Innovations for Poverty Action newsletter April 2010

Microcredit is the most visible innovation in anti-poverty policy in recent years, and also one of the fastest-growing. In just a few decades, the number of microcredit clients has surpassed 150 million, and microfinance has attracted both praise and skepticism in proportion to its popularity. The debate over the merits of microcredit has raged on for some time, often without much reliable evidence on either side.

The fact that 150 million people now have access to reliable credit from a bank is in itself a remarkable achievement, especially in countries where large scale service delivery is fraught with practical difficulties.  But if MFIs are simply businesses offering a popular service, why endlessly debate their virtues?

The answer is that many proponents see microcredit as much more than a financial product. It has been credited with enormous transformative powers, from unleashing the entrepreneurial forces of the poor, to rectifying gender inequities, to fueling large-scale investment in health and education. Others are skeptical of these claims, or even hostile toward microcredit. They see MFIs as old-fashioned money-lenders, preying on the poor and trapping them in a downward spiral of debt.

Is microcredit transformative or ruinous?  The emerging answer appears to be something in between. IPA and its Research Affiliates are engaged in a wide variety of projects to provide more rigorous answers to questions about microfinance. In this newsletter, we offer you a brief review of the evidence we have so far, as well as a look at important aspects of evaluation. The question is not as simple as "Does microfinance have an impact on the poor?", but requires that we specify what sort of impact we care about, and on whom the impact is made. Follow the links in each article to learn more, and look for updates on our ongoing evaluations on the IPA blog.

What do we expect from microfinance? The popular story is that an MFI makes a small loan to a woman, who then starts a small business, which then brings in more income for her family, which in turn gives the woman control over some household resources, and enables her to make her family more comfortable and invest in its health and education. Multiply this story across many borrowers, and the result should be less poverty, more human capital, empowered women, and entire communities on an upward development trajectory.  But is that what really happens?

IPA is conducting a series of studies on the impact of microcredit across five countries -- Morocco, India, the Philippines, Mexico, and Peru. In spite of variation in the products offered and the populations served, these studies have so far yielded remarkably similar results. Microcredit has a modest but clear positive impact on a number of business-related outcomes.

Photo courtesy of Meredith Startz

In the Philippines, where the loans were targeted specifically at entrepreneurs, access to credit did not increase investment in business activities and, in fact, appeared to shrink the size and scope of businesses. However, profits increased for male entrepreneurs.   In India, areas with access to credit saw 32% more new businesses than those without, and the new businesses were more likely to belong to women. Business owners reported higher profits, and many households increased their spending on durable goods.  The positive impacts on profits and new business creation suggests that microcredit does deliver on some of its entrepreneurial promises.

Hopes of a broader transformative effect, however, are not supported by the evidence we have thus far. Health, education, women's status, and even overall consumption appear unaffected by the availability of microcredit during the 1.5 years covered by the studies. In brief, microcredit seems to have delivered the immediate benefits one might expect-credit enables recipients to purchase expensive investment goods essential to beginning or improving a business-but not much beyond.

It is disappointing, but perhaps not surprising, that microcredit has not served as an immediate silver bullet for all of the ailments of poverty. It may be, however, that the impact on business outcomes we are observing now are the first stage of a longer term transformation.  Only time, and the results of ongoing research (including the continuation of the Spandana study), will tell.

Understanding what sort of impact microcredit can have is crucial, but understanding  the "who" attached to each outcome is just as important. Access to credit may affect one group of people differently than another. Understanding who benefits can inform decisions about targeting and outreach, and also expand our understanding of the mechanisms through which microfinance has an impact on the lives of borrowers and their communities. 

The popular conception of microfinance is based on the model pioneered by the Grameen Bank of Bangladesh, which targeted female entrepreneurs. The rationale behind targeting women is that they are both more credit-constrained than men and more likely to spend extra income on the health and education of their children, furthering long term development goals.  Additionally, getting money into

Photo courtesy of Aurelie Ouss

women's hands is often viewed as one way to increase women's power and status. Many people also assume that microcredit works by helping borrowers create and expand their businesses.  Targeting entrepreneurs, then, provides a way to guarantee that funds are used for these "productive investments" rather than consumption. 

However, the microfinance client base has expanded in recent years.  Many MFIs lend to both men and women, and no longer insist that funds be directed towards a business venture. The results we have seen so far suggest that casting a wider net is well-warranted.

