Microfinance ... a study that concludes there has been over-promising!

Dear Colleagues

I would like to share this exchange of e-mails on the Micro Finance Practice (MFP) Listserve.

On Wed, Feb 9, 2011 at 7:04 AM, milford bateman wrote:
Some might find intersting the results of the DFID-funded systematic review of the evidence of microfinance impact in Sub-Saharan Africa.

Milford

From:Dods Monitoring [mailto:sana.ahmad@dods.co.uk]
Sent: 09 February 2011 10:51
To: Jonathan Tanner
Subject: News Alert: Institute of Education:
Microfinance 'raises hopes but makes some people poorer'
08.02.11

Microfinance projects in the developing world make some people poorer, not richer, a major academic study has concluded. It should not be seen as a panacea in the fight against poverty, nor as a blanket tool to empower women.

Aid programmes providing small loans and savings accounts to those who have no access to traditional banking services have been hailed as an important way to use the market to help people improve their lives, and particularly to support poor women. But researchers from the Institute of Education, London, and the University of Johannesburg in South Africa have found that in many cases microfinance not only fails to achieve these aims, but can also damage lives. Recent news coverage of microfinance in India has highlighted the implications of the terrible debt incurred by some borrowers required to pay very high interest rates.

In the first systematic review of the available evidence on microfinance, the academics found a mixed picture. The study reviewed all the good quality research on the impact of microfinance in sub-Saharan Africa, focussing on 15 studies, and found that microfinance is doing little to advance the Millennium Development Goals.

"Health generally increases and, for some, access to food and nutrition" says the report, yet "impacts on education are varied with limited evidence for positive effects and considerable evidence that micro-credit may be doing harm."

For example data from Malawi and Zimbabwe shows that micro-credit significantly decreases primary school attendance amongst borrowers' children. The picture is particularly bad for girls, who are taken out of school or indeed not enrolled at all.

Dr Ruth Stewart of the IOE, who led the study, explains that because the debts have to be paid back very quickly, in weekly or monthly payments, they can discourage long-term investments such as the education of clients' children. "Loans, with interest rates often as high as 30%, need to be invested in business which has a quick return" she said. "In those circumstances it's not a surprise that borrowers can't afford to prioritise their children's education." Furthermore, there is very limited evidence that micro-credit, often targeted at small groups of women, empowers them at all. "This claim is not supported by the evidence" says Dr Stewart.

This is just one element of the rhetoric around microfinance, which raises false hopes and is "problematic and damaging", the report warns. "There may be a need to focus more specifically on providing loans to entrepreneurs, rather than treating everyone as a potential entrepreneur". Microfinance can help some people in particular ways, but "there is an obligation amongst donors and policy-makers not to falsely raise expectations with development aid."

Notes:
. What is the impact of microfinance on poor people in sub-Saharan Africa: A systematic review by Stewart R, van Rooyen C, Dickson K, Majoro M, de Wet T, Universities of London and Johannesburg, was funded by DFID
. The findings can be found at http://eppi.ioe.ac.uk/cms/
Read on Dods Monitoring
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I spent Sunday afternoon trying to understand exactly what the report was saying ... and ended up pretty frustrated. It is about 100 pages of small print! Some of the reason for the frustration is evident in what I wrote.

Dear Milford

Thank you for forwarding the information about the Institute of Education Microfinance Study.
(Stewart R, van Rooyen C, Dickson K, Majoro M, de Wet T. (2010) What is the impact of microfinance on poor people? A systematic review of evidence from sub-Saharan Africa (Technical report). London: EPPI-Centre, Social Science Research Unit, University of London.)

I have just spent a happy Sunday afternoon trying to understand exactly what this study is all about. By the time I am through I have really learned nothing and become exceedingly frustrated in the process.

I remember nearly fifty years ago attending a Cambridge engineering alumni meeting and hearing the Chairman of the large engineering group where I was employed suggesting to the Cambridge faculty that they should avoid wasting their effort and talent on learning what industrial practitioners had known for decades.

I also remember doing some work myself in Lesotho about 25 years ago to study the studies that had been done over the previous several years to address rural development. The pile of studies was 3 feet high and about 8 feet long ... approaching a thousand studies ... and we were under instruction not to produce another report, but to summarize what had been done!

What Muhammad Yunus says about some things in microfinance is very clear. When people are working hard for long hours every day and staying poor, there is a systemic problem! When people work hard, create something of value, and all of this value is taken by the usury of the moneylenders ... this is a serious problem. His conclusion more than 25 years ago was that micro-credit would be helpful.

I have worked a lot with microfinance ... but not from the perspective of the microfinance activity, but from the perspective of the community and its development. Microfinance is great if it is part of a full portfolio of initiatives that are addressing all the needs of the community and helping to remove the constraints that impede progress.

Compared to many fund flows to promote "development" microfinance has done well ... and development experts latched on to this because at least there was "something" that worked. But it only works ... and works well ... at the margin. Sustainable development requires increased productivity in the society so that more needs can be met with less use of resources: human, material and financial.

About 60 years into post-independence development and continuing endemic poverty is a disgrace. Microfinance is useful when the factors that are OUTSIDE the limited focus of microfinance studies are being addressed satisfactorily.

In this study I found little reference to the importance of these externalities. From my perspective and based on my experience these externalities are critical. I also found very little reference to the human dimensions of the microfinance operation ... these internalities are also vital to understanding what is going on.

From my perspective the state of the metrics being used in the analysis of the microfinance sector ... not to mention the socio-economy as a whole is also appalling. Financial metrics are dangerous as we have seen with the implosion of the global banking system and capital markets... and their apparent return to profitability! Meanwhile we have nothing that helps to link needs with resources in an efficient way so that important social progress can be made.

Dr Ruth Stewart and colleagues got one thing right ... fast return is needed to pay off high interest short term loans quickly. But most profitable activities repay one loan with another loan ... look at the balance sheet of most corporate entities ... as well as the microfinance client and many children over the past decades have got an education in part because their parents had access to microfinance.

I want to see meaningful metrics about socio-economic progress and performance ... structured like business management information NOT using the incredibly clumsy and expensive academic study methodology where very little data get used to try to draw big conclusions and externalities are effectively ignored!

Its been a happy day ... but frustrating. If I have missed something in this study ... let me know.

Peter Burgess
TrueValueMetrics.org

Whenever I read something like this I am reminded of working in corporate jobs where getting good results was not the primary thing, it was everything. I practiced "management by walking around" in addition to knowing the numbers and knowing the theory of what should be going on. A good pair of eyes is a powerful management tool. When I worked in "development" I used the same approach, and so did a lot of others who were successful at development implementation. It is from this experience that I always concern myself with the externalities ... the things that have nothing to do with what one should be doing, but have the power to completely change outcomes. I do not expect more and more sophistication in an academic environment to get to the key issues that will make development successful!

True Value Metrics and a comprehensive community focus is more the way we should be going!

Stay tuned

Peter Burgess