Hopefully Not the Final Word on Microcredit (Part 2)

Despite the long-awaited publication of six impact evaluations of microcredit, there are still many questions to be answered. But I worry about whether we will ever get answers. I don’t think that anyone involved in the impact evaluations would consider them to be the “final word” but that may be, de facto, what they are.

Why?

Back in 2011 the Development Impact blog published a survey of young academics which listed microfinance as the “least under-researched” topic in development. In other words, up-and-coming researchers were saying that enough work had been done on microfinance. You can be sure that ambitious economists looking to make their mark are not going to direct their limited energies toward a topic they think is well-covered. Indeed, while I haven’t done a thorough analysis of this, my impression is that there have been a declining number of papers devoted to credit in the last few years at NEUDC, one of the best places to see new academic work. Whether or not the impact studies are the final word on microcredit, they may be the final word in academic interest.

Of course, we don’t necessarily need academic economists to answer the many, many questions that remain. But we do need careful and directed innovation and experimentation. That costs money. If philanthropic and aid funding of microfinance pulls back along with the academics, we’re really not going to get answers.

Microfinance organizations simply cannot generate the profits necessary to fund innovation and experimentation—it will have to be subsidized. Margins for most (even nominally) profitable MFIs are thin—and even if they were able to generate more surplus there would be plenty of negative pushback. The situation is actually worse that it might seem however. Most MFIs are receiving a greater subsidy than the raw numbers make it appear (this is a claim based on forthcoming work by Robert Cull and Jonathan Morduch; stay tuned). Exploring new products and better targeting is not likely to be a high priority for MFIs seeking to shore up their profitability and reduce reliance on subsidy (if indeed it does pull back). In an environment where subsidy for microcredit innovation erodes, it is predictable what MFIs will do: they’ll move upmarket and become more conservative.

MFIs that rely less on subsidy serve wealthier customers and are less likely to serve women. Serving poor customers or inventing new, risky products is not going to be as profitable as serving better-off customers with tried and true products. This is, in part, why traditional banks weren’t serving the poor before the microcredit “revolution” and why they still aren’t.

There is an irony here. For the better part of a decade, industry observers, myself included, have been questioning “impact investment” and subsidy flowing to microfinance based on the idea that microfinance was delivering large social benefits. Now that we have reasonably good answers to the question of impact, those flows may decline. But if philanthropic and aid dollars start to finally move away from microcredit, investing in microcredit innovation could become, at long last, a “best buy” in development funding. Microcredit innovation that improves the products and expands their reach significantly won’t likely happen any other way. Still, it will require “smart subsidy”, quite different from the way capital has flowed to the sector historically, but that’s the topic for another post.