Guest Articles

December 25

James Militzer

10 Takeaways from the World Bank Forum on Microcredit’s (lack of) Social Impact

“For a researcher working on microcredit, this is kind of a defining moment.”

That’s how economist and poverty researcher Abhijit Banerjee, speaking at last week’s forum Financial Services for the Poor: Lessons and Implications of the Latest Research on Credit, described the six recent studies on microcredit’s social impact (or lack thereof). And that’s why we traveled to the World Bank headquarters in Washington D.C. last Friday to attend the forum and hear Banerjee, fellow poverty researchers like Esther Duflo and Dean Karlan, and other microfinance luminaries discuss the research and its impact on the sector. Predictably, these topics sparked a great deal of debate – and a fair amount of criticism.

The research itself has been analyzed on many sites throughout the global development space – and even in the mainstream media – and we’ve discussed its potential impact on NextBillion. (If you want more, you can read a deep dive here.) But since the studies showed no real impact on poverty or living standards, I was particularly curious about how microcredit’s leading lights would respond – and what the research might mean for the sector’s somewhat uncertain future. So rather than rehashing the studies’ findings in detail, here are 10 takeaways from the conversation – covering both the research itself and the panelists’ and audience’s reaction to it. (To get a taste of this reaction in real time, check out the World Bank’s video recording of the first few panels, and the very active Twitter stream.)

The definition of “modest”

Though microcredit’s social impact might not be dramatic, it’s still positive overall, as it provides some ability to manage income shocks, acquire assets, and reduce wage labor, among other things. And as Grameen Foundation CEO Alex Counts pointed out, this modest impact becomes substantial when multiplied by the millions being served. What’s more, for perhaps 5-10 percent of clients – especially those with successful existing businesses – microcredit’s impact can be significantly greater. This led one audience member to suggest that we look at microcredit more as venture capital than as individual loans.


An impertinent inquiry

Even so, this new research is putting microfinance supporters on the defensive. A question on whether the lack of social impact in the studies signals the “death of microcredit” provoked much nervous laughter, pointed replies from panelists, and some rather forced levity throughout the day. And though some on stage spoke sarcastically about calling off the rest of the forum because the sector under discussion was “dead,” there was clearly some apprehension about what the solidifying evidence of minimal anti-poverty impact could mean for the future prospects of the sector – and of those who’ve built careers around it. For instance, an audience member asked one panel: “If you had $1 million to give to anti-poverty efforts, how much would you give to microcredit?” After considerable squirming, each panelist declined to provide a number.


Critics need new ammo

Microcredit’s most trenchant critics will also have to adjust their talking points in light of these findings. As Banerjee put it, “There is no evidence that large populations of people who are exposed to microfinance are worse off, that they become impoverished. Indeed, there’s no evidence of irresponsible spending. … We expected to find that this was either something horrible or something wonderful, and what we found was that … it’s another financial product.”


’Pharrell has a point’

In order to capture the actual impact of microcredit, it might be necessary to broaden the definition of impact. For instance, some of the studies suggested that microcredit’s failure to increase incomes might be due to people shifting from (often unpleasant) wage labor to self-employment – or simply to more leisure time. Combined with the other lifestyle benefits clients are experiencing, this prompted some to wonder if microcredit’s impact on clients’ happiness should be measured, along with their business success. In response to a question to that effect, Karlan, Duflo and Banerjee gave a brief, unanimous response: Yes!


What do clients actually want?

It’s unclear if microcredit is actually a financial product most low-income people want. For one thing, uptake in many of the countries studied was surprisingly low – ranging from 13-31 percent of eligible borrowers for MFIs in Ethiopia, India, Mexico and Morocco. And many borrowers seem to utilize microloans as savings and insurance tools, raising questions for product design around these other forms of microfinance. As Banerjee put it, “Microcredit is a savings product through the back door. You want to buy a television and you can’t ever save up, so you buy a television through a loan, and you pay it down with savings. So that’s a way to get savings discipline.” But having said that, it’s also not clear if other microfinance products can thrive. As Duflo pointed out, insurance was seen as the next microfinance frontier, “but no one wants it unless it’s given for free.” So microcredit will likely remain part of the picture – but in what form remains to be seen.


