago – in a stalemate with the government. The crisis of microcredit in the southern Indian state of Andhra Pradesh which began last October with a rash of client suicides – we were the first to blog about this, and followed its development throughout – climaxed in a standoff in late October between the state legislature and microfinance institutions (MFIs). Mud was thrown by both sides in an intense blame-game, while actually the crisis had systemic causes rooted in weak legislation and a hyper-competitive market.

Neither side has found a way to break out. But the stalemate is becoming unstable. It is increasingly clear to MFIs and their funders that most loans in Andhra Pradesh will not be recoverable, since trust in the MFIs’ promise of being “here to stay” is dwindling, and the new legislation has rendered erstwhile coercive recovery practices impossible. On the other hand, the Andhra government cannot step down from its legislature issued under the promise of protecting the poor without losing face, and the Indian federal government has chosen to largely ignore the issue.

The Economic Times from Mumbai recently provided a thorough update on what happened in the past few months, which I’m quoting here. The growing problem is that the MFIs in Andhra Pradesh will need new capital soon in order to replace the loans they have written off, or will soon be forced to write off. Read the rest of this entry »

This post is provided by guest blogger Domen Bajde, Assistant Professor of Marketing at Faculty of Economics (FELU) at the University of Ljubljana/Slovenia. He is also running a personal blog at bajde.net.

In one of his depressingly amusing anecdotes Ronald Reagan suggests that in the US ‘War on poverty’ (declared by Lyndon B. Johnson two decades earlier) ‘poverty won.’ In the decades that followed, Reagan’s smug conclusion has resonated with many who have either lost faith in organized political/governmental action against poverty or have altogether refused to conceive of poverty as an issue of governance. Similar qualms have been raised in regard to nonprofits’ and charitable organizations’ ability to effectively besiege poverty. Not surprisingly, the ‘foot soldiers’ of the anti-poverty regiment (i.e., regular citizens/donors) are often overwhelmed by the endless charity appeals and a profound sense of hopelessness.

In our collective efforts to discover (create?) ‘fresh’ champions in the ongoing war on poverty, many heads have turned to business. Philanthropy-business hybrids, such as venture philanthropyphilanthrocapitalism or social entrepreneurship, have become central to contemporary pursuits of poverty alleviation. These hybrid alternatives are often depicted as an unproblematic marriage of economy (self-interest, resource management) and philanthropy (social values, charitable giving). Due to their supposedly apolitical and non-ideological nature they appeal to individuals of varied political convictions and domiciles (globally, so to speak). Read the rest of this entry »

I knew I was opening an interesting book when I picked up Lendol Calder’s „Financing the American Dream: A Cultural History of Consumer Credit”. But I had no idea that, in reading the historical chapters, I would stumble onto the microfinance of the early 1900s. Published in 1999, Calder’s book tracks the rise of consumer credit, from Victorian society’s scorn for debt, to credit as a practical life necessity in modern societies. It’s a great read. And against the backdrop of the 2008-2010 credit crisis, this book is as poignant as ever.

However, what astonished me most is that modern microfinance, it turns out, has its almost exact equivalent in North America in the early 20th century. The public of rich countries is currently enthralled by the notion that a supposedly innovative set of morally-driven  credit institutions could create a better society, a world without poverty, more empowered individuals… This is so much an instance of history repeating itself, it’s almost creepy. Calder writes how well-meaning people in America tried lending to the poor to help them escape poverty by building up the licensed small-loan industry – before World War I, before the Model T, before Morgan Stanley – and failed. As Calder explains on pp. 111-112, the licensed small-loan industry was created to help the poor take charge of their lives through small enterprise. But credit did not create more entrepreneurial, freer human beings; instead, as an unintended consequence it created the consumer culture of the USA which we know today.

“The lenders and reformers who organized the licensed small-loan industry did not view themselves as advance agents for debt-based mass consumerism. On the contrary, through the mid-1920s small-loan lenders conscientiously resisted modern consumerism, at least what they could see of it. The business of personal finance was perceived as an exercise in philanthropy and social welfare, as a way of liberating workers from the clutches of poverty and the loan shark. In order to combat the odium attached to their business, small-loan lenders characterized themselves as upholders of the American dream. Read the rest of this entry »

Practically everyone has heard the proverbial story of poor a Bangladeshi or Nigerian taking out a microloan to, say, buy a few chickens or start a small business selling mangoes, and becoming a wealthy and successful farm entrepreneur or fruit trade mogul. There is even a picture book for children about that story.

Picture books, however, don’t make the story any more real or representative. This blog has been critical of microfinance success stories in the past, because they mislead people into generalising from a few exceptional success cases (see also Tim Ogden’s smart analysis of the consequences of misleading storytelling). More generally, the blog has been critical of microfinance because not everyone who takes a loan can make a profit on a business venture and use the profit to repay the loan plus interest; very few will benefit spectacularly from this, and their successes do not equal “development”.

But donor bodies increasingly expect microfinance to become the centerpiece of development. Proposals for microfinance to reach beyond small-business-lending and into the traditional remits of the state abound. Microcredit loans are being suggested and applied by various agencies for generating access to a range of goods and services linked to development, from sending kids to school, creating better health, improving water and sanitation, to even helping with peace and reconciliation. Using microfinance for water and sanitation has been an area of particular focus (here is one prominent example, with its own success stories). Read the rest of this entry »

The reactions to Tom Heinemann‘s controversial documentary “The Micro Debt” have mostly been strong. The film sheds light onto a number of questions, first and foremost the risk microcredit borrowers face of becoming trapped in debt. However, public debate has so far focused on two rather marginal parts of the film: a more-or-less resolved dispute over aid money (cf. “GrameenLeaks”), and a dispute about a house supposedly promised in the village of Jobra. It is worth investigating why so much publicity has been given to these two issues, and so little to the film’s main message: that microfinance can cause debt traps.

