Setting new benchmarks for the impact of microfinance

What do we do now that two impact studies from the Philippines and India say that microfinance isn’t such a big deal after all?  The Microfinance Working Group at Columbia took on this question in a panel on “Taking stock of microfinance: Does it really help the poor.”  An ambitious topic to cover in one hour, but the panelists did a commendable job (a full recap of the discussion is available on the Social Performance Indicators blog).  

For me, the most interesting discussion was how these two impact studies have changed the tone of the conversation within the microfinance industry. 

The panel opened with a quote from Jonathan Morduch’s 1999 paper "The Microfinance Promise", "the ‘win-win’ rhetoric promising poverty alleviation with profits has moved far ahead of the evidence, and even the most fundamental claims remain unsubstantiated."

Thanks to the two impact studies, we now have some evidence, but it remains mixed.  Researchers found no impact of microfinance on welfare indicators such as household spending, women’s input on spending decision or school enrollment.  But, in India researchers found  positive impacts on the number of new businesses created, spending on durable goods, and reductions in temptation (consumption) goods.  While these results are clearly a far-cry from the poverty reduction rhetoric that’s been trumpeted, they show some benefits for some users.  The question is whether these benefits are sufficient. 

The studies present an opportunity to reopen the conversation on expectations.  What should we expect successful microfinance programs to achieve?  If we agree that microfinance is not a silver-bullet, what kind of bullet is it?  Do programs have to demonstrate an improvement in well-being, or is it sufficient that they allow households to better cope with life’s uncertainties?  Is it enough if the bullet does no harm?  

Microfinance advocates and practitioners claim that the best evidence of the impact of microfinance is the wide-scale demand for microfinance programs.  The fact that millions of households are microfinance customers means that the products must clearly be doing some good.  Otherwise, why would households want them? 

I agree with this argument - partly.  Financial diaries research from Portfolios of the Poor clearly shows that poor households lead intense financial lives and could benefit from suitable financial products that address their needs.  But, I have reservations. Simply pointing to a ready-market is not enough.  New evidence from behavioral economics and the recent sub-prime crisis demonstrates that households don’t always make the most optimal decisions.  We need to better understand the needs of households and how products and services affect a household’s well-being; these recent impact studies allow us to do just that.