PAPER WRAP-UP: Beware of Bad Microcredit by Steve Beck and Tim Ogden

By Steve Beck and Tim Ogden. Harvard Business Review, September 2007, Vol. 85 Issue 9, pp 20-22, 2 pages

In their short article published in the Harvard Business Review, Steve Beck and Tim Ogden warn that, though microcredit programs can be highly effective, companies need to exercise caution before investing in them because of the risk for such investments to backfire, both from a social development and a public relations standpoint.

Increasingly, companies are investing in microcredit initiatives as part of their corporate social responsibility (CSR) systems. They are attracted by the seemingly endless upsides: the prospect of alleviating poverty, the non-handout ideology of helping poor entrepreneurs help themselves and the lure of regaining their investments, thus helping more people with less money.

Mr. Beck and Mr. Ogden speak from experience when they state that microcredit has the potential to be effective in increasing school enrollment, empowering women, improving nutrition and increasing household incomes. The two currently work at Geneva Global, a seven-year-old charitable investment advisory firm that encourages its philanthropist clients to invest in, among other ventures, responsible microcredit programs. Mr. Beck is the CEO and Mr. Ogden is the Chief Knowledge Officer. Currently, Geneva Global has USD 58.3 million in client investment, 126 worldwide staff, and investments in 110 countries. According to the article, in the past three years, they have brokered investments in over 150 microcredit providers.

But, this article argues that despite the hype, poverty is resistant to silver bullets. Though a plethora of heart-warming case studies exists, there is little systemic evidence suggesting that microcredit borrowers escape poverty directly, quickly or frequently. While there is a shortage of data demonstrating the benefits of microcredit, there is also evidence that some programs may actually exacerbate problems by spiraling borrowers further into debt.

In a recent analysis by MIT’s Poverty Action Lab, researchers Abhijit Banerjee and Esther Duflo evaluated dozens of studies on the economic habits of the poor. Their findings indicate that, regardless of country or continent, very little of each additional dollar of disposable income is spent on any kind of investment, or even on food and shelter. This confirms what many heads of microfinance institutions (MFIs) have admitted privately and what John Hatch, the founder of FINCA International, has said publicly-90 percent of microloans are spent on current consumption, not on stimulating enterprise. The authors cite Bangladesh as an example of the low impact that microcredit has on development. In 1991, Bangladesh was ranked 136^th on the UN Development Programme’s Human Development Index. In 2006, despite high microcredit penetration (one in four households had a microloan in 2001), Bangladesh was ranked 137^th.

The dangers of bad investment are twofold. From a social development perspective, investment in ineffective microcredit programs siphons funds from the best programs and threatens their continued operation. From a corporate public relations standpoint, companies that make low-value or harmful investments risk attack for the impact of their CSR activities. Recently, many companies have been exposed for attempts to “green wash.” As reporters cover more and more stories on failed microcredit ventures, organizations may receive bad press for “poverty washing.” Experts in the industry are also increasingly wary of the sweeping promises of microcredit. In this environment, an investment in the wrong microfinance provider could not only fail to help borrowers escape poverty, but also taint the reputation of even the most well-intentioned investor.

There are several promising trends in the industry, including improvements in outcome measurement and reporting, influx of capital with precise financial and social benefits requirements and growth of commercial MFIs with the scale and discipline to drive down costs of service delivery. These trends are just emerging, and, as in any program, expert due diligence is critical.

The main challenge for CSR leaders looking to make informed investments in microcredit is still the lack of standardized, easily accessible, outcome-based measures that would foster better decision making.

In order to make the best possible investments, the authors encourage leaders and their organizations to do three things.

1) Insist on a set of clearly-defined measures of success (income growth, quality of housing, school enrollment and nutrition) and be willing to pay for the measurement.

2) Invest in improving the effectiveness of the entire microcredit industry, for example, by supporting literacy training for borrowers or improving access to technology that decreases the cost of lending.

3) Seek out opportunities to support small- and medium-sized enterprises (SMEs) in regions of poverty.

Ultimately, the article concludes, businesses that create stable jobs and strong economies are the only proven poverty reducers.

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