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Does Microcredit Benefit the Poor? New Evidence from a Long Panel Survey of Microfinance Clients in Bangladesh

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Microfinance has long been seen by many as a panacea for fighting poverty by providing access to financial services to low-income population considered unbankable by the traditional financial system. Over the past 20 years it has reached out to a large number of people across the world providing mostly access to credit. Its effect on improving household welfare have been debated with some studies finding positive effect, while some others finding no or even negative effects. One of the early evaluations of microfinance based on non-experimental design was carried out by researchers at the World Bank who, using a cross-sectional survey data from Bangladesh, found positive effect of microcredit program on household welfare1. However, these findings have been debated by other researchers on ground of methodological limitations (selection bias) of the evaluation. To avoid some of these methodological issues, many of the recent studies have used experimental approach (based on Randomized Control Trial) for evaluating microfinance programs. Some of these randomized evaluations assessed short-term program effect by investigating the impacts of microcredit program over a period of 18 months. Most of the randomized evaluations found no or limited evidence on the effect of microcredit2, and thus challenged the popular belief of effectiveness of microcredit as an anti-poverty tool.

However, these randomized evaluation are also criticized on the grounds that typical observation period is too short for assessing the benefit of microcredit. Proponents of microfinance argue that it can take years before such program can affect the productivity and business potential of low-income households, thereby influencing economic variables to generate observable differences in measures of family well-being. So, it is essential to assess the impact of such program over a much longer time period.

A recent study by Khandker and Samad has documented interesting results on the longer term effects of microcredit on household welfare. Utilizing a panel data of households which undertook three rounds of household survey (in 1991/92, 1998/99 and 2010/11) spanning over 20 years covering 87 villages of rural Bangladesh, this paper estimated long run effects of microcredit on household per capita income, expenditures, poverty, non-land assets, household net-worth, male and female labor supply, and schooling of children. Additionally, the paper also investigated whether multiple program membership and MFI competition result in adverse effects on household welfare.

The empirical analyses of the paper are based on 1,509 households from 1991/92 that are common in all three rounds of survey. In order to circumvent the issue of selection bias – a common problem of non-randomized evaluations – the authors used advanced econometric methods while estimating the effect of microcredit. The paper also identified separate estimates of the effect of borrowing by female and male on outcome variables and explored whether the effects of microcredit vary over time as well as whether past borrowing has a distinct effect from the current borrowing.

Results of this paper show that borrowing by men increases household per capita expenditure, men’s labor supply, non-land assets, and household net-worth. The estimates show that when borrowing by men increases by twofold (e.g. from TK. 5000 to TK. 10000) – household per capita expenditure increases by 0.4 percent, male labor supply by 1.8 percent, household non-land asset by 2.8 percent, and net-worth by 2 percent. On the other hand, when borrowing by women increases from 5000 to 10000 – monthly per capita income increases by 0.6 percent, male labor supply by 3.3 percent, female labor supply by 4.6 percent, household non-land asset by 2.5 percent, and boys’ and girls’ schooling enrollment rates by about 7 and 8 percentage points respectively. Borrowing by women also reduces the likelihood of being in extreme poverty. Thus, the results do indicate that borrowing from microcredit institutions helps improve economic conditions of the clients.

The comparison of effect of credit across different survey rounds suggests that the program effects change over time, and perhaps, decline for some outcomes over time. Similarly, the comparison of effect of current borrowing (over the 5 years before the current survey round) and past borrowing (over the 5 years preceding the past survey rounds) indicates that past borrowing may have effects independent of current borrowing. However, there is no uniform trend since such effects could be lingering (e.g., past male and female borrowing increases per-capita income per-capita expenditure, past female borrowing reduces likelihood of extreme poverty), diminishing (e.g., past male borrowing reduces non-land asset and net worth) or even non-existent depending on the outcome variables.

While exploring the effect of multiple borrowing (which is a prominent feature in Bangladesh and in other countries as well) on household welfare, the authors found that there is no negative effect of multiple borrowing when both current and past incidences of multiple borrowing are taken into account. So, this result indicates that multiple borrowing does not necessarily lead to reduction in household welfare and thus rejects the popular claim that adoption of multiple borrowing by MFI clients is harmful for the low-income population.

