NB Financial Innovation
No Silver Bullet: While microfinance alone won’t end poverty, it is making an impact – so let’s re-focus it to serve the poor
The debate about the contributions that microfinance is making to global poverty alleviation is an interesting one. But it’s also getting a little tedious.
We are all disappointed that microfinance has not, as the popular culture has promoted it, proven to be the “silver bullet” for poverty alleviation. If, however, we challenge ourselves to really understand (and be transparent about) the strengths and limitations of microfinance, and begin to think about it as just one part of a more comprehensive package of development services, the debate (and potential for impact) becomes much more interesting.
Freedom from Hunger has spent the last 25 years documenting the impacts of microfinance, and using that research to inform and inspire other practitioners to move beyond just providing poor people with access to financial services. We have always believed that the real opportunity is to leverage the platform and infrastructure of microfinance to reach poor people with other tools that, when combined with savings and credit, help them to escape hunger and poverty.
What Do We Know?
We know that microfinance is not lifting the majority of clients and households out of poverty (or even sustainably raising their incomes). However, if we look at it through this lens alone, we are missing half the picture, along with some very exciting positive impacts for poor people.
My predecessor, Chris Dunford, took a systematic look at the impacts of microfinance in the Evidence Project blog, and Freedom from Hunger continues to study and document the impacts of our own work and that of other leaders in the field. Here’s what we have learned over the past 25 years:
1. Microfinance is a good thing. It provides reliable credit options for poor households to smooth consumption. In some cases, it is paired with savings options that are reliable, safe and convenient, and that help poor households protect and build assets.
2. Microfinance in groups can be even better. In societies that already have high social capital, providing financial services through groups can further augment social capital and empowerment. However, joint liability can be problematic, and the evidence suggests it is not necessary, since high repayment rates can occur within group-based microfinance even without it.
3. Access to microfinance improves household consumption-smoothing and shock-coping. This is one of the most important and solid findings of the Evidence Project. The most significant impact of microfinance services (credit, savings and/or combinations of both) seems to be in building household resilience and helping poor (especially very poor) households to smooth their consumption and cope with shocks. The higher the quality of services, the greater the impacts. By simply expanding high-quality microfinance services to poorer beneficiaries, we will likely achieve greater impact, especially when we talk about hunger and food security.
4. Microfinance must intentionally do more to have important impacts on household poverty. To reduce poverty, you must reach poor households. To reduce poverty, you must also increase household income. Microfinance alone does not raise household incomes. Poverty reduction happens most readily in households that have a microenterprise. Thus, the services for these particular households must offer accompanying non-financial services that improve the profitability of their microenterprise(s).
5. Microfinance must intentionally do more to have impacts on women’s empowerment. Just by providing financial services to women, organizations can improve the self-confidence and social capital of beneficiaries. They can also unintentionally dis-empower. This shouldn’t be left to chance. Organizations must intentionally train staff to build relationships of trust with beneficiaries that, in turn, augment social capital and personal empowerment.
6. Microfinance must intentionally do more to have important impacts on family health and nutrition. Illness is one of the most common reasons the poor stay poor, or fall back into poverty. There is a strong business case for microfinance institutions (MFIs) to provide health services, and a strong social case for MFIs and non-governmental organizations (NGOs) to incorporate health products and services, but institutional commitment is vital in order to provide high-quality services. A recent longitudinal study of the health protection program, jointly developed by Freedom from Hunger and its Indian MFI partner Bandhan, showed that five years after the program was concluded, women who participated remain much more likely to know and use the health practices that they learned. As importantly, they are more likely to share that knowledge with their friends and family, thereby magnifying the impact throughout their community.
7. Quality field agents are the key ingredients for enhanced impacts of microfinance services. Field agents are themselves agents of change. They are responsible for creating the trust that is necessary for the poor to get and stay engaged with financial services. This relationship between field agent and beneficiary is the foundation for building successful group-based microfinance and must not be underestimated. Whatever technological innovations are introduced to improve efficiency must complement, rather than replace, the relationship and trust between field agent and beneficiary.
The Evidence Project showed that microfinance programs can and do have important impacts when the right people are reached with appropriate, high-quality services. But it also shows us that we cannot stop at providing access to credit and expect significant impacts on poverty alleviation.
Credit, savings, insurance and payments provide families with important consumption-smoothing and shock-coping mechanisms that are valuable contributors to poverty alleviation. Well-designed financial and non-financial services are necessary for helping the poor increase their actual income, but this is most likely to happen with a smaller subset of beneficiaries who have the opportunity to become successful entrepreneurs.
Both financial and non-financial services are necessary if the goal is to support household resilience, poverty alleviation and reduction, and household food security. However, if these services are delivered poorly, the impacts will be inconsistent. It is for these reasons that the Smart Campaign, the Social Performance Task Force, MicroFinance Transparency and TrueLift are so critical.
Where Do We Go Now?
The public has come to expect that financial service providers who engage in microfinance (including MFIs, self-help groups, rural banks, cooperatives and savings-group promoting institutions) embrace a mission to alleviate or reduce poverty. Much of the recent criticism of microfinance stems from a growing disconnect between the original aims of microfinance and the directional choices that we, as a sector, have made. If we continue to move up-market, we not only betray the original promise of microfinance, but we also lose a tremendous opportunity for deep and sustained impact.
Despite this, the microfinance community still has an opportunity to deliver on its original promise to serve the poor. Moreover, we can do so in a way that also contributes to the sustainability and financial performance of the sector at the same time. With more than 200 million clients worldwide, microfinance providers have proven to be a durable and sustainable channel for reaching poor families. The innovations that we are seeing from many of our sister organizations in the sector are very inspiring, impacting everything from agriculture, savings and housing to education and mobile technologies. Imagine how the debate would change if the microfinance sector was contributing in a significant way to national and global health-improvement targets, especially in the areas of maternal/child health and nutrition. Now THAT would be impact!
Freedom from Hunger has been beating the drum for cross-sectoral collaboration for more than two decades. We have demonstrated the business case for MFIs to integrate microfinance and health, and we hope that what we are learning and sharing with our peers will help build enthusiasm for, and commitment to, increased collaboration between the health and microfinance sectors.
Microfinance as it currently stands is, on balance, still generating strong positive outcomes for clients. When these impacts are balanced against the negative ones, it’s still doing real and lasting good. However, while credit alone is not the transformative silver bullet that some feel was promised, there remains tremendous potential to build on what we have accomplished.
We cannot turn a blind eye to the problems. Yet as a community, there are a lot of very real positives to point to. We need to refocus the discussion around microfinance to how we can go further and do more to reach and serve the poor.
Steve Hollingworth is CEO of Freedom from Hunger, a US-based international development organization that fights global hunger and poverty by developing, testing and disseminating financial services that, when paired with other development services, help the poor overcome hunger.