The GiveWell Blog

My greatest fear about microfinance

(updated on: ) | by Holden

How much of microfinance’s popularity in the world of philanthropy comes straight from this story?

I was shocked to discover a woman in the village, borrowing less than a dollar from the money-lender, on the condition that he would have the exclusive right to buy all she produces at the price he decides. This, to me, was a way of recruiting slave labor.

I decided to make a list of the victims of this money-lending “business” in the village next door to our campus.

When my list was done, it had the names of 42 victims who borrowed a total amount of US $27. I offered US $27 from my own pocket to get these victims out of the clutches of those money-lenders. The excitement that was created among the people by this small action got me further involved in it. If I could make so many people so happy with such a tiny amount of money, why not do more of it?

It’s an amazing and moving story. But it’s a story about one giver and 42 beneficiaries in one village.

In 2007, the Grameen Foundation alone saw over $16 million in donations and claimed over 7 million clients served (see its annual report (PDF)). It works in 32 countries on 4 continents. And it’s still putting that $27 front and center.

We know little about microfinance’s actual impact, and much of what we do “know” comes down to myths (myth #6, in particular, seems oddly fitted to the story of the original $27). We’ve seen very little interest in general in pushing skeptically on the appealing stories charities tell.

Dr. Yunus’s original loan was interest-free, while today’s microloans charge interest in the 30%/year range. We know that the for-profit participants in microfinance have been participating for reasons other than one great story.

I don’t feel nearly so confident about the philanthropic participants.

The Carter Center

(updated on: ) | by Holden

Early in 2009, we were extremely excited about The Carter Center. It seemed so strong that we devoted weeks to understanding it in depth.

As discussed in a blog post we made at the time, several of its programs work on extremely promising “neglected tropical disease control” activities, and there’s a truly unusual amount of disclosure from these programs. It appeared that the Carter Center is near the top of the heap both for what it’s doing and for how it’s sharing information. To boot, it was directly involved in one of the most cited global health success stories, the near-eradication of guinea worm.

The Carter Center also has several programs that don’t seem as promising. At first we nearly dismissed/overlooked these programs. But as we dug deeper, we realized that just because a charity emphasizes its best programs doesn’t mean it’s spending most of its funds on them. Oddly, the one piece of information we couldn’t seem to find anywhere on its website was how much of its budget was allocated to each program. The back-of-the-envelope calculations we did surprised us: the heavily documented river blindness program seemed as though it must be tiny, while the agriculture program hadn’t published anything since 2005 but appeared at that time to be taking up around 10% of the total budget.

We got in touch with The Carter Center and asked for a budget breakdown by program. We spoke to a senior representative and followed up with him 4 times. We even tried getting a connection of ours who has been a major Carter Center donor to ask for the information. It kept getting put off. Today we still don’t have this information.

To be honest, at this point we don’t know whether the “flagship” disease-control programs are at the core of the Carter Center’s work or act as more of a “hook” for donors while it focuses on things like fellowships for mental health journalism. And we have no sense of what a donor accomplishes by giving them a small gift (a gift that, however it’s officially designated, is likely effectively going to fund what the Carter Center wants it to fund due to the issue of fungibility).

To give a sense of the variety of program type and quality, here’s where we stand on a few select programs:

We wish the Carter Center were as transparent about its budget as it is about (some of) its program activities.

Medicine and philanthropy

(updated on: ) | by Holden

David Leonhardt’s excellent piece on health care reminded me of the debates within philanthropy.

For most of human history … [doctors’] treatments consisted of inducing vomiting or diarrhea and, most common of all, bleeding their patients … Yet patients continued to go to doctors, and many continued to put great in faith in medicine … There was a strong intuitive logic behind those old treatments; they seemed to be ridding the body of its ills. They made a lot more sense on their face than the abstract theories about germs and viruses that began to appear in the late 19th century … So the victory of those theories would require a struggle. The doctors and scientists who tried to overturn centuries of intuitive wisdom were often met with scorn. Hippocrates himself wrote that a physician’s judgment mattered more than any external measurement, and the practice of medicine was long organized accordingly.

The single most common retort to the GiveWell approach is that the staffers, volunteers, and even donors “know” the programs they fund are working, based on their intuitions.

Then again, many highly intuitive programs have been shown not to work, and there’s good reason to distrust intuition in this area:

Behavioral researchers have come to believe that there is a clear pattern to when intuition works and when it doesn’t. “Intuitive diagnosis is reliable when people have a lot of relevant feedback,” says Daniel Kahneman, a Nobel laureate in economics who recently collaborated on a project about intuition with Klein. People need a great deal of experience, and the feedback from these experiences — whether a treatment is working, say — needs to come quickly and to be clear. “But,” Kahneman adds, “people are very often willing to make intuitive diagnoses even when they’re very likely to be wrong.” When doctors have been asked to estimate the likelihood of a treatment succeeding based on experience, for example, they give wildly divergent answers. Medicine is full of such examples.”