Recent studies in India and the Philippines revealed that microfinance does affect some people differently than others.  The findings, however, run counter to traditional assumptions about who is impacted in what way by access to credit. Neither study found significant impacts on women's empowerment, although in India new businesses created in areas with access to credit were more likely to be owned by women.  In the Philippines, research revealed that men who were extended access to microcredit had higher business profits than those without access, but found that access to credit made no difference to women.  Men with access to credit also had more family members enrolled in school, which suggests they spent more on education. 

In India, where borrowers were not required to use their loans for business purposes, new business creation increased significantly. In contrast, in the Philippines, where loans were targeted at entrepreneurs, business investment didn't change and business size actually shrank. These results emphasize the need to remember that development interventions may have a variety of effects on subgroups of people.  In particular, we can no longer assume that microcredit is uniquely or even especially beneficial to women, nor that it should be offered only to burgeoning entrepreneurs. Carefully considering the potential implications for different beneficiaries before beginning an evaluation will ensure that the right questions are asked, and the full impact question is answered

Photo courtesy of Kerry Brennan

While it's exciting to see evaluations that measure the holistic impact of access to credit, there are also many interesting questions being asked (and answered) about the design and implementation of microcredit products.  Learning more about the features of individual lending programs can help us understand the mechanisms through which credit affects borrowers . As innovation in microfinance proceeds, we may find that there is no universal impact of access to credit, but instead that different products benefit different people in very different ways.

For example, the original group liability model of microfinance, in which a group of borrowers is collectively responsible for each individual's loan, is often cited as the innovation that allowed banks to lend to the poor by decreasing the risk of default.  Could the impact of credit be affected by the type of liability?  Could an insistence upon group liability deter some people from borrowing?  How does switching from group to individual liability affect loan repayment and client outreach ?  Ongoing studies in Bolivia and the Philippines hope to answer these questions.

Another important issue is related to how much MFIs should charge their clients.   Most discussions of microfinance tend to focus on access to credit more than its price, and microfinance interest rates are often quite high.  Could the impact of credit be affected by how much it costs to borrow?  What would be the impact of offering lower interest rates?  The results of studies in Mexico, Peru, and the Philippines may provide some answers.  We've also seen that the bundle of services included in the offerings of an MFI may affect its impact.  Some microfinance advocates praise the natural entrepreneurial ability of poor women, but others see a need to teach business skills.  Does adding business or financial literacy training change the impact of credit?  A study in Peru found that the impact of microcredit on businesses was improved by the addition of business training.  Ongoing work in the Philippines and Peru will add to our understanding of the role of training in microfinance impacts.

A native Spanish speaker, Alfinio Flores grew up in Arizona and began working for IPA in June 2009 after receiving his undergraduate degree from Harvard.  Alfinio now lives in the border town of Nogales, Arizona where he commutes into Mexico each day to work with our field partner CompartamosBanco on the Impact of Microcredit for Women in Mexico evaluation.

What do you enjoy most about working on your project? 
I am given so much responsibility, which is really unusual for someone my age.  I get to have my boots on the ground (or rather, in the field) and my head in the academic "clouds".  I'll spend the morning walking "uphill both ways in the sun" in a border town to verify a client's address and ensure that she lives in a treatment area, and return to the office in the afternoon to exchange emails about study methodology with the researchers.  It's great to be able to go back and forth between two very interesting and different worlds. 

I also really love working with my co-workers at Compartamos. They are a very young and dynamic crowd, and apart from being a fun group of people to share a day at the office with, they are good friends and remind me how different life is day-to-day on the other side of the border.

What is it like living on the border?
It is quite surreal being in two countries every day [...] Living on the border has made me realize that this is another of the many "Mexicos" that form part of this large and diverse country. The border cannot be categorized only as Mexican or American or even Mexican-American; it is its own world, obviously with elements from these two countries. It takes a while to appreciate its beauty and uniqueness, and while not always as picturesque as one would hope, it is definitely interesting. 

Every day when we cross the border to come back to the US we are greeted by a barrage of questions by the Customs and Border Protection agents: "What was the purpose of your visit to Mexico?" "Do you have anything to declare?" "Is someone hiding in your trunk?" One exchange that always makes me smile was when an agent asked us if we were working with some kind of religious organization given the description of our research, and when I said no, he smiled and nodded: "You guys are really cool."