Finally, the paper estimated the effect of competition among the MFIs and found that current density of MFIs has a positive effect on household net-worth; though there is a negative wealth effect from past density of MFIs, which possibly hints on the diminishing economies of scale. The dynamic effects, however, indicate that households still benefit in terms of higher income from past incidence of higher village-level MFI density. This is possibly because, typically MFIs impose caps on loan size (credit demand is not met by single MFI). This necessitates clients to borrow from multiple sources in order to pool funds and gain economies of scale from income generating activities. However, the finding on diminishing economies of scale suggests that without complementary support (such as skill enhancement program and market linkage activities), access to microcredit alone may not be sufficient in achieving a sustained reduction in existing poverty levels.

Nonetheless, while one may agree or disagree with the findings here, this paper provides enough evidence to suggest that further research, both empirical and theoretical, is required to pass a conclusive judgment of microfinance, and a policy maker ought to take a note of this. After all, providing one more loan option to the poor cannot harm welfare, unless we assume borrower irrationality. The moot point is, can we really assume that?

1 – Khandker 1998; Fighting Poverty with Microcredit : Experience in Bangladesh, New York, NY: Oxford University Press.
Pitt and Khandker; 1998; The Impact of Group-based Credit Programs on Poor Households in Bangladesh: Does the Gender of Participants Matter?” Journal of Political Economy, 106 (June): 958-996.
Pitt and Khandker; 1996; “Household and Intrahousehold Impact of the Grameen Bank and Similar Targeted Credit Programs in Bangladesh.” World Bank Discussion Papers No. 320. Washington D.C.

2 – Studies include the following, among others: Karlan and Zinman 2010; de Mel, McKenzie and Woodruff 2008; Augsburg et al., 2012; Attanasio et al., 2011; Banerjee et al., 2010; Crepon et al., 2011; Karlan and Zinman 2011)


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10 Responses

  1. I’m afraid all the excitement over this paper is quite misplaced.

    First, the work by Khandker (and his old sparring partner, Mark Pitt) upon which this output is effectively a continuation, has been extensively and comprehensively debunked both by David Roodman and Jonathan Morduch, and then also by Maren Duvendack and Richard Palmer-Jones. Among other things I found fascinating, by dropping just 16 (sixteen!) outlier rich families from Pitt and Khandker’s sample of 5,218 families, Roodman and Morduch found that Pitt and Khandker’s core ‘positive
    poverty impact from microcredit’ finding goes away completely:

    Second, remember that this work has been undertaken by a World
    Bank economist (Khandker), and the World Bank is one of most aggressive
    supporters of microcredit, so its not too difficult to appreciate the pressure
    they would have been under to somehow come up with good things to say on behalf
    of their employer. You don’t need to be a conspiracy theorist to know that you
    don’t make a career at the World Bank (or IMF, EBRD, USAID, OECD, etc) by
    coming up with research results that conflict with core institutional
    priorities: and vice versa, course. For a long time the World Bank has been
    shown to be distorting and massaging its research output in favour of its
    particular hard-line neoliberal ideological stance. A really good book to check
    out on this is by Bayliss, Fine and van Waeyenberge published in 2010.

    You might also want to check out my blog posting here on the
    way impact evaluations of microcredit are also routinely distorted and massaged
    to come up with the required positive results, as indeed was the case with
    Khandker’s work:

    Third, in a recent exchange for Handelsblatt newspaper between
    myself and Khandker it became clear to me that Khandker has a surprisingly very
    weak grasp on what is going on in Bangladesh (or perhaps he simply ignores what
    is going on since it would invalidate his models and uplifting results). For
    instance, in spite of all the evidence that has emerged in recent years from
    Bangladesh, and all the evidence form elsewhere, Khandker steadfastly still
    believes that all microcredit accessed in Bangladesh is for business investment
    not consumption spending: this is simply plain wrong, full stop. The Goldin
    Institute, among many many others, have reported on this. A good reference to check out would be Kasia Paprocki and Jason Cons – The Limits of Microcredit— A Bangladesh Case, 2008. You can download the paper at:

    Fourth, David Roodman has also vigorously challenged the Economist’s
    reporting of the Khandker output: .

