Note: I’ve responded to the most recent batch of comments.
A lot of work has been put into estimating the “bang for your buck” in health initiatives. In the area of microfinance, though, things appear very murky.
Microfinance advocates say things like “As our clients repay the loans, the money is loaned again and again to help many more entrepreneurs. It’s giving that keeps going.” Skeptics reply that much of the cost of lending is in operating institutions, not simply loan capital. We should be able to agree that the cost-effectiveness of microlending is not literally infinite, but what’s the right ballpark? Does the impact per dollar dwarf that of health?
We can take a very rough – and very generous to microfinance – cut by looking at some global estimates by CGAP. Notes before we get to the numbers:
- We are trying to get a number that we can put alongside existing estimates of health cost-effectiveness, just to see whether the microfinance sector as a whole has a clear and large advantage in cost-effectiveness. The estimate will be extremely rough and will not apply to any given microfinance charity, but rather to the area of microfinance as a whole.
- Our estimate is essentially a “best-case scenario” for what microfinance cost-effectiveness would be if (a) there were a direct link between donations and people served (b) microfinance could reach an enormous “target population” at the same level of donation funding that’s being provided now.
- $11.7 billion of funding went to microfinance in 2008, of which 19% – or ~$2.2 billion – was grants (not loans, not investments, not guarantees).
- There are currently between 130 and 190 million microfinance borrowers worldwide.
- CGAP implies a “target number” of borrowers: “Given that almost 3bn people live on less than two dollars a day, clearly the battle to bring financial access to as many people as possible is a very long way from being won.” I have major issues with this target – for one thing, I’m not sure that people living under $2/day should all be targets, or are the only targets, of MFIs.
A couple of ways to look at the “costs per MFI client”:
- A lot of money is spent on microfinance. $2 billion in grants is about 10% as much as the total official development aid of the U.S. government (according to the 2008 Index of Global Philanthropy (PDF)).
- We’re currently spending $12-$17 in grants alone for every MFI borrower. Of course, the grants could be paying for a lot more than borrowing (including savings), and could be made with the aim of expanding future services rather than maintaining existing ones.
- If you believe that microfinance will eventually reach the entire CGAP “target population” (or a population that size, which would be around half the population of the world) and that the current level of grants will be maintained (say, growing only at the rate that the size of the target population grows), then at the point where microfinance is reaching its entire “target population,” the grants per person reached will be about $0.75. While this figure could be overstating the costs per person served if grants eventually create self-sustaining institutions and become unnecessary, I think it is far more likely that it understates the cost because (a) those who can most practically be reached in a profitable/sustainable way are likely to be those already reached, and the hardest people to reach are more likely to require continued subsidies; (b) there is a huge amount of other investment in microfinance, and we have very little sense of the role that grants play in enabling the expansion of services; (c) 3 billion clients is an extremely ambitious goal – around 20x the number of people actually being reached today, and around half the world’s current population.
A couple of ways to think about the comparison with health:
- For $200, would you rather provide about 250 people with a year’s worth of financial services, or prevent a single death via vaccination?
- For $3.50, would you rather provide 5 people with a year’s worth of financial services or 14 children with deworming drugs, leading to one extra year of school attendance?
I would answer both of these questions mostly with a shrug. Certainly, under this extremely generous estimate of what microfinance could cost, it is “competitive” with the best health programs.
But this is assuming that all of that money going to microfinance is going to eventually succeed in reaching half the world, and also making the even bigger assumption that grants are the key factor. We think it’s very possible that much of microfinance’s reach has very little, or even literally nothing, to do with charitable support. (The less generous cost-effectiveness estimate of $12-$17 is fairly clearly not competitive with the best health programs: compare 12-17 person-years of financial services vs. 1 life saved, or 1 person-year of financial services vs. 3-5 person-years of extra school attendance due to improved health.)
Bottom line: we don’t see cost-effectiveness or “multiplying the impact of your dollar” as a strong argument for funding microfinance over health, on a general sector-level basis. This is the case even under the most generous model of the microfinance figures we’ve come up with.