We’ve thought and written a lot about microfinance lately. As of now, here’s where we stand.
What microfinance is and isn’t
First, it’s important to recognize that most of what you’ve heard about microfinance is false. It isn’t primarily about funding business expansion.. It isn’t a “proven solution” to poverty. And it doesn’t leverage your donation far more than other options.
Rather, we think of microfinance as a way to help people with low, volatile incomes manage their financial lives, an idea that is well argued in the recent Portfolios of the Poor study. This study implies that microfinance is really about providing one more option for borrowing rather than the only way to borrow, and that the borrowing is continual rather than “one crucial loan to escape poverty” – more like a credit card than a business investment. (This would explain why “graduation” from microlending programs appears rare).
What to look for
Does microfinance do good? It depends on a lot of things.
- If loans are constantly and heavily subsidized, they can be thought of as similar to giving out cash, in which case our primary concern is that benefits reach the right people.
- On the other hand, if loans are not subsidized, a microfinance institution’s profits could be taken as a sign that it has paying customers. This in turn could be a sign that it is providing empowerment.
With the latter goal (which seems to be the more common one), there is a big question about what role donations can and should play. We have expressed serious concerns about mixing donations with for-profit enterprises, with the possible result that donations end up padding profits (concept; example). In addition, we worry that there are too many donations blindly chasing the microfinance “story,” with the result that donations end up disappearing into nebulous activities.
There is also a question about the extent to which loans are truly providing empowerment. There is evidence that borrowing is bad for at least some borrowers.
We have developed a set of critical questions both about microlending and microsavings, to get at the question of whether an institution is helping people. We’ve looked hard for organizations that can answer our questions.
What we’ve found
In trying to answer the above questions, we’ve become fairly pessimistic about the area of charitable microfinance in general.
- The large U.S. charities are rarely clear even about what their value-added is. To the extent that I’ve been able to see their due diligence on partners (most of which is unfortunately confidential), it seems focused on financial performance, with much weaker examination of social impact-related questions.
- Something as simple as the “repayment rate” turns out to be reported, by standard practice, in what we feel is a highly misleading way. We’ve been shocked at how hard it is even to get what we consider the “real repayment rate” out of a microfinance charity.
- We’ve also been surprised by how often people drop out of microlending programs, generally for negative reasons.
- All in all, the picture we have is of a sector that tells stories about helping people but largely measures and rewards financial performance. As a result, microfinance institutions seem to have strong incentives to maximize their scale and their profits, even if doing so isn’t good for the borrowers.
All in all, we would guess that microfinance as a whole has done a great deal of good, but has also probably done some harm. We are more pessimistic specifically about microfinance donations in the current environment. For the reasons outlined above, we believe that giving to an “average” or “typical” microfinance charity – or giving with an illusory “peer to peer” relationship as the extent of your due diligence – is a fairly bad bet. At the very least, it will deliver far less good, and far more potential harm, than the typical microfinance narrative suggests.
Yet we still find the basic idea of providing financial services to people with low and volatile incomes very appealing as a way to help people … if it is done in a way that stresses social impact and uses donations responsibly.
We believe that microsavings is a particularly promising area, although we haven’t found a microsavings charity we can be confident in.
We believe that the Small Enterprise Foundation is a microlending institution that is truly and appropriately focused on achieving positive social impact. We’ll be writing more about it.
I hope managers of microcredit funds, economic development officials, and microfinance managers read this article. We’ve seen mini scandals in microcredit this year (the No Pago movement in Nicaragua, the question of when Kiva disburses funds, etc.) but there is a larger scandal brewing. When the donors and investors who were sold on microcredit as a panacea–in which the vast potential of poor entrepreneurs is unlocked with a small loan–realize that the results are no better than other development strategies (and in some cases, worse), their support will go elsewhere. I made a case for MFIs to introduce savings (and for the microfinance investment vehicles like Kiva to compel them to do so) as quickly as possible here: http://www.seattlemicrofinance.org/microfinances-circular-firing-squad/2009/11/10
Finally, Holden, I would strongly encourage you to distinguish between microfinance and microcredit. I’m certain you understand the distinction between the broader term and the more limited one, but some readers may not.