    All in all, this paper provides no evidence whatsoever to support any claims that the microfinance model works as it has long been supposed to work in reducing poverty or promoting bottom-up development.

    1. The novelty of our scholarly research on microfinance in Bangladesh is based on numbers generated from scientific surveys rather assertions using anecdotes. Nevertheless there is ongoing debate on the benefits and cost of microfinance all over the world. What is important though to make it clear is that everybody should have access to institutional finance irrespective of race, ethnicity, gender and wealth. What traditional/commercial banks have failed in general all over the world — provide financial access to poor and disadvantaged people – has been tackled by microfinance institutions through innovative program design. Whether such an access leads to income and wealth growth of a borrower is a matter of his/her skills and the economic environment he/she operates in. This necessarily implies that income or wealth augmentation because of microcredit access is context specific. What researchers, using statistical tools, attempt to estimate is the approximate effect of improved access to credit. One could debate the methods and findings on substance without attacking the researcher’s association for the sake of professional decorum. Also before criticizing, one need to be well versed of the complexity of the issues in hand and must be aware of the limitations of alternate approaches.

      Unfortunately, Mr. Bateman’s critique does not have any substantive issue regarding the findings or methodology of the new study on the dynamic effects of microcredit in Bangladesh. Here are the facts to counter his arguments posted in the IFMR blog.

      First, Mr. Bateman has a very selective reading of the literature that he cites. For example, the papers by Roodman and Morduch and by Duvendack and Palmer-Jones were completely refuted by rebuttals that were published in the same issue as each of the papers that he cites. Indeed the rebuttal papers followed on the very next page in both cases. As a self-acknowledged expert on the micro-finance literature, it is odd that Mr. Bateman is either unaware of these published rebuttals or just unwilling to acknowledge their existence since they contradict his view that micro-finance does not work.

      Second, as the rebuttal papers point out, the Roodman and Morduch paper, and the Duvendack and Palmer-Jones paper contain so many errors that their credibility is in serious question. Furthermore, the blogged critique of Roodman attacking the Khandker and Samad paper makes the same critical error that the Roodman and Morduch paper makes. Rephrasing Mr. Bateman’s critique of me, it has become clear to me that Bateman has a surprisingly very weak grasp on what is going on at the field level and in the Bangladesh microfinance literature (or perhaps he simply ignores what is going on since it conflicts with his beliefs).

      For those wishing to follow up, the rebuttal to Duvendack and Palmer-Jones was published online on 18 Dec. 2012 in the Journal of Development Studies as “Gunfight at the Not OK Corral: Reply to ‘High Noon for Microfinance’ and appeared in the same month (Dec. 2012) in print (Vol. 48 No. 12, pages 1886-1891). There are numerous rebuttals to the work of Roodman and Morduch going back almost 3 years as they keep altering their paper in response to numerous mistakes that Mark Pitt and I have pointed out. The Roodman and Morduch paper finally was published on line by the Journal of Development Studies a few months ago, as was Pitt’s thorough rebuttal. The Roodman and Morduch paper and the Pitt rebuttal paper appeared in the print version of the JDS of April 2014. The most recent papers rebutting Roodman and Morduch were also published online by the World Bank. The full versions of all these rebuttals can be downloaded or viewed at .

      Third, let’s turn to the particular criticisms that Bateman makes of the Khandker and Samad paper reviewed in this IFMR blog post – oops, it turns out there are none. There are paragraphs of ad hominem attacks including that I am a lackey of the World Bank who slants his research to get ahead and meet the expectations of my masters. In fact, I am proud to work for the World Bank, can say unequivocally and categorically that I have the full freedom to exercise my independent judgment as a researcher in the Bank and that the views expressed in my researches are entirely mine and they do not reflect the views of the World Bank or any affiliated organization.

      Finally, Bateman’s sole line concerning the paper under discussion is this: “David Roodman has also vigorously challenged the Economist’s reporting of the Khandker output” and this line of attack is about the Economist’s reporting and not the paper. There is not a single substantive (or even insubstantive) remark from Bateman about my new paper with Samad. If this is the type of criticism that Bateman offers, no rebuttal is really warranted.

