I had written a while ago on the new controversy in microfinance research. Recent research shows that microfinance has not really helped individuals where it is most expected.
Two studies, both by Poverty Action Lab researchers have been in heavy controversy since they have been published. First – The miracle of microfinance? Evidence from a randomized evaluation by Abhijit Banerjee, Esther Duflo, Rachel Glennerster and Cynthia Kinnan (May, 2009). Second by Expanding Microenterprise Credit Access: Using Randomized Supply Decisions to Estimate the Impacts in Manila by Dean Karlan (July, 2009). First based in India, second in Philipines. Both studies show limited impact of microfinance on people’s lives.
The first study was done on a microfinance organisation’s clients – Spandana based in Hyderabad. Abhijeet Banerjee had explained in this article that results will take time to show.
IDF Blog points to Esther Duflo further discussing the results:
Before discussing audience reactions, I’d like to mention Professor Duflo’s dismissal of existential concerns for the sector. She said that it would be a complete mistake to take the results of the Spandana study to mean that microfinance isn’t working. Instead, she felt the study reified the original assumptions and hopes for microfinance, considering its primary function as a financial product. The study found that micro-credit leads to the creation of new businesses, and that for entrepreneurially inclined households, micro-credit leads to the trimming of non-durables and temptation goods from the household budget as the purchase of business/household durables increases. This is great news! And while the study does not show impacts on health, education or empowerment indicators, it does not mean that micro-credit could not effect these areas in the longer term (the study only looked at 18-24 months after the first loan cycle).
It means simply that if you, as a development practitioner or donor, want to impact empowerment and health outcomes within a year, micro-credit is probably not the most effective channel. This seems intuitive, with the gamut of empowerment/health-oriented development interventions out there, but it still might be a tough pill to swallow for advocates of microfinance who hoped that the holistic transformation of a household would take effect immediately.
Read the whole thing. I don’t understand the fuss really. All know it takes a longer time for any development policy to show desired impact on health, education etc. Even if you see some immediate impact, one usually waits to see whether the results hold in long- term.
Why should it be different for microcredit where the purpose of credit is multidimensional. A person has different needs from the other and is likely to use the money where priority is higher. In most cases, it is usually to pay off debts or to use it for furthering business. Health etc would only follow.
My concerns with microcredit is not really these results. But it is the proliferation of microcredit firms and it being seen as the best panacea to remove poverty. It is kind of becoming a fad. You see various kinds of seminars on everything on microfinance - human resources for microfinance, Operational framework for microfinance, Microfiance Strategies for removing poverty etc etc. There were talks that microfinance is becoming a risky sector but was shot down by microfinance industry leaders. They said this sector is very different, payment of loans is very high etc. Well, one must not take anything for granted. We all said the same thing for finance just a while back. The same euphoria has caught up with microfinance.
There have been such fads earlier as well but none worked. Removing poverty is very complex and fads don’t work. You need a mix of policies which will change depending on the location and context. But somewhere down the line we don’t learn lessons from history.
The real challenge for J-Pal/IFMR researchers is not to educate people on their various research studies. The real challenge is to deglamourise microcredit/microfinance and tell all it is just one of the tools to alleviate poverty.
There was a conference by IFMR which looked at translating research into practice. We need more of these with some reality checks.