The GiveWell Blog

What does the repayment rate really tell you about the impact of microfinance?

(updated on: ) | by Holden

We wrote last week that the direct evidence of microfinance’s impact is less than overwhelming. However, many believe that direct evidence is not needed – that as long as microfinance institutions demonstrate high “repayment rates,” they can be assumed to be improving lives. The logic goes that if a person is able to repay their loan with interest, they must have used it productively.

We believe the repayment rate doesn’t tell you nearly enough to have confidence.

Concern 1: what does the “repayment rate” actually mean?

One of the things that has surprised us, as we’ve looked into microfinance, is that we haven’t seen a clear or consistent definition of the “repayment rate” often featured on charities’ websites.

The excellent MixMarket site is a clearinghouse for standardized information from MFIs. But looking through its glossary doesn’t turn up any statistics that are clearly equivalent to the repayment rate (i.e., the percentage of loans due that are repaid on time). The closest items appear to be:

  • “Loan loss rate”: the loans written off (minus any payments recovered post writeoff) divided by the total outstanding loan balance.

  • “Portfolio at risk > [XX] days ratio”: the loans that have a payment past due more than [XX] days, divided by – again – the total outstanding loan balance.

One problem with both of these statistics is that they are taken as a percentage of loans outstanding, not loans due. In other words, if one takes either of these measures as the inverse of “repayment rate,” an MFI can inflate this “repayment rate” simply by growing its loan portfolio (making loans that aren’t yet due). Consider the simplified case of an MFI that has made $1000 worth of loans that are all past due, and $2000 worth of new loans that aren’t due yet. In this case it will list a “loss rate” of only 1/3, even though all of the loans due have failed to repay. This is an especially serious concern because of how common it is for an MFI to be rapidly expanding its loan portfolio. Out of 257 MFIs we examined with the relevant data, 82 have seen their portfolio grow by 50% or more in the most recent reported year, while 21 have seen 100%+ growth.

In addition, both of these statistics rely heavily on which loans an MFI chooses to “write off.” An MFI that chooses to hold bad loans on its books could have a very low “loan loss rate”; conversely, an MFI that chooses to write off many loans could have a very low “portfolio at risk” (since a loan that is written off is no longer considered part of the portfolio).

We spoke with Accion International and asked about the figure on its website claiming a historical repayment rate of 97%. We were told that this figure is calculated via “loans paid” divided by “loans due,” which distinguishes it from both of the standardized figures listed above. However, we were also told that loans can be counted as “repaid” even if they’re restructured (i.e., the terms of the loans are changed to accommodate late or incomplete repayment). Another microfinance charity, FINCA, has told us that “portfolio at risk” (discussed above) is the metric used.

Bottom line: the “repayment rate” figure is highly subject to interpretation, unless the organization giving it is very specific about how it’s calculated.

Concern 2: is a repaid loan always a good thing?

This question has been discussed at length on David Roodman’s blog about microfinance. Some concerns:

Concern 3: who is taking out the loans?

Are the people served by MFIs extremely poor? Relatively poor? Relatively wealthy? Moneylenders themselves, taking advantage of donor subsidies?

When donations are used to offer a loan at a below-market rate, a loan may be quite functionally similar to a a cash gift, especially if funds can be re-lent informally (and studies such as Portfolios of the Poor suggest that the informal market for lending is quite active).

Note that a high repayment rate could partially be the product of wealthier clients’ repayments, even if repayments from lower-income clients are less reliable.

Beyond repayment rates

Here is some of the information we think an MFI can provide to address the concerns above:

  • A clear and explicit definition of “repayment rate.” Are “loans outstanding” implicitly counted as “loans repaid” (as in the MixMarket measures we discussed) or does the rate only include loans due? Can loans be counted as repaid when they have been restructured or delayed? How common and drastic are restructurings and delays?
  • Information on clients’ incomes and standard of living. How are clients selected? How poor are clients?
  • Information on client turnover. How often do clients leave the program, and for what reasons? (Presumably, clients would be more likely to continue taking out loans if the loans were truly beneficial for them.)
  • Rigorous impact studies, which we’ve discussed at length.

Microfinance evidence of impact

(updated on: ) | by Holden

David Roodman posts a review of recent high-quality studies of microfinance.

Note that prior to these fairly recent studies, most impact studies in this area had serious flaws, as Mr. Roodman notes and as we argue in our year-old review of this area.

The studies Mr. Roodman discusses are randomized controlled trials, and so their conclusions are far more trustworthy. But the conclusions are also generally less encouraging.

  • A consumer loan program in South Africa (i.e., loans that were not specifically for business expansion) had very positive effects: “Six to twelve months after they applied for the four-month loans, unrejected applicants were 10 percentage points more likely to have a job, 7 points less likely to be below the poverty line, and 6 points less likely to report that someone in the household had gone to bed hungry in the last month than those rejected.” (This study is included in our year-old review of this area.)
  • A Philippines microcredit program targeting the middle class found “no changes in household income, spending, or diet 1–2 years later.”
  • A savings program “appeared to help [women] accumulate money for investments such as stock for their stores, leading eventually to greater prosperity.”
  • The one study of a traditional microfinance program targeting the very poor found “no impact on total income, spending, health, or school enrollment rates” overall, though some subgroups appeared to benefit.