      1. Mr Khandker is trying to slide out of a corner he put himself in.

        First, I agree that it is awkward to point out one’s professional
        association in any critique, but it simply has to be done, I’m afraid, if one works for one of the major development institutions, and especially the World Bank. This is because there is a mountain of evidence (and, for what it is worth, my own personal experience as a consultant stretching back twenty five years or so) that one simply has to agree to come to research results that agree with the overall ideological points that the World Bank wishes to promote if one (a), wants to get a job there in the first place, (b), one want to continue working there, and (c), one wants to enjoy a decent career with regular promotion. I am sure we would all wish that it were otherwise, but it is not. I am not saying that Mr Khandker automatically or
        mindlessly slants his research results in a particular way, like, say in the old Soviet Union’s research units that all regualrly found evidence to support the ‘unrivalled efficiency’ of central planning, but undoubtedly the pressure is always there to find ‘creative’ ways to conclude one’s research with the political-ideological message that the World Bank wishes to promote. Once again I refer readers who might be sceptical of this point to consult the brilliant book by Bayliss et al – its a superb reminder, if one was really needed, that the World Bank is a supremely political organisation that at all times expects its employees to manages its research outputs in such a way as to support its political and ideological goals. Also, if anyone is still unconvinced, then also have a look at Robert Wade’s brilliant blow-by-blow insider account of how the World Bank put together its (in)famous ‘Miracle’ study in the early 1990s claiming (quite wrongly) that the East Asian miracle economies were all about free markets and not a developmental state’ and pro-active industrial policy. You can find this very important study here:

        Second, I am very well aware of the debate that has taken place involving Khandker, Pitt, Roodman, Duvendack, and others. In fact, I am currently co-editing a book for SAR Press about microfinance in which Maren Duvendack has several really interesting chapters on this very issue, including one rather nice one written with Richard Palmer-Jones on ‘Econometric(k)s, replication and economic science’…….! Anyway, as far as I understand, there were genuine mistakes on all sides, not helped at all by a refusal by Pitt and Khandker to release important data for such a long time, but on two important points Pitt and Khandker have never been able to adequately respond; 1). they make the important claim that poverty is reduced as microfinance has been rolled out, but they do not show that there is any causation here, simply correlation. 2). On the 16 outlier families issue, I am not aware of any rebuttal on this issue
        from either Mr Pitt or Mr Khandker.

        Third, on the use of microfinance, Mr Khandker claimed to me directly that the microcredit issued in Bangladesh is ALL used to underpin income-generating activities. He did not say, but one can presume, that he has to make this rather perverse claim since it would
        otherwise be very difficult to come to a research result that holds that microfinance raises incomes if it all, or even just mainly, goes on consumption spending. But, to repeat, the evidence for this microcredit not used for consumption spending in Bangladesh’
        point is very very weak indeed. In fact, that most microcredit is increasingly used for consumption spending is confirmed in a whole host of outputs, ranging from Stuart Rutherford’s ‘financial diaries’ projects, to Rutherford’s book looking at the experience of ASA in Bangladesh, to the Goldin Institute’s outputs to a French documentary team from ‘France 24’ who found that almost all of the loan officers they interviewed in Bangladesh in 2010 reported that almost all the microcredit they disbursed went into consumption goods, like new TVs, medical expenses, weddings, etc (or else to repay an earlier microloan…). Moreover, another point to consider is that if consumption spending is now very widely seen as the main
        use of a microloan all over the developing world, why would it be any different in Bangladesh?

        Finally, the article by David Roodman does contain a very important point criticicising the Khandker study, one relating to the impact found in the latest study by Khandker. Roodman shows that the author’s of the Economist piece, like Khandker and Samad, exaggerate the claimed impact of microcredit. A nice explanation of this important point is by long-time microfinance supporter Daniel Rozas, here:


      2. Shahid,
        I share your feeling that this discussion would be improved if Milford spent less time theorizing about people’s motives. Of course it matters who pays us, but other peoples’ states of mind are very hard to observe, making confident statements about them unscientific.

        At the same time, I’d point out that your comment contains essentially no substantive points either. Perhaps you feel that this is not the place to get into a substantive discussion of your study?

        You’re right that my post about the Economist article ( was aimed in the first instance at the Economist. But it also contains substantive points about your new paper. So the statement that “this line of attack is about the Economist’s reporting and not the paper” is not fully correct.