Feedback is near-nonexistent in the field of philanthropy.

As Toyota built better cars than its competition for less money, it won new customers. Some rivals matched its successes (as Honda did); some lost market share (as Detroit did). No such dynamic exists in health care. William Lewis, a former director of the McKinsey Global Institute who studies productivity, says that the economic benefits from the various quality movements have been quite large but that they are also largely in the past. Most industries have incorporated Deming’s big ideas and are now making only incremental progress. “However, there is one big exception,” Lewis adds. “You guessed it: health care.”

I can think of another exception.

Evaluating microsavings

(updated on: ) | by Holden

We’re excited about the idea of microsavings as opposed to microlending. But it isn’t enough to see that an organization offers microsavings. We need to know:

  1. Are savings services being provided relatively efficiently? How many clients are served per dollar of operating expenses?
  2. Are clients able to access their funds when they need them? We have heard anecdotal concerns about client dissatisfaction with the difficulty or bureaucracy involved in accessing savings. In addition to the proxies for satisfaction discussed in our earlier post, we’d like to see the “turnover” of client accounts: does money go in and out, or sit stagnant?
  3. What are the interest rates/fees on the accounts? Excessive fees would concern us, but so would extremely generous interest rates, which would make the program less like a savings account than like giving out cash.

Some of the questions at our earlier post (regarding profitability, client income levels, and client satisfaction) also apply.

If microsavings is more needed, why does microcredit get more attention?

(updated on: ) | by Holden

Portfolios of the Poor tells a story you won’t hear from a typical microfinance charity:

Sankar was a landless, illiterate rickshaw driver, whose wife had Grameen membership. They had borrowed from Grameen Bank a few times – in fact one loan had helped him buy his rickshaw. Suddenly his wife told him they would have to open a GPS [savings account] in order to get the next loan. He was suspicious, he told us. “And now?” we asked. He chuckled. “Now, we try to avoid loans and just use the GPS.” Pressed to explain, he said that his income was small but sufficient for their daily needs and they had nothing to invest an expensive loan in. Their priorities now were for their children, and the GPS seemed, compared to borrowing, a cheaper, more relaxed, longer-term way of providing for their future (marriage for the girl, a business for the boy). Like Jharimon, Sankar borrowed sometimes and saved always. “Grameen should have done this years ago,” he said, echoing what many others had told us. (Page 170; emphasis mine)

What do the poor need more, savings or loans? There isn’t much information on this question – something I find pretty shocking given that microfinance is decades old. But the limited evidence seems to point to savings, at least for the poorest clients:

  • The general impression given by Portfolios of the Poor (quoted above), the only systematic attempt I’m aware of to see how the poor manage their financial lives.
  • A 2001 survey of SEWA Bank clients, which found that the bank was “far more important as a depository for savings in early 1998 than it was as a source of credit” (page 79) and that “39 per cent of borrower households were below the $1 a day line, compared to 53 per cent of saver households and 67 per cent of [non-client] households.” (page 81) This is the only study we’ve located directly assessing savings vs. loans clients at an MFI – please let us know if you know of more – but it is consistent with charities’ and scholars’ off-the-record comments to us that the poorest clients tend to be more interested in savings than in loans.
  • The strongest studies of microfinance, which show weak/no effects for two traditional microcredit program and positive effects for a savings program.
  • The purely logical argument that savings provides the same “risk management” benefits as loans, without the same risk of harm that comes with putting poor people into debt at high interest rates. (David Roodman among others makes this argument.)

But loans are far more prevalent

Looking at the 537 MFIs listed on MixMarket under US-based networks (source data), we note that

  • 517 of 537 appear to have introduced loans before they introduced savings; 0 of 537 appear to have introduced savings first. (This may be an artifact of changing data reporting standards, but if Mix collected loans data before savings data, that fact is also indicative).
  • In their most recent year, 503 of 537 MFIs had more outstanding loans than savings; 34 of 537 had more outstanding savings than loans.

Why?

Why are loans so overwhelmingly common compared to savings, when the little available evidence points to a greater need for savings?

Is it for purely logistical reasons? Savings and loans each present different challenges, but the necessary “innovations” seem to have come first and been expanded more for loans.

Or is this another case where the best program loses to the best donor story?

Too much attention on the giver’s experience; not enough on the recipient’s

(updated on: ) | by Holden

From the recent discussion on Tactical Philanthropy:

As philanthropists/donors/funders, we spend so much time thinking about how to maximize social benefit through our activities, that often we lose sight of the personal benefits that we experience from these endeavors.

We disagree. Consider the current state of the nonprofit sector.

Bottom line: giving today is all about the giver. The sector revolves around telling donors great stories, while charities’ actual impact is unexamined and essentially irrelevant.

We do believe that the benefits of giving for the giver are important, particularly from a fundraising perspective, but we think the current level of attention to them is out of control.