It seems to us that rigorous studies have not shown the impact implied by success stories, and that the most encouraging effects have come from programs that are not centered around business expansion loans.

GiveWell grants awarded

(updated on: ) | by Holden

Note: this post does not refer to the economic empowerment grant whose process we opened on August 4. That process is still ongoing, and the funds we will grant there are in addition and distinct from the funds discussed below.

Having released our updated recommendations for international aid, we will be making grants to the two charities we have designated as “top-rated.” These grants are being made from restricted funds: donations made to GiveWell and earmarked for regranting to top charities.

We are splitting the available funds between our top two charities, and are therefore granting a total of $85,047.10: $42,523.55 to VillageReach and $42,523.55 to the Stop Tuberculosis Partnership.

We are also recommending that our donor-advised fund grant $12,523.94 to VillageReach and $12,523.94 to the Stop Tuberculosis Partnership. (In general, we make grants from this fund according to donor wishes, as specified at our GiveWell Advance Donation description, but these grants are attributed to the startup funds that GiveWell put into the fund.)

That makes a total of $110,094.98 that we are directing (through grants or grant recommendations) to top charities. This does not include GiveWell Pledges, GiveWell Advance Donations, or any other case where donors give using our research.

We still have $250,000 that is earmarked for regranting specifically within economic empowerment, and are conducting an open application in order to identify the grantee.

Tactical Philanthropy Advisors

| by Holden

Sean Stannard-Stockton of Tactical Philanthropy has launched a philanthropic advisory service for giving customized advice to major donors.

According to Give and Take, the firm is already advising roughly $35 million worth of future gifts.

This is good news because Sean is, among other things, a longtime advocate for extreme transparency in the nonprofit sector. We hope – and believe – that he will share as much as he publicly can about the giving processes he’s helping with, and that this step represents an increase in the influence he’s able to exert as a transparency advocate.

Cleft lip/palate charities: What does one surgery really accomplish?

(updated on: ) | by Elie

It’s clear why donating to charities that fix cleft palates and other deformities – such as SmileTrain or Interplast – is popular among donors: the donation’s impact seems extremely tangible. A donor can see “before” and “after” pictures of children, and feel that the donation helps a child with serious problems become a “normal” child. But in our view, those “after” pictures don’t fully represent what’s going on.

To see why, consider these profiles of cleft repair patients in the U.S. Going through the profiles starting with “A” (33 of them), we see 11 mentions of multiple surgeries (including nine in one case and seven in another) and 6 other profiles that mention the prolonged use of equipment such as a NAM device. An additional 3 mention other major birth defects, and one states that a single surgery “has not helped [the child’s] speech.” One child’s treatment is chronicled in a 27-page journal.

By contrast, it appears that cleft palate charities (both those that conduct surgical missions and those that pay local doctors to perform surgeries) often provide only one surgery for each child, with no follow-up. (See, for example, question 26 of our interview with a surgeon.)

How much good does performing one cleft surgery actually accomplish?

I think it probably accomplishes some good, but I think it’s fair to say that it probably doesn’t accomplish what donors expect: transforming a child that would have lived a very difficult life as something of an outsider into a fully “normal” child.

“A” for effort?

(updated on: ) | by Holden

Sean at Tactical Philanthropy has continued his discussion of “high-performing” vs. “high-impact” organizations, which we previously commented on. The message he is sending (see posts here and here) is partly that we need to take the emphasis off of “funding organizations that have shown results” and put it on “funding organizations that seem ‘on the way’ to proving results.”

I believe there is a place for funders who invest as Sean advocates. However, I think that when taken too far, the idea of rewarding charities for being “on the way” is damaging – and the idea is currently being taken too far.

As we’ve written before, our experience is that there are far more nonprofits with impressive evaluation processes and evaluation plans than there are nonprofits with impressive evaluation results. The ratio is so out of whack that it actually appears to be systematic, not an accident of timing.

When you see – as Sean does – that “very, very few nonprofits have ever gone through extensive analysis that has proven that their programs have impact,” you can react in one of two ways. You can hold up those few as the best targets for more funds (especially from casual donors), or you can decide that the “high-impact” bar is too high altogether. The problem with the latter approach – at least when too many funders take it – is that there are no financial incentives for charities to show actual results, as opposed to showing impressive processes and plans.

We believe that what gets rewarded is what gets done. We hope to reward proven impact, leading to more proven impact. We believe that rewarding promises will lead to more promises.

There is also a place for funders who reward the nonprofits that are “on the way” – as Sean observes, without such funding no nonprofits could even get off the ground and become high-impact. But someone has to save their donations for the charities that have actually gotten results – and for reasons we outlined before, we think that someone can and should be individual donors.

A couple of other observations on this discussion:

  • It’s refreshing to see widespread acknowledgement that “high-impact nonprofits” – nonprofits that can truly demonstrate past success – are incredibly rare. It’s worth keeping in mind next time you are confronted with traditional nonprofit marketing.
  • Sean believes that identifying high-performance nonprofits can be easy. We disagree, but rather than getting into a theoretical debate, we prefer that Sean (or someone else) try to apply the proposed method to actual charities, and make recommendations for giving within certain causes. At that point it should be easier to assess how viable this approach is.