        My main message about the paper is this: I think it is a real contribution to have followed up over such a long period. But the paper has a responsibility to state, and discuss or critique, the things we much believe about how microcredit was done 25 years ago in these villages in order to interpret the reported correlations as causal. This gets hardly a sentence. As a result, the reader is not able to reach a well-informed opinion about the possible explanations for the statistical results and how much weight to give them.

        In the same spirit, I think it’s important to distinguish between “rebuttal” and “response.” It is a fact beyond dispute that you and/or Mark Pitt have responded to the various criticisms of your work, including in the pages of the Journal of Development Studies, which properly invited your responses. Whether these responses constitute rebuttals is rather like whether your correlations prove causation. Judging it requires getting into the substantive questions of what the key identifying assumptions are and what evidence there is to support them, which the above comment does not do.


        1. I am not attempting to make any substantive point here. I am trying to ask a practical question. While these debates are all very interesting, can we just stand back a moment: this purported benefit is so minimal as to be irrelevent. I can’t believe that senior World Bank economists are getting so excited about something so utterly trivial. I’m amazed it even got published. Double debt, get 0.42% improvement. That’s it. In any other sector this would be laughed at. Can you imagine such a result in the medical profession? If a new vaccination program had a similar impact it would be considered an utter failure. Roodman himself stated it most succinctly (followed by Rozas giving us a clear example of its application): statistical significance does not equte to real-world significance. And yet the attention focuses on minor details, ignoring the massive elephant in the room. It’s just not working. Is it just me that is a little disappointed that this is all we can really claim microfinance is contributing? And even these results are disputed! We can’t even agree on whether this trivial result is in fact accurate! Sorry, but not only do I find this sobering, but I find it equally concerning that most people fail to notice this rather obvious point. Or am I missing something? When people talk (optimistically) about the poverty-alleviating properties of microfinance, I suspect they were hoping to see results a little more impressive than this. At this rate poverty alleviation is going to take millennia. Is this what Yunus had in mind when he spoke of his poverty museums? I assumed he was talking a little sooner that the twenty-fifth century!

  2. I would like to, if I may, broaden the scope of the discussion a little bit. It is my impression that when the word “micro-credit” is used it is often meant to describe one specific product — a loan with 50 weeks of maturity, offered at a fixed rate of interest, with weekly repayments. If my impression is correct then I find it surprising that a broad word such as “micro-credit” or sometimes even “micro-finance” is used because it conveys the impression that the discussions (and the conclusions arising from them) refer to all forms of lending / financial services to low income households and not just this one specific product. If my impression is incorrect and indeed the reference is to the broadest form of services to low income households (and not just to weekly-repayment loans) and by extension to entire countries full of such households, then how do the “no impact” findings square with the broader literature on financial development which seems to find strong linkages between the growth and development of such nations and financial development and the removal / relaxation of the “credit constraint” and with the findings of papers such as Pande and Burgess.

    1. Mr Mor

      An interesting point. The broader literature you are referring to, involving people such as Ross Levine, actually supports the ‘no/negative impact from microcredit’ argument that I have been making for some time, as in my book released by Books for Change based in Bangalore:

      People like Levine argue that a financial system has an impact on growth because a) it increases the quantity of finance available for enterprise development and b). ensures that the quality of investments made thereafter is higher. However, for many development economists, this interpretation was quite incomplete because it failed to explain most actual finance-driven historical episodes of rapid development and growth. They suggested that a developmentally efficient financial system is actually far removed from
      the type of market-driven financial system celebrated in neoclassical textbooks,
      and from the reformed version promoted by Levine and others. A developmentally efficient financial system is actually one that not just increases the quantity of capital available for investment in the enterprise sector, as such as Ross Levine posited was important, but one that also possesses particular institutions, organisations and regulatory structures that are capable of ‘guiding’ that capital into the ‘right’ growth-oriented enterprises.
      Defining the institutions and organisations that can successfully ‘guide’
      capital, and also what these ‘right’ enterprises were, formed much of the
      foundation of the seminal work of Alice Amsden, Robert Wade, Lance Taylor, Peter Evans and Ha-Joon Chang.