I encourage you to check out a microsavings program that is working, http://www.MatchSavings.org, if you have not already. World Council of Credit Unions, which has nearly 40 years of experience in developing financial cooperatives throughout the world, began the matched savings program last year to provide an incentive for the working poor in remote areas of Mexico to open their first savings account at the regulated credit union we work with. The savers select a savings goal: housing, microbusiness, healthcare or education, and commit to making a deposit when the CU field officer visits their community each month. Through the website, you can read the savers’ stories and choose to match deposits set aside for one (or all) of the savings objectives. Of the 120 savers in the first phase of the program, 118 completed the program, and they all continue to regularly save. Beyond savings, they have access to a full range of financial services as credit union members… and the community-based institution is growing as a result.
Ryan, true – we sometimes say “microfinance” when we mean “microcredit.” I’ve been trying to catch myself re: this.
Jenny, thanks for the link. My first impression is that this website doesn’t appear to be as clear/transparent as Kiva about where money is flowing and what it’s ultimately/effectively paying for. I would guess that gifts via this site fund a variety of “partner institutions” that are doing a variety of things besides matching people’s savings, and feel more information is needed to really get a sense of what a donor is getting.
If the author and some readers read the publication referred to on how the Poor Live on 2US$ a Day then they can understand where the potential of Microfinance truly lies. Money is the only possible universal exchange that can buy all people and especially the poor, the basic goods & services in life: food, drinking water, healthcare, transport, shelter, education, shoes & clothes. Try finding poor people in the world that pay medicine with a cow’s leg or some potatoes!! As they have a less secure environment, not a network of relatives and friends with the means to help out, not many individual qualifications and thus also less self-confidence, their lives depend on the safety and prudent management of cash, for today, tomorrow, next week and next month. The poor need banks more then we need them and Microfinance can help them integrate when we consider banking and bankers not only in the desertified image of greed and thieves but as an important profession, an emancipated job. You can have many different kinds of banks with different profit objectives and usage, such as reinvestment in the economy where they collected the deposits they use as loan funds; not only in the form of sponsoring charity or golf tournements. The poor need banks, that is the crux of the matter, something less will not protect and assist them.
Holden – Glad that you took time to check out MatchSavings.org. I noticed we did not have the % breakdown of where donor money goes and have added it to the FAQ section of the site (www.matchsavings.org/faq.php). 85% of donations are deposited directly into the accounts of savers upon completing the program, and 15% is used for admin and fundraising costs. To clarify – We currently work with just one credit union. Funds raised through MatchSavings.org do not subsidize credit union operations. The credit union does, however, receive technical support from World Council of Credit Unions (WOCCU) through an existing development program funded by the Mexican government that is focused on bringing financial services to marginalized communities in the poorest areas of Mexico.
Peter, we agree in concept and have mentioned the publication you mention (Portfolios of the Poor) in our past writing on the subject. However, just because there is an apparent need for better financial services does not mean that giving to a microfinance organization (particularly a generic/”average” one) is a good use of funds.
Jenny, thanks for the clarification. I see that you currently work exclusively with Caja Yanga. This leads me to questions about Caja Yanga’s operations, but I cannot find a website for the organization and its WOCCU profile appears sparse (it does not have financial information, in addition to not having answers to the questions I listed).
More detailed and substantive information about Caja Yanga would be the key to GiveWell’s view on Matchsavings.org, since the latter seems primarily like a vehicle for funding the former.
It would also be nice to see the tracking of past funds – i.e., when the donations for each saver were received, and when (and whether) the saver received their match. Kiva shares this sort of information, which has both improved the sense of tangibility some donors feel and led to legitimate questions. To us, information on Caja Yanga is more important, but it’s something to consider.
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