While the charges of financial malpractice in the Grameen conglomerate have now been largely cleared up, Muhammad Yunus still remains a target of negative attention from the Bangladeshi government. He is now apparently no longer Grameen Bank’s director. But Yunus’ personality and job status should have nothing to do with an impartial assessment of the virtues of microfinance. What becomes clear from the recent debate is how symbols are mobilised (and abused) in legitimising as well as challenging microfinance. However, this distracts from more substantial questions about what microfinance does or doesn’t, can or can’t, achieve.

Let us take a look at “The Micro Debt” and the reactions to it, and also take a look at another, less-known documentary with less impact but perhaps a better focus on substance: “Easy Money”. Both films make the allegation that microfinance can be exploitative and can cause more problems than it solves. But the reason why “The Micro Debt” has been perceived as so inflammatory, while “Easy Money” apparently has hardly been discussed at all, is that “The Micro Debt” attacks microfinance’s symbolic self-representations of success and integrity. Read the rest of this entry »

Joseph Hanlon, Armando Barrientos, David Hulme, 2010: Just Give Money to the Poor: The Development Revolution from the Global South. Sterling: Kumarian Press.

If it sounds novel to suggest that if you want the poor to have more money, you could just give them money, these are strange times. What could be more straightforward than giving money to people in need? But cost recovery, self-help, and “financial deepening” are essential tenets of the current development ethos, so someone must go out and make the argument – as Joseph Hanlon, Armando Barrientos and David Hulme do in Just Give Money to the Poor – that simply handing out cash may be easier, and better, than anything else.

Cash transfers are a rising idea in development policy. Even The Economist likes them. Still, they are far from a hype, and little is known to most people about the successful programmes implemented by Brazil, Mexico or Indonesia, for example. This book aims to change that. Perhaps its greatest strength and weakness is its simplicity. But hard science can be discussed elsewhere. Just Give Money to the Poor introduces a broader audience, and gives impetus, to the simple but still-controversial idea: that redistribution works.

The authors recap evidence from two decades of experimental and pragmatic progress on social transfer programmes in the developing world. They argue that no-strings-attached, widespread systems of cash distribution are far more effective and cheaper than other models, such as vouchers, food subsidies (where monitoring creates costs) or microcredit. The key is that the money must be a dependable, substantial and easy source of income for the poor. Assured regular cash transfers – not charity or philanthropy – are the key, even at a relatively small scale, for achieving impressive outcomes:

“In the short term they reduce poverty levels and ameliorate suffering. In the medium term, they enable many poor people to exercise their agency and pursue micro-level plans to increase their productivity and incomes.  In the longer term, they create a generation of healthier and better educated people who can seize economic opportunities and contribute to broad-based economic growth.”

The target groups could be particularly vulnerable demographics – children, the elderly – or simply everyone. Programmes can be gradually expanded as experience grows, since garnering political support by demonstrating impact, fairness and adequacy, is key. Read the rest of this entry »

One of the things that make blogs particularly interesting are series. The “series” series recommends series at related blogs. This time, I introduce the “State of the Sectorseries on the blog of the enigmatic Indian rural finance practitioner Ramesh S. Arunachalam.

Okay, it took me quite some time to appreciate this blog.

First there was the turn-off boring title “Microfinance in India”. And the strange header “Candid Unheard Voice of Indian Microfinance” – think disgruntled ex-microfinance industry dissident, ranting away in Internet obscurity. Also, the site looks like it was designed in the mid-90’s, even though blogs didn’t exist then.

For this reason, the props Ramesh S Arunachalam deserves for having won me over are even bigger. He did so with his high-quality, insightful blogging about – well – microfinance in India. The transnational field of microfinance mostly generates a dull, glossy, PR-esque discourse. Ramesh is one of the bloggers who have proven their mettle not only by being incisive and dealing with messy issues, but also truly familiar with the situation on the ground.

What got me hooked was Ramesh’s exhaustive coverage (an incredible 44 posts since October) of the Andhra crisis, by now a somewhat all-Indian microfinance crisis. The development of the crisis, its causes and consequences, could be followed in a nutshell via Ramesh’s series of posts on the “State of the Sector“, in which he takes a sweeping view of the MFI sector and its environment.

Ramesh publishes with incredible regularity and energy. Each post appears immaculately researched; often he draws on extensive personal experience. In an in Internet full of babbling voices on microfinance – funders, promoters, academics, advertisers … but rarely real practitioners, and of course never clients – Ramesh’s contributions strike me as some of the most insightful analyses of what’s really going on in Indian microfinance.

His most recent original contribution has been to expose the role of unofficial microfinance intermediaries – “ring leaders” or “agents” who create ghost loans and excessive debt at the expense of naive MFI employees and borrowers.

Strangely enough, it is pretty hard to find information on this prolific blogger. He has authored book chapters on microfinance and gender; was recently named a “top pick of the microfinance blogosphere”; and is found throughout the web as a lively commentator. And yet, apart from “rural finance practitioner” with “over two decades of experience”, the all-seeing Google turns up little info on this enigma. His personal website is undergoing maintenance.

So, without knowing much about the subject of my praise, I must highly recommend listening to this “Candid Unheard Voice of Microfinance” … If, last but not least, just for the delightful way most posts end, no matter how serious the subject, with a cheerful message like

“Have a great day!”

(phil)

The Book

Governance across borders: transnational fields and transversal themes. Leonhard Dobusch, Philip Mader and Sigrid Quack (eds.), 2013, epubli publishers.
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