Is microfinance a good bet for a donor? We feel the answer is complicated, and that the many extreme exaggerations of microfinance’s impact get in the way of making an informed decision.
This post summarizes the differences between the stories you’ve probably heard and the reality according to available evidence.
Myth #1: the way microfinance charities help is by giving people loans to expand businesses. Success stories like Andrea’s, Lucas’s and Sophia’s are representative.
Reality: there isn’t much reliable information on how people are using loans, but the evidence there is suggests that “microloans” are often used for consumption purposes: food, visits to the doctor, etc. This isn’t a bad thing - the poorest people in the world face considerable financial uncertainty, and loans can empower them to manage their own lives.
So, however, can savings, which some scholars feel are more beneficial for the poor than loans. Funding institutions to help people save may not have the same sex appeal as “lending your money to help people grow their businesses,” but it might do more good.
For more, see:
- “Will the real microlending please stand up?” - a summary of this idea, 2 years old (more evidence has become available since)
- Portfolios of the Poor, a study on how extremely low-income people use financial services (formal and informal)
- Post on evidence of impact for microfinance - most encouraging effects came from programs not focused on business investment
- Conversation with David Roodman about microfinance
- More information on how loans are used
Myth #2 The best way to support microfinance is to lend your money to specific individuals.
Reality: Choosing your own borrowers is not really possible or desirable. The recent debate over Kiva.org (summarized by GiveWell Board member Tim Ogden) makes clear that even when your donation is “officially” matched to a borrower, you’re really funding an institution. And as we discuss immediately below, this is likely a good thing.
Myth #3: a gift to a microfinance charity gets lent out again and again, making its impact essentially infinite.
Reality: Many of the most important challenges of microfinance (such as developing effective outreach, creating incentives for repayment, and helping people to save as well as borrow) involve significant institutional expenses. (See our discussion with David Roodman as well as any microfinance charity’s budget.) Update 5/2010: also see our rough estimate of the overall “cost-effectiveness” of microfinance, concluding that it is hard to argue that microfinance donations in general are more cost-effective than donations to top health programs.
Myth #4: microfinance has been shown to reduce poverty.
Reality: many studies on the impact of microfinance have been done, but most have serious and widely recognized flaws. The few - and recent - stronger studies show mixed effects. The most encouraging effects are for programs that don’t fit the traditional “lend to expand a business” story.
Details at our post on evidence of impact for microfinance charities.
Myth #5: a high repayment rate means that things are going well and clients are benefiting from loans.
Reality: the repayment rate can be both technically and conceptually misleading. See our post on why the repayment rate may not mean what you think it means.
Myth #6: microfinance works because of (a) the innovative “group lending” method; (b) targeting of women, who use loans more productively than men; (c) targeting of the poorest of the poor, who benefit most from loans.
Reality: all three of these claims are often repeated but (as far as we can tell) never backed up. The strongest available evidence is limited, but undermines all three claims.
Bottom line: should you give to a microfinance charity?
We feel that the marketing of microfinance is exaggerated, excessive, and full of unsupported myths - to a degree unusual even in the world of fundraising.
Once you put these myths out of your head, the fact remains that microfinance institutions are often working with people in extreme poverty and empowering them to better manage their own financial lives. The fact remains that high numbers of clients for a product that costs clients money (interest) - while not necessarily demonstrating positive impact - suggest that MFIs are offering something clients want. All in all, this is more than most charitable causes can say for themselves.
We feel that global health is a better area for a donor overall, especially because we have identified outstanding charities in global health that have far more to recommend them than any microfinance charity we’ve seen to date. We continue to search for an outstanding microfinance charity (through methods including our ongoing grant application). Make sure you’re signed up for updates (or following our blog or Twitter) and you’ll know if and when we find one.
Thank you for this important critical look - we owe it to ourselves and our constituents on all sides of development (donors, recipients, staff, policy makers) to be honest and constantly seek the best data possible about the impact of our work.
Trends like that of microfinance can represent the spread of best practice, but can also be dangerous if not constantly examined and adjusted…
There are no quick fixes to poverty.
Thanks for this post. I have a job interview for a microfinance organization in the upcoming weeks and these are great talking points.
Very interesting post. Have you written yet about any organizations working on microsavings?
