The GiveWell Blog

6 myths about microfinance charity that donors can do without

(updated on: ) | by Holden

Is microfinance a good bet for a donor? We feel the answer is complicated, and that the many extreme exaggerations of microfinance’s impact get in the way of making an informed decision.

This post summarizes the differences between the stories you’ve probably heard and the reality according to available evidence.

Myth #1: the way microfinance charities help is by giving people loans to expand businesses. Success stories like Andrea’s, Lucas’s and Sophia’s are representative.

Reality: there isn’t much reliable information on how people are using loans, but the evidence there is suggests that “microloans” are often used for consumption purposes: food, visits to the doctor, etc. This isn’t a bad thing – the poorest people in the world face considerable financial uncertainty, and loans can empower them to manage their own lives.

So, however, can savings, which some scholars feel are more beneficial for the poor than loans. Funding institutions to help people save may not have the same sex appeal as “lending your money to help people grow their businesses,” but it might do more good.

For more, see:

Myth #2 The best way to support microfinance is to lend your money to specific individuals.
Reality: Choosing your own borrowers is not really possible or desirable. The recent debate over Kiva.org (summarized by GiveWell Board member Tim Ogden) makes clear that even when your donation is “officially” matched to a borrower, you’re really funding an institution. And as we discuss immediately below, this is likely a good thing.

Myth #3: a gift to a microfinance charity gets lent out again and again, making its impact essentially infinite.
Reality: Many of the most important challenges of microfinance (such as developing effective outreach, creating incentives for repayment, and helping people to save as well as borrow) involve significant institutional expenses. (See our discussion with David Roodman as well as any microfinance charity’s budget.) Update 5/2010: also see our rough estimate of the overall “cost-effectiveness” of microfinance, concluding that it is hard to argue that microfinance donations in general are more cost-effective than donations to top health programs.

Myth #4: microfinance has been shown to reduce poverty.
Reality: many studies on the impact of microfinance have been done, but most have serious and widely recognized flaws. The few – and recent – stronger studies show mixed effects. The most encouraging effects are for programs that don’t fit the traditional “lend to expand a business” story.

Details at our post on evidence of impact for microfinance charities.

Myth #5: a high repayment rate means that things are going well and clients are benefiting from loans.
Reality: the repayment rate can be both technically and conceptually misleading. See our post on why the repayment rate may not mean what you think it means.

Myth #6: microfinance works because of (a) the innovative “group lending” method; (b) targeting of women, who use loans more productively than men; (c) targeting of the poorest of the poor, who benefit most from loans.
Reality: all three of these claims are often repeated but (as far as we can tell) never backed up. The strongest available evidence is limited, but undermines all three claims.

Bottom line: should you give to a microfinance charity?

We feel that the marketing of microfinance is exaggerated, excessive, and full of unsupported myths – to a degree unusual even in the world of fundraising.

Once you put these myths out of your head, the fact remains that microfinance institutions are often working with people in extreme poverty and empowering them to better manage their own financial lives. The fact remains that high numbers of clients for a product that costs clients money (interest) – while not necessarily demonstrating positive impact – suggest that MFIs are offering something clients want. All in all, this is more than most charitable causes can say for themselves.

We feel that global health is a better area for a donor overall, especially because we have identified outstanding charities in global health that have far more to recommend them than any microfinance charity we’ve seen to date. We continue to search for an outstanding microfinance charity (through methods including our ongoing grant application). Make sure you’re signed up for updates (or following our blog or Twitter) and you’ll know if and when we find one.

Good news can create new challenges for donors

(updated on: ) | by Holden

I was glad to read of a new $110 million initiative for insecticide-treated bednet distribution, which we find one of the better-established ways to spend money to improve lives.

But what does this mean for you if you’ve been giving to a malaria charity? Do independent bednet distributions now run the risk of being redundant with the new one? Has USAID provided enough funding that your donation is no longer as needed?

