Managing expectations, or, freeing microfinance from the role of panacea

“Can magical microfinance eradicate poverty?” asks India’s Financial Express this week. Magical. Herein lies the problem that microfinance faces today. Recent research has revealed that microfinance might not be what we thought – or what many hoped it was. It turns out we still haven’t proven that microfinance eradicates poverty, improves health, education levels, women’s empowerment, or achieves any number of other development goals and dreams we had pinned on it. And maybe we never will.

But even if ultimately we find that microfinance doesn’t achieve these original objectives, this doesn’t mean it’s not achieving anything, and doesn’t add tremendous value to the lives of the world’s poor. Through the work of FAI and others, we’ve learned that increasing access to financial services might, for instance, allow poor people to do things like smooth out erratic income, prepare for emergencies, and plan for big ticket expenses like housing or weddings.

Of course it’s still early days, and this new set of potential benefits needs substantiation as well: study timeframes were short, and there’s more work to be done. But it would be a real shame if any possibly life-changing – or even life-saving – improvement in the lives of the poor was undermined or wiped out because microfinance failed to be “magical.”

And microfinance would have to be magical indeed if it were to accomplish the goals this journalist sets for it: charging interest rates below cost, taking on the special challenge of providing agricultural credit while also marketing farmers’ produce – even solving the myriad challenges faced by the poorest of the poor (though see work on targeting the ultra poor for promising directions).

The article quotes FAI’s own Dean Karlan as saying that microcredit “isn’t the panacea that it is purported to be.” However, Karlan and the other researchers who ran the impact studies point out that “microcredit seems to have delivered exactly what a successful new financial product is supposed to deliver – allowing people to make large purchases that they would not have been able to otherwise” (The Role of MicrofinanceThe New York Times). It’s time to acknowledge the potential value of this – and that we may need to rethink our goals for microfinance entirely. But no matter where we end up, it’s clear that we need to let go of the idea of microfinance as all-powerful.

The author concludes that microcredit can be a “survival strategy,” but that it “is not the key to development.” He may turn out to be right—but that could be something to celebrate.