By David S. Gibbons, Commissioned Workshop Paper, 2011 Global Microcredit Summit, June 2011, 16 pages, available at: http://www.microfinancegateway.org/p/site/m/template.rc/1.1.13634?cid=PSD_MFGatewayBulletinEN_W_EXT
In this paper, the author argues that many studies on the impact of microfinance frame their question poorly, leading them to fail in assessing the positive impact of microfinance on poverty.
As evidence of this impact, Dr Gibbons cites the high degrees of satisfaction expressed in surveys of borrowers from the Indian nonprofit microfinance institution (MFI) Cashpor Microcredit as well as the generally high repayment rates observed in the sector and the rapid spread of microfinance across the world.
Dr Gibbons finds a significant gap between the opinions of clients that claim microcredit reduces poverty and the results of various randomized controlled trials (RCTs) that show no such impact. He argues that this discrepancy is due to the poor choice of questions in RCTs.
For example, in a recent study called “Measuring the Impact of Microfinance: Taking Another Look,” Kathleen Odell argues for the importance of RCTs in attempting to determine whether “women who have continued access to microfinance have significantly higher household incomes than similar women who don’t have such access.” Dr Gibbons argues that the answer may not be the same for all poor women, irrespective of their physical and entrepreneurial acumen. Instead, the author suggests that the research question should be presented as, “Is continued borrowing of microfinance – for say at least 5 years because the loans are small – strongly and positively associated statistically with being no longer poor?”
While some RCTs seek a correlation between microcredit use and increased incomes, Dr Gibbons contends that sustained access to microfinance helps poor women, “but not always in the form of increased incomes.” He argues that this is due to the vulnerability of poor people to shocks such as seasonal food shortages, illness of household members, natural disasters and social obligations.
Furthermore, the relationship between opportunities for employment and interest in microfinance is inversely related: demand for microfinance decreases when more employment opportunities are available and vice versa. For example, in Malaysia poor women have better wage employment opportunities, so their demand for microfinance is low. However, in many poorer countries in Asia, Africa and Latin America, employment opportunities for poor women are inadequate, resulting in significantly higher demand for microfinance among poor women.
The author argues that a major problem with RCTs is that they require the “control group” to be deprived of financial services during the study period. In India, Bangladesh and other poor countries where microfinance outreach is growing fast, finding a control group is difficult.
Another issue that can affect the utility of RCTs is that poor people may not reveal to researchers all of the financial transactions that they conduct. Poor people, “with or without access to microcredit,” normally live with many financial transactions including borrowing from loan-sharks, relatives, shop-keepers or from a second or third MFI to repay their loans. There may be other informal savings or borrowing arrangements among friends or relatives, with or without interest being charged. Analysis based on data lacking this aspect of people’s lives may be misleading or may carry so many qualifications as to be useless in the real world.
The author endorses the use of the Progress out of Poverty Index (PPI) to estimate whether a person is poor before and after her use of microcredit. He also suggests that since public money no longer plays a significant role in the financing of MFIs, governments should not be much concerned about the social impact of MFIs. Finally, the author argues that poor people should ultimately decide on the effectiveness of microfinance, based on whether it responds to their needs.
By Ashim Kar, Research Associate
Sources and Additional Resources:
Gibbons, David S. (2011). “The Debate on Outreach & Impact: What do We Know and How do We Know it?”, Commissioned Workshop Paper, 2011 Global Microcredit Summit, Valladolid, Spain, available at: http://www.microfinancegateway.org/p/site/m/template.rc/1.1.13634?cid=PSD_MFGatewayBulletinEN_W_EXT
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