When we think about microfinance, we don’t ask “which person” or “which story” to fund; we think about which organization to fund.

As explained at our discussion of microfinance myths, we don’t think the traditional story donors are told is accurate. We do think microfinance could be helping people in other ways – or hurting them. Here are the questions we’re asking as we consider granting one or more microfinance charities:

Even if an microfinance charity can’t directly show changes in standards of living, it seems like a good sign of “empowerment” if people are choosing to participate in a program that has concrete costs (i.e., interest).

On the other hand, a microfinance charity that’s heavily subsidizing loans could be essentially giving out cash, at which point the mere fact of participation becomes less meaningful, and it becomes more important to ask whom the handouts are going to.

Some ways to get at this question:

1. Is the charity creating self-sustaining institutions? If so, it is (a) multipling the impact of donations; (b) ultimately creating services that people are willing to pay for.
2. If not, is the charity seeing high participation (per dollar of operating expenses) with high repayment rates and reasonable interest rates? Together, these seem to indicate “real participation”; an operation with high default rates (10%+ per year) or depressed interest rates (relative to, for example, local bank rates) is closer to giving out cash. Note that the “headline” repayment rate is not necessarily the right one to look at.

This is an especially important question if the answers to the above questions are “no” (implying that the charity is making gifts more than providing services). If a charity is giving out gifts, we want strong evidence that those gifts are going to those in need.

As a side note, many charities argue that low average loan sizes prove that they are serving the very poor; we don’t find this convincing.

As we wrote in Microloans vs. Payday Loans, we aren’t convinced that mere borrowing and repayment means positive impact.

Impact studies would be ideal, but based on what we’ve seen, we doubt that we will be able to find a microfinance charity that provides strong impact studies. That leaves us with measures of the general popularity/client satisfaction of programs, which won’t tell the full story (as in the case of payday loans).

1. Data on dropouts. How many people each year drop out of the program? Are they dropping out for positive reasons (like now having the creditworthiness to get traditional loans) or negative ones (failing to benefit from costly loans; paying back under undue pressure)?
2. Trends in participants per branch. If impact studies and good data on dropouts aren’t available (and they often aren’t), we may try this measure as a proxy for the general “popularity” of services. The idea is that growth in total clients may simply be due to aggressive marketing and geographic expansion, but if more clients continue to come in in the same area, the product is probably popular and people probably perceive themselves to be benefiting. We’d like to see that most branches have positive growth and that many have significant (10%+) growth in clients.
3. Monitoring of client satisfaction, client overindebtedness, harassment by loan officers, etc. To be confident that meaningful monitoring is happening, we’d want examples of and figures on actual complaints filed and actions taken, not just a manual laying out how monitoring is supposed to happen.

This post has focused on “microfinance” as most people know it, i.e., loans. However, we find “microsavings” more promising in some ways, and have a different set of questions to assess microsavings programs. More in a future post.