Learned Lessons from Microfinance
In recent decades, microfinance has experienced a fast and successful growth in developing countries. Microfinance institutions (MFIs) focus on providing small-scale loans to the poor, who do not have access to traditional bank financing. They seek to encourage the creation of small-scale businesses that generate incomes and contribute to poverty reduction.
Although microfinance’s initial aim was not specifically in the social realm, several MFIs now identify one or more social goals such as women’s empowerment, children’s school attendance, and awareness of and demand for public services. For instance, evidence of the social impact of microfinance in countries such as Bangladesh has been mixed, but on balance, suggests that microfinance and the associated activities of MFIs have had positive social effects.
It appears that microfinance’s intended economic effect has influenced the social domain of countries. For example, a woman’s access to credit allows for her broader participation in community social networks and social programs, which in turn enhance her wider opportunities and empowerment.
Studies (e.g. Todd, 1996) reveal that access to credit can often foster social, psychological and political empowerment. Credit services for the poor, and predominantly poor women, reverse their systemic exclusion from access to public or private funds, thus shifting systems of hierarchy and power. We have also learned that access to alternative means of finance can help reduce dependency on moneylenders and those who lend money. In general, microfinance appears to induce a ‘leveling of the playing field’, which in turn allows the poor to participate more effectively in the social, economic, and political workings of their communities.
Most critiques of microfinance appear to focus on moving microfinance models forward, and not necessarily discrediting the approach in general. For example, the degree of achievement of the oft-stated goals of poverty alleviation and empowerment of the poor, and the extent to which different groups benefit, have become important topics of research and debate. Scholars such as Hulme and Moseley (1996) in their studies have highlighted the overall lack of knowledge about those for whom microcredit is just ‘micro-debt’: loan defaulters and program dropouts.
Fortunately, criticisms of microfinance and the debate surrounding it have spurred discussion of microfinance’s tools and overall approach which over time have led to innovations in financial services for the poorest that emphasize flexibility, savings, and household asset creation (Matin and Hulme 2003). Practitioners and scholars have increasingly examined the perceived trade-offs between the achievement of goals of poverty alleviation and empowerment, the evolution of financially sustainable MFIs, and the provision of a broader range of financial and non-financial services to a more diverse clientele. These discourses have raised questions surrounding the best ways to reduce costs to both MFIs and their donors, and to poor people themselves, as well as the role that technology plays in financial inclusion.
The Grameen model in countries such as Bangladesh seems to have been relatively effective in reducing poverty. According to some research by scholars and practitioners (e.g. Hulme and Moseley, 1996), part of Grameen’s success can be attributed to experimenting on a small scale, improving the efficiency of the service once it became effective, and then phasing expansion over several years. Furthermore, Grameen effectively produced a product that met client needs, developed relatively low-cost delivery mechanisms, and generated resources that permitted it to survive and expand.
Other factors which have been cited as important to MFIs’ effectiveness are: targeting, screening out ‘bad’ (non-poor and too-poor/non-viable) clients, ensuring repayment, reducing costs, and administrative efficiency. Targeting involves reaching out to those most in need / or those most able to effectively utilize credit to alleviate their own poverty. MFIs have adapted combinations of direct targeting, using an effective indicator-based means test (e.g. a combination of effective landlessness and involvement in manual labor combined with being female), and indirect targeting, through self and peer-selection. Some MFIs allow for self-selection through a combination of initially small loans with market-level interest rates and strict repayment conditions, as well as time consuming membership obligations such as compulsory attendance at meetings.
The financial soundness of micro-financial services targeted at various subgroups of the poor, including women, the landless, and small business owners, is not only based upon the replacement of subsidized credit by market-rate loans (some MFIs continue to depend on subsidized donor credit, and few are sustainable). We have learned that equally important is the ability to innovate targeting programs, screening, and monitoring mechanisms.
The microfinance industry has increasingly expanded during the last couple of decades. Some MFIs which have emerged did so through micro-financial innovation outside of the Grameen model. Organizations such as ASA, BURO, Tangail, and SafeSave have been persuaded by ‘the poor are bankable’ but yet have sought to provide them with products that more adequately meet their needs than the Grameen model. This has meant a greater emphasis on savings, individual rather than group-based approaches, and greater flexibility in terms of loan size, repayment schedules and access to savings. The success of the Grameen Bank model encouraged many MFIs to seek to do better by undertaking their own experiments.
Grameen Bank and other organizations have also learned from their own efforts and adapted over time. In 2001, Grameen Bank launched itself into Grameen II with a promise to transform its microcredit services to clients. The new products included: flexible loans, voluntary savings and micro-pensions. Grameen and other MFIs has also been innovating in other areas including mobile telecommunications.
Over the last few years, with rapid changes in technology, microfinance has been evolving and organizations are expanding their services in innovative ways. An example of this is the delivery of microfinance services via mobile phones. M-PESA, a mobile-based payment and money transfer service introduced by Safaricom, allows users to transfer money, deposit money, and withdraw money, all through their mobile phone.
Microfinance organizations are leveraging mobile technology to improve the delivery of microfinance services and products to their clients. Technology will continue to play an important role in MFIs’ ability to reach the poor. It will be important for MFIs to continue to assess how technologies can be enhanced so as to improve service.
The reputation of microfinance has gone through a myriad of opinions, both positive and negative. Much of the debates surrounding microfinance’s effectiveness revolves around anecdotal evidence. This suggests that in order to effectively measure and analyze whether microfinance is truly effective, we must adopt a balanced, evidence-based approach. This entails conducting rigorous research and differentiated inquiry from a facts-based perspective.
We have learned that randomized evaluations provide a rigorous and reliable way to assess microfinance’s impact. Randomized evaluations can help practitioners and scholars measure impact and evaluate effectiveness. Studies using a randomized evaluation methodology can show how changing specific features in various microcredit products, can lead to different results. These studies can help improve the design and delivery of microfinance products so as to improve their impact and effectiveness.