Unfortunately, we have no way of answering this question. While there are some attempts to coordinate government aid, we know of no one asking questions like “How much total room is there for funding distribution of bednets? How can we make sure that all the malaria organizations are on the same page? How can we track the extent to which individual donations are still needed?”

If donors focused on how to have real impact (as opposed to, say, fictions about where “their” money goes), such a question would be extremely important to them.

Agriculture charity evaluation: Incomes boosted are not the same as lives changed

(updated on: ) | by Holden

What’s wrong with this “evidence of impact” for high-profile charities?

Among other possible problems, two major issues jump out:

1. No context on what “normal” variation in incomes looks like for poor farmers. Some years have more favorable weather – and local economic situations – than others. Enough that one year’s income or crop yield could be double another’s? 4x? 20x?

Unfortunately, one of the better pieces of “evidence” that jumps to mind is a 75-year-old novel, The Good Earth, whose farmer protagonist is comfortable one year and has literally zero income the next, for no other reason than the weather. If a given year’s yield were close enough to zero, the next year could be a huge increase (2x, 4x, 20x or more) simply by returning to normal.

I have seen little information on the local year-to-year volatility that poor farmers can experience, but I imagine that it (a) varies greatly from region to region and (b) could easily involve incomes falling and jumping by enormous amounts.

None of the above reports provide any context on this question, beyond qualitative statements about how favorable the rains were in each year examined. None of them employ any sort of “comparison group” of farmers (aside from one vague reference to “farms not using improved seeds and fertilizers” in the Malawi Millennium Village). Ultimately, none accomplish one of the most basic goals of an evaluation: giving a sense of how likely the “gains” they describe are to have arisen by pure chance.

With larger sample sizes, we might be able to use country-level volatility for context. But that brings me to the next problem.

2. We have no assurance that the described gains are representative, as opposed to “cherry-picked.”

All of the above organizations have reputations for consistent and thorough monitoring and evaluation, yet in all cases, we find ourselves looking for “impact” from a tiny subset of their projects.

Some ways to produce more compelling evidence of impact

  1. Be clear about what is being measured and what is being published, and when. It seems to us that in this area, charity evaluation lags far behind clinical trials, which are constantly registered before they are complete so people can track their progress. (The Poverty Action Lab is similarly transparent with its own ongoing projects.)
  2. More sample size; more context; use of comparison groups. Discussed above.
  3. Look for more sustained improvements in people’s lives. One measure I find superior to straight “income” or “crop yields” is asset accumulation. A jump in income could be temporary; if someone upgrades their roof or sanitation, it’s likely that at least they expect the gain to be a real and lasting one. The Village Enterprise Fund’s evaluation is one of the better charity evaluations I’ve seen in the area of economic empowerment, partly because it focuses on standard of living rather than a simple measure of income.

*It’s possible that the yields mentioned are for “clusters” of villages rather than individual villages; there are only 12 clusters. However, the source documents available for Sauri and Koraro appear to be at the village rather than the cluster level, and the details of how the measurements were made are unclear.

Are charities helping? We don’t know

(updated on: ) | by Holden

In a recent debate, David Hunter’s article on the nonprofit sector has taken heat for its assertion that “While nonprofits work incredibly hard, with passion and dedication, and often in incredibly difficult circumstances to solve society’s most intractable problems, there is virtually no credible evidence that most nonprofit organizations actually produce any social value.”

We agree with the claim for the sectors we’ve examined, which we believe are similar to the sectors Mr. Hunter has examined: particularly thorny areas such as charities working to improve education and international charities addressing extreme poverty overseas. These are problems on which experts have struggled for decades to make any progress, and while we don’t necessarily agree that most charities are failing to produce value, we agree that most charities cannot produce any credible evidence that they are. This is different from the claim that Sean Stannard-Stockton attributes to Mr. Hunter (“most nonprofits and the social sector as a whole is not currently producing social value”), but it still means that it’s very hard for a donor to give with confidence.

