NB Financial Health
Weekly Roundup – 2/20/15: A Turning Point in the Evolution of Microfinance?
There have been plenty of studies on the social impact of microcredit, and many that have raised serious doubts about its effectiveness. But something about the latest research – published last month in the American Economic Journal: Applied Economics – feels different.
The stature of the researchers, which include some of the top names and organizations studying solutions to global poverty, is likely a factor. And so is the nature and scope of the studies – randomized evaluations on the impact of microcredit on poverty reduction, conducted from 2003 to 2012 in six countries on four continents, including Bosnia and Herzegovina, Ethiopia, India, Mexico, Mongolia, and Morocco.
But probably the biggest factor in the resonance of these new studies is the fact that they so consistently undermine the microfinance sector’s once-lofty claims. To quote their introductory paper, “The studies do not find clear evidence, or even much in the way of suggestive evidence, of reductions in poverty or substantial improvements in living standards. Nor is there robust evidence of improvements in social indicators.” As Esther Duflo, co-author of the India and Morocco studies put it, “These loans do help, but the changes are not transformative, certainly not transformative enough to justify charitable donations to the standard microcredit model.”
In light of such a definitive assessment, it was no surprise that some in the global development world responded by asking (rhetorically) if this was “the final word on microcredit.” Yet the studies also provided little support for microcredit’s harshest critics, who argue that microcredit puts borrowers at grave risk of over-indebtedness. Even when individual lending took place at high interest rates, the research showed little evidence of harmful effects, on average. And it found that microcredit offered some benefits in helping people optimize the ways they earned, spent and invested money, and managed their financial risk.
But though few believe that these studies will end the debate over microcredit as a poverty alleviation tool, some analysts have speculated that they actually could contribute to a reduction in academic interest and subsidies flowing to the sector – in spite of the multiple unanswered questions that remain. Others have expressed the hope that they’ll spark needed changes in microcredit models, while pushing the microfinance sector to focus more on savings and other products that go beyond credit. So while it remains to be seen if they’ll become a turning point in the sector’s evolution, it’s clear that these studies have already had a major impact.
That’s why we’ll be heading to Washington D.C. to cover next week’s forum, “Financial Services for the Poor: Lessons and Implications of the Latest Research on Credit,” which will take place from 9:00 a.m. to 5 p.m. on Feb. 27. Held at the World Bank Headquarters and jointly organized by The World Bank Group, CGAP, IPA and J-PAL, the event will bring together investors, donors, financial service providers and researchers to discuss the implications of this research for the industry. Including several of the authors of the studies under discussion, the forum will offer a unique opportunity to reflect on the new findings and the overall body of evidence on microcredit, and to explore promising innovations in product design and delivery channels that could expand its impact.
The first three hours of the event will be webcast live at live.worldbank.org. Live-tweeting will be provided by @NextBillionFI, along with @CGAP and @WorldBankLive, and you can follow and join the conversation on Twitter at #WBlive and #Microcredit2015. You can read the agenda here, and check out the line-up of participants below.
Moderator: Stella Dawson, Chief Correspondent, Thomson Reuters Foundation
Bertrand Badré, Managing Director and World Bank Group Chief Financial Officer
Peer Stein, Director, Finance and Markets Global Practice, World Bank
Orazio Attanasio, Professor of Economics, University College London
Abhijit Banerjee, Ford Foundation International Professor of Economics, MIT; co-founder and co-director, J-PAL
Gerhard Coetzee, Senior Financial Sector Specialist, CGAP
Jaikishan Desai, Senior Lecturer and Director of International Students, Victoria University of Wellington
Esther Duflo, Abdul Latif Jameel Professor of Poverty Alleviation and Development Economics, MIT; co-founder and co-director, J-PAL
Martin Holtmann, Chief Microfinance Specialist, IFC
Dean Karlan, Professor of Economics, Yale University; President and Founder, IPA
Rebecca Mann, Program Officer, Financial Services for the Poor, Bill and Melinda Gates Foundation
Costas Meghir, Douglas A. Warner III Professor of Economics, Yale University
Sustainability Gets a $100 Billion Boost
In other news – big news, in fact – Citigroup Inc. released its new sustainability strategy this week, and backed it with an eye-popping financial commitment: $100 billion over 10 years. The funding will go toward lending, investing in and facilitating activities that promote sustainable growth and mitigate climate change.
Citi (which sponsors NextBillion Financial Innovation) has released ambitious sustainability strategies before, including the 10-year, $50 billion commitment to finance projects that reduce global carbon emissions that it launched eight years ago and completed (early) last year. And according to Val Smith, director of corporate sustainability at Citi (as quoted in GreenBiz), the new $100 billion goal “builds on the learnings that we accumulated during the first $50 billion.” But she added, “This is the first time that we’re publishing a multi-year strategy that aligns a lot of activities across Citi’s different businesses into one cohesive document.”
“When we knew that we were going to hit the $50 billion goal three years early, we did an assessment across our different businesses,” Smith explained. “We wanted to expand the scope of the $100 billion goal so that we could capture a lot of other activities that are very important to people, that are very important to cities, that our clients are deeply engaged in. … Citi has had about 15 years of hard work and engagement on environmental and sustainability issues. We got to a point where we had this groundswell of activity that we could leverage to get even more innovation.”
According to Marshal Salant, Citigroup’s head of alternative energy finance, it was this growth in investable opportunities in renewable energy that made the scope of the strategy possible. “We can do literally a billion-dollar solar or wind bond and have dozens of investors go in and participate,” he said in an interview. “Five years ago, if you came to me and said, ‘Can we do a billion dollars?’ I’d say, ‘I don’t know, it’s never been done before.’”
Citi’s new commitment outpaces the (considerable) sustainability efforts of other financial companies, including Bank of America, which committed to $50 billion in deals for low-carbon initiatives in 2012, and Goldman Sachs, which announced a $40 billion climate program the same year. Hopefully, this kind of healthy one-upmanship will continue.