Researchers call for more … research

There was broad agreement that more research is needed, but there are questions about how it should be conducted. For instance, Banerjee was unmoved by an audience member’s suggestion that the studies’ duration may have been too short to capture long-term impact. “I would’ve loved to have found any evidence for it, but I find no change in people’s lives,” he said. “… It’s not like you see something emerge suddenly after six years.” Nevertheless, Duflo said that longer-term research is in progress. And Karlan added that it would also help to have shorter-term studies, that show exactly what people do with the money when they first get access to microloans.


The million dollar question

One of the most interesting research questions seems to be: Why are a small number of borrowers able to parlay microloans into much greater entrepreneurial success than typical clients? Duflo said there are studies that are trying to zero in on the 5-10 percent of clients who truly thrive with microcredit. However, she added, “There is no magic sauce that I know of … [to determine] who not only has entrepreneurial spirit, but who is good at it. That’s kind of the million dollar question, not just for microfinance but also for commercial banks.” Yet the common approach of combining business training with loans doesn’t really work, she said – at least not as currently practiced. As for the 90-plus percent who don’t derive major benefit from the loans: as Banerjee put it, “I think people are making the right choices, it’s just that business is not their priority. Their priority is to maybe buy a television, pay down another loan, or something. I think we haven’t done a good enough job in tracking down what they really want to do with the money, because we started with the presumption that business is what it’s about.”


What is microcredit about, anyway?

If entrepreneurship isn’t actually “what microcredit is about,” as seems to be the growing consensus of researchers, many in the sector haven’t gotten the memo. Though panelists like Counts easily dispatched the strident audience question about the sector’s death, they had a harder time with a more probing follow-up questioner, who pointed out that even bellwether organizations like Grameen Bank still feature outdated descriptions of microcredit’s anti-poverty impact – claims that look increasingly exaggerated in light of this and other research. For years, intra-sector discussions about microcredit have been focused on the future and grounded in a nuanced understanding of its strengths and weaknesses – and they’ve increasingly looked beyond its original focus on financing microenterprises. Yet some of the sector’s most visible leaders and organizations continue to emphasize the original model, leaning heavily on anecdotal success stories that portray microcredit as a life-changing approach that helps the poor work their way out of poverty. It will be interesting to see how the public face of microcredit changes in light of growing evidence of its actual uses and impact.


A touchstone in the sector’s evolution

Though it’s not clear if the researchers hoped to make a grand statement on the limitations and future priorities of the sector by publishing these studies together, that may be their ultimate impact. Though the studies started at different times and were conducted by different organizations without prior coordination, they asked similar questions, collected similar data and, as it turned out, arrived at similar findings. As Duflo said, when studies are presented individually, “there are always people who say, ‘That doesn’t apply to me, because I’m different in such-and-such way.’” But that becomes much harder to say in response to six studies in six countries on four different continents. So it seems likely that the research will become a touchstone in the evolution of the sector, perhaps adding momentum to some already-established trends, like decreases in researcher and impact investor interest in microcredit, and movement both toward new microcredit models, and toward non-credit microfinance products.


An exciting – but nerve-wracking – future

There’s a lot of excitement about the future of the microfinance sector, and in spite of discouraging impact results, microcredit is very much a part of that future. Beyond its current modest impact, it plays a key role in sustaining the business model that can allow providers to offer additional financial products to the poor. And panelists spoke excitedly – though with some trepidation – about what will happen when microcredit is digitized. As Dean Karlan put it, the thought of poor clients being able to acquire a loan after five clicks on their cell phone is “both exhilarating and scary.” And with mobile access opening new frontiers in low-cost data generation, risk management approaches and loan delivery, microcredit access could be poised to skyrocket. As the sector enters the digital era, will this new ease of access amplify its positive impacts, increase its risks – or both? In either case, when asked for the number one thing they’ll wish, in 20 years, that the sector had worked on now, many of the day’s final panelists replied with one word: trust. Without it, the uptake of financial services – whether they’re microcredit or mobile money – is likely to remain low. With it, full financial inclusion in the coming decades could be a real possibility.


(And finally, some comic relief)


James Militzer is the editor of NextBillion Financial Innovation.


Photo courtesy of Martin Fisch.

Education, Impact Assessment
financial inclusion, impact measurement, microfinance, mobile finance, poverty alleviation, research