The information we have

Our belief is based on two years of looking for this evidence; we’ve published the full details of our findings online, and you can see our summary of international charities (only 19 out of 320 examined publish any impact-related evaluation reports) and U.S. equality of opportunity charities (only 6 of 83 examined provide credible impact-related reports, and 2 of these show negative or no impact).

In addition, in a guest post on the GiveWell Blog, David Anderson of the Coalition for Evidence-Based Policy estimates that 75% of rigorous evaluations show weak effects, no effects, or negative effects.

More information needed

On the other hand, we also believe the criticism that Mr. Hunter doesn’t support his own claim with evidence has merit. We would like more clarity on which sectors Mr. Hunter has examined and is referring to, and information on where he has looked for evidence and what he has found.

In addition, we feel that examples of failing/harmful programs, such as “Well intentioned but ineptly run mentoring programs where failed matches reinforce in youngsters a sense of their low worth and poor prospects” (and the other items on the list on page 2 of the article) should be clearly referenced to summaries of evidence.

The truth is that we cannot have a very informed debate about how much value nonprofits create because we have so little evidence of any kind. Some people adamantly believe that nonprofits create enormous value; others are skeptical that they create any; and there is very little to go on, at least in the sectors under discussion.

Nonprofits that do have credible evidence of their social impact

The good news for donors is that they need not be in the dark if they give to the right charity. Our top-rated charities do produce credible evidence of their social impact. We encourage individual donors to expand and fund these charities until and unless others follow suit.

Is fundraising stuck in the world of Mad Men?

(updated on: ) | by Elie

Advertising is based on one thing: Happiness. And you know what happiness is? Happiness is the smell of a new car… It’s freedom from fear. It’s a billboard on the side of the road that screams with reassurance that whatever you’re doing is okay. You are okay. — Don Draper on AMC’s Mad Men. (Video on YouTube.)

I sometimes wonder how Don Draper would react to someone telling him that in 2009, many consumers make their buying decisions based on a product’s quality rather than the feeling a product’s advertising instills in them, or the narrative in which the ad places them.

I picture Don saying, “User reviews? Restaurant ratings? Product testing? No way. That’s just not how consumers are hardwired to think.”

When I see Sasha Dichter and Nathaniel Whittemore saying the same thing, I wonder whether they’re right that the problem is donors as opposed to the information donors have access to.

Sure, it’s possible that donors are hardwired a certain way and may never care about the real impact their gift has. But it’s also possible that many donors would look past happiness and use information on impact – if only it were easier to find. That’s what we’re trying to bring about.

What’s different about Kiva

(updated on: ) | by Holden

Why has Kiva been singled out for so much criticism lately (see GiveWell Board member Tim Ogden’s summary)?

Part of the answer is that Kiva has arguably been misleading donors – but that can’t be the full answer. David Roodman’s original post could never have come about without the fact, as Mr. Roodman puts it, that “the way Kiva actually works is hidden in plain sight.” And our followup analysis on repayment rates was only possible because Kiva makes all its repayment data publicly and easily available. As Elie said in that post, “Similar analysis would be impossible for nearly every other charity I can think of.”

Contrast Kiva with, for example, UNICEF. Kiva makes it possible to trace the path of your donation, to the extent that such tracing is realistic (and it largely turns out to be more along the lines of “you funded a certain MFI” rather than “you funded a certain person”). UNICEF doesn’t even seem to have a breakdown of how much money is going to each continent. We definitely can’t find information on questions like (a) What specific projects are you funding? (b) What is your role in each? (c) What new projects are planned, and where? (d) How is each project going, whom is it affecting, and how?

There are no strange patterns in UNICEF’s numbers because there are no numbers. There are no contradictions because there is no concrete information. And the intent here isn’t to single out UNICEF – it’s merely one of the vast majority of international aid organizations about which we know essentially nothing.

Giving an impression to donors that’s undermined by the facts is a minor scandal. When will complete opacity – simply sharing no information at all – be a major one?