      One massively important problem that emerges from this paradigm is of interest to those of us researching local economic development – that far too much of a country’s scarce finance is intermediated into unproductive ‘no-growth’ informal microenterprises and self-employment ventures (the ‘wrong’ enterprises) and far too little has gone into more productive formal small, medium and large enterprises (the ‘right’ enterprises). You can see the problem very clearly in India with its huge ‘missing middle’ but it has also been very pointedly examined in Latin America by the Inter-American Development Bank (IDB) which bravely announced in 2010 that this adverse intermediation process (catalysed by the growing number of microfinance institutions) is actually THE most important reason why Latin America was trapped in poverty and deprivation in the 1980s onwards. It is also why people like Hernando de Soto were so completely crazy in putting forward their theories about the poor being ‘heroic entrepreneurs’ and they only needed deregulation and more microcredit, and poverty would disappear (of course, it actually doubled in those places where the informal sector doubled). I discuss the situation in Latin America at length in my working paper for OFSE, which you can download here:

      The South Africa government is another one that increasingly recognising that, thanks to the expansion of microfinacne institutions, far too much of their scarce savings goes into the wrong types of enterprise (and also simple consumption lending) which has created a disaster in that country. I am actually there next week in Johanesburg to deliver a couple papers at a big EU-funded conference on industrial policy and also, pointedly, to give a lecture to senior financial advisors in the Government on why microfinance has been a disaster everywhere but especially in their country.

      The work of Pande and Burgess, to my mind, misses the point entirely when it comes to microfinance, esepcialyl when the problem today is too much credit in almost all localities in developign countries. I feel their work is more about simply trying to find some good things to say about a policy – microfinance – that has political/ideological importance to mainstream US development institutions and research funding bodies, but as an local economic development policy is a disaster.

      1. Thank you Dr. Bateman for your detailed reply to my question. From what I can understand it is your view (and perhaps also of other thinkers that you refer to you in your note) that financial markets do not allocate resources effectively between agents and that signals such as interest rates and credit spreads are far too noisy to be relied upon. While I did not quite understand what you thought a superior alternative might be, from a quick scan of the work of other thinkers that you cite, it appeared to me that you would rather trust in the force of central planning and state led development. If I have understood you correctly, while I am no expert in this, as somebody who has lived through both the regimes, I must say that I am not entirely persuaded by these views. It is my sense that markets, in order to do their job well, must constantly be watched for “irrational exuberance” and “malpractice”, by alert regulators and every effort must be made to ensure that market interest rates and credit spreads are indeed “appropriate”, but otherwise markets must be left alone to do their jobs. I worry that, for all their imperfections, markets appear to outperform central planning by a wide margin and India, thankfully, has almost entirely given up on it.

  3. I wonder if this debate is missing the wood for the trees. I am not qualified to comment on the subtle econometric debates surrounding the P&K paper – my only onclusion is that it would be dangerous to conclude from their original paper that microfinance is either a miracle cure, or a total disaster. The recent paper was similar: I was enthused to read that someone had done a rigorous piece of research and discovered that microfinance is having a positive impact. Until I saw that impact. It is, frankly, pathetic. Rozas summrises one of the key findings well:

    “Let’s put this in perspective. Let’s say you are a middle-class family earning €50,000/year. Would you want to double your debt in return for an extra €210?”

    Is that it? After all these years, however many billions of dollars spent on MF, and all we can expect, according to a World Bank paper (which may or may not be biased, as Bateman alludes to below), is a 0.42% increase income? Stand back a moment – who cares whether it is positive or negative – the number is so small as to be meaningless! Could we not have had a better impact by deploying this capital elsewhere? What is the income generating impact of a vaccine to a curable disease? What do a few extra years of education do to a person’s earning potential?

    I came to a similar conclusion reading Karlan’s paper on Compartamos. You can almost feel the frustration of the authors. They did a massive RCT (which I am sure some will criticise and others will praise, on both valid and petty grounds), and the result was similarly meaningless. Some good, little harm. Clients are apparently a little “happier”. Only 1 in 5 of those offered loans in this RCT took up the offer, a minor detail brushed over in the paper: over 80% didn’t even want to participate! And yet the authors squeeze out every positive piece of data they possibly can, without (as far as I know) actually fiddling the data. It’s the inherent bias, the desperate quest to say something, anything, positive when confronted by such mediocre results. I am not criticising the methodology here, and the results speak for themselves. It’s the tone, the desire to say something nice about microfinance. In other words, “spin”.

