Microfinance - possibilities and limitations

The scope of microfinance to lift poor people out of poverty and provide mechanisms of empowerment is being challenged as questions are raised about the supporting evidence.

In a discussion hosted by the UK's Overseas Development Institute (ODI), the academic evidence was concluded to be unclear, unreliable and inconclusive.

"[There is] no clear evidence that microfinance has any positive or negative impacts," said Maren Duvendack, ODI fellow and author of a recent systematic review of microfinance, while David Roodman, of the Centre for Global Development, added: "I [wouldn't] say microfinance doesn't work, I would say it does not systematically reduce poverty. We do not have credible academic evidence that microcredit on average lifts people out of poverty... We [also] do not have evidence that microfinance is systematically making people worse off."

Range of services

"I think a lot of people think that microfinance equals microcredit [providing small loans]," Duvendack told IRIN. "[Microfinance is] not just credit and savings, [but also] insurance, business skills, training, financial literacy."

Most studies consider the impact of microcredit, but Roodman suggested another of the microfinance portfolio products - microsavings - could have positive impacts on poverty reduction.

Duvendack, however, who is completing a study on the impact of microsavings, said it showed no significant benefits over microcredit.

Microfinance risks

The predominance of microcredit as a microfinance tool could be a significant hindrance to poverty reduction, as the risk of indebtedness is high.

According to former ODI fellow, Milford Bateman, micro-enterprise failure after funding with microcredit can strip poor people of all their remaining assets.

"It is the overall lack of access to credit for small and medium enterprises that prevents micro-enterprises growing into anything more substantive," Bateman added in an ODI paper. Microfinance initiatives have provided a social legitimacy for poor people to become indebted, commented Bateman, and the commercial business model has meant high interest rates for microcredit.

"This year, I expect even a larger profit"

Just three years ago, Shila Rani Mazumder and her husband were struggling to make ends meet in Bangladesh. Her husband earned just US$3 per day as a carpenter and she worried she would never be able to send her two children to school. "Each month, we were short of money. Quarrelling became a regular part of our daily life," the 31-year-old told IRIN. In 2010, she learned about a microfinance initiative in her village to help poor people and decided to take a chance. With a loan of $63 payable over one year, she invested in growing vegetables in their fields. She was also provided agriculture, fisheries and livestock training by the microcredit organization. "After one year, I paid back the loan and earned a good profit," she said. In 2011, she borrowed another $360 and is working to pay that back now. "This year, I expect even a larger profit," she said. But the dividends are already being realized in other ways; both children now attend school. Many people in the Adampur village in Comilla District, 60km east of the capital Dhaka, have changed their lives with the help of micro credit from the Centre for Community Development Assistance (CCDA), a local NGO, which has been operating providing microfinance for poor people in Bangladesh since 1992. According to CCDA, close to 2,300 residents, mostly women, in Mazumder's village receive microcredit support, with almost 100 percent repayment rates. Across Bangladesh, the organization is supporting close to 60,000 people by providing microfinance support, offering one-year loans at 24.72 percent interest per year. MA Samad, executive director of CCDA, said farmers in the area needed money at certain times of the year, particularly in September and October. "The micro-finance support is helping the farmers in the area. Many poor people have changed their lives with the help of microcredit," he said, noting that it was not easy for them to get loans and microcredit was largely the only option available to them. He denied that the interest rate was high. "Before the introduction of microfinance, people used to take loans from 'mohajan' [informal money lender] and they often charged even two or three times the amount microfinance organization charge," Samad said.

"Microfinance institutes [are] now required to generate high financial rewards for their managers (salaries, bonuses) and owners/shareholders (dividends and capital gains)," Bateman explained.

"The fear is that significant financial flows are flowing out of the poorest communities, rather than being retained and recycled within them to underpin productive investment as the precursor to an escape from poverty."

Consensus is growing that microcredit should not be offered to the poorest of the poor due to the risk of harm, said Ruth Stewart of the Social Science Research Unit at the Institute of Education, University of London, at a London International Development Centre event.

Limitations and advances

The limitations in evidence of microfinance for poverty reduction result from poor study design and unreliable data, despite more than 30 years' experience. Hopes remain that robust and well-designed research, including randomized controlled trials and systematic reviews, will provide clearer conclusions in coming years.

Microfinance initiatives will not be successful in a vacuum, according to Duvendack. They will need to operate as part of a broader poverty reduction strategy with appropriate large- and small-scale economic frameworks to support advancement for poor people.

Another forthcoming systematic review co-authored by Duvendack will also show no firm conclusions of microfinance as a tool to empower poor women, although it does increase recognition of poor people as consumers of financial services, and can result in the development of regulatory frameworks around consumer rights. These factors were argued as possible forms of empowerment and new regulatory frameworks for India were cited.

"There are indigenous models and we need to investigate these models," said Will Derben, head of community relations at Barclays Africa.

Indigenous community models to provide finance for poor people, like the Susu men in Ghana, have been overlooked during implementation of microfinance tools.

Potential customers, as well as existing community models, need to be better understood so as to be better supported by microfinance initiatives.

Also overlooked, Duvendack told IRIN, may have been other potentially important development interventions, such as targeted welfare programmes, conditional cash transfer programmes, or small-scale agricultural growth programmes.

"I think we need more studies to be clearer about what is the actual impact of the various products," said Duvendack. "Do we have to have credit plus savings together or savings alone, or credit alone - or what is it now?"

Growth

By 2008, the microfinance industry had grown to include at least 2,420 microfinance institutes in 117 countries, according to microfinance institute exchange; the number continues to grow annually.
Microfinance institutions are able to be relatively self-sufficient, to innovate, to provide jobs and to compete in financial markets.

For Barclays Africa, Derban said, "Microfinance is a concept. It's about finding that balance between providing a financial service that will improve people's lives but yet be viable commercially.

"We need to provide financial services and we need to find ways of improving the system. Everybody wants to be banked."

To maintain a balance between doing social good and implementing successful financial products, Derban explained, Barclays Africa combines its commercial expertise with regulations bound to the philanthropic budget used to invest in community projects.

"I think it used to be the case where a lot of people that came into the microfinance sector came via the NGO route, where it's all about helping. [Now] we're seeing... more commercial people are coming in."

Regulation

"Certainly we shouldn't just let the market do its own thing," added Roodman. "Government does need to play a major role, setting the rules of the game and ensuring that it stays on an even keel."

Continuing to increase funds invested in microfinance, Roodman reflected, would not only be unnecessary, but could also potentially create harmful "microcredit bubbles".

"We cannot assume that more is always better. The amount of money going into microcredit these days poses the largest threat to the largest strength of microfinance."

Microfinance, argued Roodman, offers "a cautionary tale about putting a lot of money into things where the impacts are not rigorously dealt with".

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