Look at a typical microfinance institution’s website and you will find heartwarming stories about people who managed to dig themselves out of poverty and into prosperity. Often, these narratives suggest people didn’t do it just for themselves, but also for their children, so that they, too, could have a better future. The clear promotional message is the potential of microfinance to better the lives of billions of poor people everywhere.
Yet, do these select stories fairly represent the true overall impact if microfinance? Or do they paint a biased, too-rosy picture, too good to be true? Hundreds of millions of people have used microfinance services over the last several decades. Perhaps that might mean the, sentimental stories chosen for highlighting on web pages and in brochures just might not be the full story. Successes intentionally selected for their promotional value are not enough to tell whether or not the poor, on average, benefit from microfinance. Maybe some are hurt, say by getting over their heads in debt. Maybe other people in some communities lose at the expense of MFI clients who gain. As it turns out, economic researchers have been looking hard into these sorts of questions a lot over the last couple decades. Using both quantitative and qualitative research methods, researchers are seeking a much better understanding of the impact of microfinance on alleviating poverty, empowering women, promoting education and much more.
Impact assessment studies are widely used by donor agencies, government officials, and investors for the purpose of evaluating their current strategies, measuring their effectiveness, whether they are having enough social or economic impact, and to identify ways to improve.
At one level, the question about microfinance’s impact has a simple answer: the fact that more than 200 million people use microfinance services suggests the industry must create some sort of positive value for clients. Why else would hundreds of millions of rational human beings participate so willingly? Thus, the questions explored in many impact assessment studies go beyond “does microfinance work in general?” to deeper and more important questions like: Is microfinance’s impact on poverty significant? Are incomes higher? Families’ health and education better? Women more empowered? Are some poor people harmed by microfinance, and why? Moreover, the research evidence helps us and industry practitioners learn about which practices work best and which are ineffective. How might microfinancial services be improved?
The Grameen Foundation has periodically commissioned reviews of the ever growing body of research in microfinance.[i] The resulting reports are widely well-regarded. The aim has been not only to summarize the state of our collective understanding and to broadly assess microfinance’s global impact, but also in part to distill for public consumption what can often be work mathematically impenetrable by all but specialists. The two most recent versions, in 2010 and 2015, were authored by Kathleen Odell, an associate professor of economics at Dominican University’s Brennan School of Business in Illinois.
The deepest pool of impact assessement evidence comes from microcredit, the longest standing and most widely established of the microfinance services. Jumping straight to the spoiler: what conclusions did Dr. Odell draw? What various impacts does microcredit appear to have or not have?
Table 1 summarizes, dividing the body of research findings into whether the evidence is strong, mixed, or where there is little evidence of a particular type of impact. With regards to microfinance as a whole, she found that the most rigorous studies have uncovered consistently positive, albeit minor, changes in the well-being of most of those on the receiving end of microfinance services. There is good evidence that the credit needs of the poor are now better met so they can borrow more, which in turn increases their business creation and investment, broadens their occupational and consumption options, and tends to focus their spending towards more productive priorities.
Less strong, mixed, evidence in some–but not all–studies is suggestive that microcredit might empower women, reduce household risk and stabilize asset ownership, and improve children’s health. On the other hand, there is not convincing evidence for sustained impacts on income, education, or overall household consumption.
Thus, for most clients the impacts of microcredit appear to be fairly modest; helpful but certainly not the magic bullet solution to global poverty. That said, quite substantial benefits have been noted in the lives of about 10% of recipients studied.
Furthermore, regarding potential negative consequences, Odell found little statistical evidence pointing to the existence of any broad harmful effects from the provision and receipt of microcredit.
Most importantly perhaps, although the impact might be modest, hundreds of millions of microfinance clients have freely voted with their feet; surely they find value in it.
Table 1. Summary of Evidence on the Impacts of Microcredit
|Mixed or Suggestive Evidence||
Little or No Evidence
|· There is good evidence that access to credit leads to increased borrowing, suggesting previously unmet demand for credit.
· There is good evidence that access to credit increases business creation, investment, and expansion.
· There is good evidence that access to credit leads to increases in occupational choice and consumption choice.
· There is good evidence that access to credit reduces impulse consumption of temptation goods (such as cigarettes and tea) in favor of other, often more productive, spending and investment priorities.
|· There is evidence in some (but not all) studies that access to credit is empowering for women.
· While business profits increase in some studies, the link between business investments and profits is not robust.
· There is evidence that access to credit reduces risk and allows households to maintain asset ownership during periods of stress.
· There is mixed evidence of the impact of credit on health. A few studies show promising correlations between credit access and children’s health.
· There is emerging evidence of an important relationship between credit and international migration.
|· There is little evidence of large or sustained increases in income or consumption.
· There is little evidence of substantial changes in household investment in education.
· There is little evidence of harmful effects, even in the case of individual loans and even in environments with some of the industry’s highest interest rates.
|Source: Odell (2015)|
[i] These reports are:
Goldberg, Nathanael (2005). Measuring the impact of microfinance: taking stock of what we know. Grameen Foundation USA publication series. Washington DC: Grameen Foundation.
Odell, Kathleen (2010). Measuring the impact of microfinance: Taking another look. Washington DC: Grameen Foundation.
Odell, Kathleen (2015). Measuring the impact of microfinance: Looking to the future. Washington DC: Grameen Foundation.