    Indeed, Karlan’s book “More than good intentions” speaks lucidly about microfinance, but in the concluding chapter he doesn’t even list it as one of the 7 things that do in fact work.

    We have technical debates over econometrics that 99% of us cannot follow. We have rumours of bias that can never be proved. We have extreme claims on both sides of the debate (miracle cure versus disastrous waste of time), while the truth is likely somewhere in-between. But at the end of the day we have the results presented, and they are under-whelming to say the least. Positively mediocre in my opinion. And yet I have seen very few papers examining the more interesting question to me, which is simply whether we could have had a better impact with the copious funds deployed in
    microfinance had we directed them to something else. Why does no one ask this question? How much capital was required to achieve this paltry 0.42% increase in income? How many kids could we have vaccinated, educated, given a mosquito net etc. instead – and would this have had a larger or smaller result? It is surely a valid question, but one that those in the microfinance sector seem to avoid.

    And when confronted with such mediocre results (once again), the temptation seems to be to jump to one of two conclusions: 1) look at how wonderful microfinance is, let’s do more of it, now we have PROOF that it works, or 2) it has been an utter waste of time and should be phased out. Wouldn’t a better approach be to look at the cases where microfinance works, and try to boost these, while looking at where it fails, and try to limit
    these? Instead the sector remains dominated by polarized opinions. We have endless companies showing us a few anecdotal cases of success (usually with a photo of a smiling woman with a goat or sewing machine in the background), heralding these as the proof of how miraculous the phenomenon is. No academic I know of takes these remotely seriously, and yet this is the public image of microfinance, which borders on outright deception in my opinion. Then we read that the only alternative to microfinance is apparently central planning, which is questionable. Somewhere in the middle we have institutions like the SMART Campaign, which superficially appear to be addressing some of the weaknesses of microfinance, but are in fact little more than an elaborate window-dressing campaign led by the likes of ACCION. And academic data emerges suggesting that the overall impact is in fact so trivially small that it really makes little difference whether it is positive or negative. And all this after +/- 30 years of microfinance, an +/- $80 billion sector (MixMarket), and countless studies.

    Surely we can do better?

  4. I am not an apologist for microfinance or MFIs. But I feel that some of the criticism – based on expectations of what microcredit should achieve- is unfair. If the operations of MFIs are commercial, there is no point in asking them to do something else on the premise that microfinance does not do much. Microfinance is good as bad any other investment and one of the tests the promoters will apply is whether it is viable and sustainable. As for the customer whether it is sustainable for them is the question. Why the customers persist in using microcredit (and expanding their use over time) when it is not working to their interests? And why they pay hard earned money towards interest and keep up repayment rates higher than in the other “productive’ sectors of the economy? If we see from a customer perspective, some of the arguments – that microfinance does not have any impact and should be closed down – do not seem to have a sound basis. The poor need access to finance – the apparently flawed models of microfinance are all that are available to many people. There are no white knights riding in to rescue the poor and provide them with access to finance of a positive type – if there is one.

    Another point is that Sinclair suggests that the money can be used for vaccinations, education, etc. Fair point. But the nature of funding in microcredit has been that the capital returns intact and is recycled perennially. The capital is not expended which is what happens when we vaccinate, educate etc. The structure of funding resources should then be different and equity or loans will not be available commercially for such interventions. We need to differentiate between public funding of microcredit schemes, loan funding of microcredit schemes and commercial enterprises running microfinance operations with equity investments leveraging other funds. While there can be alternative uses of public funds, when people invest their equity or take bulk loans to run MFIs, they have the freedom to do a lawful business.

    A final point is that financial services do not lead to positive income or asset increases without other resources such as skill sets, technical inputs and a conducive policy and market environment. If the rest of the ecosystem is adverse (which is often the case around the poor), finance can at best alleviate suffering but will not be able to achieve a measurable positive impact in the lives of poor. Finance (micro or otherwise) is a medium and in a sense acts as a catalyst. By itself it cannot achieve much when provided as a loan. If microfinance is seen having failed then it is more a failure of expectations – not of substance. Let us not condemn aspirin of failing to cure cancer…

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