I don’t quite see how your argument leads to the conclusion you draw. Alongside every objection you cite are positive caveats like, “but that is a good thing for poor people”, or “that helps MFIs reach more people”. And we know that MFIs reach millions of people and become self-sustainable, and many of them capture savings. Why is that result worse for donors than adressing healthcare, which isn’t even self-sustainable in the developed world? Don’t you get more for your phlanthropic dollar when the solution can take off on its own?
Roy, most health programs aim to become self-sustaining in some sense, and so do most MFIs. And in both cases, some succeed; many do not; and it’s difficult to find reliable information about how common success is.
Health programs, however, have demonstrated more tangible and verifiable impact on people’s lives. Regardless of the sustainability of a program, curing a case of tuberculosis (for example) can make a permanent difference to an individual, who in turn can make a permanent difference to his/her family and community.
The odds that a program can become self-sustaining - when there is any information about them - should be taken into account. But so should the benefits of helping and empowering individuals.
In addition, we still have major questions in general about the extent to which MFIs are helping the people they serve. There are questions about whether they’re reaching the right people, and about whether those people are benefiting or overpaying (could microloans be comparable to payday loans?). We haven’t yet identified a microfinance charity that can address these concerns well; we have identified health charities that appear to be at a much higher level of transparency, accountability, and knowledge about the impact of their work.
Jeremy, we haven’t yet written about microsavings programs. Many of the larger U.S.-based microfinance charities do a significant amount of savings-related work, and we are hoping to get more information about it.
Donations to overcome illness or poverty are both good. It is a mugs game to say which is better. The true test of any donation is transformation that occurs in the mind of the donor. Notwithstanding the donor’s elevated consciousness about every one being in this together, the cascading effect the recipient has on the lives of his fellow community members is the best (albeit impossible) test of a successful donation.
Your discussion on micro-finance seems to take an either/or position, enforcing the assumption that it has to be either the financial or the health needs of the poor that one focuses on. Isn’t our thought process and our desire to help expansive enough to encompass both of those areas of need? Why should a choice ever be considered? And from what value system do the criteria come for deciding if a micro-finance program is helpful or successful?
If a hypothetical program only helps 10 out of a hundred individuals/families get out of debt and improve their well-being during a program cycle, is that a failure in the eyes of the individuals who have been removed from the devastation that poverty brings to the human spirit? And would the other 90 individuals complain that their lives had been temporarily or marginally benefitted? Would they be willing to try again, and perhaps join 20 out of a hundred in the next round?
The question I am raising is about the value system underlying the studies that claim that unless a certain percentage of poor individual’s lives are improved in a certain measurable way, that a program failure has occurred. What about the internal, personal egoic, spiritual benefit someone has gained from the very fact that someone else reached out to help them? How is that benefit measured, and is it any less important than a measurable exoteric result?
I also wonder if the work of Grameen Bank was considered in your analyses? I’ve read Stuart Rutherford’s book, The Poor and Their Money, and the recent follow up to that work (Portfolios of the Poor), and both of these respected resources say that the Grameen Bank’s work has been beneficial. And even Dr. Yunas states that Grameen continually examines past results and seeks greater success.
My suggestion is that we focus on “best results” in all fields of poverty alleviation and health improvement, rather than comparing one method of assistance against another (Your comment: “We feel that global health is a better area for a donor overall . . .”) and encourage people to give more and to get more of their network involved in helping - locally and globally.
John, in response to your question, “Why should a choice ever be considered?”, the answer is that donors have a limited amount of money to give and must choose where to give it.
We realize that there is a strong “apples and oranges” component to a statement like “global health is more promising than economic empowerment.” It is based on a combination of facts and subjective judgment calls. See also this earlier discussion of a similar comparison.
Our position on microfinance is that it is likely much more helpful in some cases than in others. We seek to evaluate the options available to donors. It does not appear that giving to Grameen Bank is an option for a donor, although giving to Grameen Foundation (a very different organization) is.
You seem to be seeking out microsavings programs to assess/evaluate. I suggest looking into WOCCU’s (World Council of Credit Unions) Matched Savings program. Also Freedom from Hunger (based in Davis, California) provides training on integrating preventative healthcare with microfinance programs for organizations worldwide.