UPDATE 13/02: I just came across a 2009 journal article by Susan Johnson by the same title. Had not been aware of it previously.
The verdict is out. Final publication of six randomly-controlled studies (RCTs) has drawn a pretty thick line under the words of David Roodman: the average impact of microcredit on poverty is about zero. The notion that microfinance lifts the poor out of poverty is officially dead.
Now, the caveats. The studies evaluated microcredit only – not savings or payments or insurance. Nor did they cover so-called microfinance-plus programs, which provide training, health care or other interventions, along with credit. It’s quite possible that these or other specialized branches of microfinance practice do raise the living standards of the poor. But, if I may be so bold, even the best of these initiatives are probably less effective than we might have supposed.
This is good news. We in the microfinance community could use some humility. We’re financiers, not doctors, scientists, or teachers. To think that we can alter the lives of millions is hubris.
That doesn’t mean that the value or even the existence of microfinance should now be called into question. Not everything that is valuable is life-changing. Marginal improvements are just as important. And microfinance – not just credit – can marginally improve the difficult lives of the poor. I am 100% confident that you the reader rely on a multitude of financial services for any number of needs. Life would be far more difficult without them.
That the majority of the 2+ billion unbanked will eventually join the financial system is inevitable. The question is how soon and under what circumstances. We could just wait for economic development to take its course, and as incomes rise, banks will find their customers. What would be the cost of that wait?
First, it would mean forgoing useful financial services to hundreds of millions for decades to come. That’s a real cost to them. Sure, they can continue to rely on the informal financial services – the ROSCAs, moneylenders, pawnbrokers, susu collectors, and the finances that flow between friends and family. Some of these are better than others, and all are better than nothing at all.
Certainly, we should not ignore these informal systems, least of all because they give us a better understanding of how to serve the poor. But to think that we cannot improve on informal finance is to romanticize the lives of the poor. It sustains strengthens families and sustains communities! Perhaps. But people don’t seem to think so – as soon as people have the money to go to a bank, an insurance company, or a pension fund, they nearly always do. It’s nice to have a social network to help out when hard times come to pass, but mostly we seem to prefer to keep our friendships and finances separate.
Second, over the past few years, the microfinance sector has made real strides in developing mechanisms to protect clients from harm. On its own, the banking system would never undertake such initiatives. However, client protection is increasingly becoming adopted by regulators as a core operating principle and this is a development for which the microfinance sector can legitimately take credit. This work is ongoing, and much work remains to be done to make sure these regulations apply to clients in all microfinance markets, and not just a select few.
What’s left is the question of outreach, of reducing that 2 billion unbanked without waiting for them to become rich enough to do it on their own. This shouldn’t be just a game of numbers. The way microfinance currently operates, closing that gap would mean 2 billion loans. Or maybe 2 billion savings accounts and a smaller number of loans. We can measure the numbers, but what’s missing is the quality of the services we provide. Protecting clients isn’t nearly enough if the only choices given are cookie-cutter loans tailored for high-turnover businesses. And it’s here that we’ve barely begun.
We have very little currently that enables MFIs to measure both the quantity and diversity of services provided. If financial inclusion is a stated goal, it’s not enough for an MFI to simply count the number of clients. For that matter, the foundation of all microfinance data – the MIX – doesn’t even allow tracking clients. You could check the number of active borrowers, or number of savings accounts, but without any idea whether these represent the same people or not. And unlike loans, many savings accounts are mere shadows, sitting empty, dormant or both.
This is only scratching the surface. Who can answer how many insurance policies have been issued by MFIs worldwide, and how many of those are currently active? How many money transfers (and by how many people) have been done in the past year? And these are just the most top-level metrics. Remember those cookie-cutter loans? If we’re to measure diverse offers, we should be able to answer some more basic questions: what share of loans are issued with a term of less than 6 months? More than 2 years? How many savings accounts are in fact dormant? What is the average turnover (deposits + withdrawals) for savings accounts? What is the average payout ratio on insurance contracts?
Answering any of these questions currently requires sitting down with an MFI’s data management staff and asking them to generate a special report – and that’s assuming the IT system even supports this type of analysis. We’re still far removed from the day where these questions could be answered at the country-level, let alone globally. Yet that is ultimately what’s needed.
Today, the microfinance sector is embarking on an important journey. We leave behind earlier shibboleths of eliminating poverty, as we adopt new goals of better and broader financial inclusion. But this important goal requires a parallel change in the standards and metrics that will tell us how well we are doing. We can’t expand financial inclusion without being able to measure it.