This post is about the cost-effectiveness of the microfinance sector as a whole. We’re arguing against funding large U.S. microfinance charities, or effectively funding microfinance institutions through Kiva, on the basis that microfinance is so inherently cost-effective as to make finding outstanding organizations unnecessary. If you find an outstanding microfinance institution, your donation could end up far more cost-effective (and one way is by leading to creation of a self-sustaining institution).

If you want to compare this to the cost of one-time health interventions, you’d need to consider the probability that this blue sky vision is possible. The premise of your math is that it is not possible, as you assume donor capital is needed in perpetuity. If your premise is right-—even for the best microfinance institutions—-then microfinance is not as sustainable as it is commonly advertised to be. But if the blue sky vision is reasonably attainable, then it the long-term cost of microfinance is lower and it is more difficult to compare microfinance to one-time health interventions.

Phil S, on the issue of interests rate, one way to take look at it is that the specific interest rates are less important than that people voluntarily take the loans with the known interest rates, which, on aggregate, serve as a reasonable indicator that the services achieve some purposes, or people wouldn’t take the loans. However, what Holden mentioned that at times the loan officers are too “pushing the loans out” could be a real danger and should be kept in mind.

Our quick take on Kiva is included in this post on “celebrated charities”. And here’s our full set of posts on Kiva.

Out of curiousity, what’s your take on an organization like Kiva.org

• “Microfinance” is a general term for financial services that are provided on small amounts of assets, small transactions, etc. It includes loans, savings and insurance. Discussions of it usually focus on loans, although microsavings is arguably more promising.
• “Microcredit” refers to loans only.

Coming from the microfinance field, you would expect me to defend the importance of microfinance over and above other forms of development–or at least in conjunction with them. I’m not inclined to do that, however, as I think health care, education, political rights for the disenfranchised, and other basic needs have a higher value than access to financial services. However, in some cases, microfinance provides a means or a conduit to provide these other, more important services. The recent announcement by PATH, Global Partnerships, and Pro Mujer to provide access to health services through existing microfinance networks is just one example of many.

MF is not the third world equivalent of payday loan places. Many developing countries have informal moneylenders as well, and those are the equivalent of payday lenders, not MF institutions.

Holden,

I agree with many of the points in this analysis, especially your assessment that the entirety of the 3 billion people living under $2/day should NOT be the “target population” of microfinance (as Phil S. says, I agree that people who can’t afford loans shouldn’t become indebted).

However, I would like to see some more thought put into the objective in your final analysis of “providing someone with a year’s worth of financial services.” Do you really think that’s where the impact of microfinance ends? So far we have no evidence of the long-term effects of financial access, and two pieces of evidence demonstrating that there are no short-term effects in the Philippines and mixed effects in India, it seems. We also have an amazing piece of intensive research, the book Portfolios of the Poor, which meticulously tracks financial behavior and exposes issues associated with lacking basic financial services, while also exposing some of the failures of MF services as is.

Though I agree that the “multiplier” effect of capital spent on microfinance might be small or nonexistent, I challenge you to think more about the effect of financial services on someone’s life. It is a tad unfair to compare financial services with something health-related like vaccines or deworming, which has a clear-cut link to being “life-saving.”