Third Step: Manage the Business for Major ROI – Part II – Hulme & Mosley

The classic poverty reduction rationale for microfinance (the beating heart of public support) is that the poor make enough additional income from investment of their loans or savings in income-generating activities (IGA) to enhance their survival prospects. If not, then why bother with microfinance?

It turns out this is not the only rationale these days, but in this and the next several posts, I explore for evidence of enough return on investment in IGAs to increase household income.

I start with a paper written a decade ago by my Freedom from Hunger colleagues Barbara MkNelly and Mona McCord on research looking into the impacts of microfinance, especially group microfinance for women, on household economic capacity and security. This was one of three Credit with Education Impact Reviews led by Barbara to summarize the research we had done in house and by others researching other models, mostly in the 1990s. These review papers and many other research reports and articles can all be found at

Here, in this and subsequent posts, I offer highlights of Barbara’s and Mona’s paper as a foundation of evidence on which to build with more recent evidence up to the present day.

They started by reviewing the work of other researchers in the 1990s, including Finance Against Poverty by David Hulme and Paul Mosley (Routledge, London, 1996). This two-volume work includes a comparative analysis of the performance of 13 microfinance providers in seven countries (Bangladesh, Bolivia, Kenya, India, Indonesia, Malawi and Sri Lanka). Hulme and Mosley drew two general conclusions that had lasting influence on microfinance thinking going forward:

1. Well-designed microfinance programs can improve the incomes of poor people, and for a proportion of cases, these programs can move the incomes of large numbers of poor households above the official poverty lines of these countries.

2. Impact of a loan on household income is greater for what may be termed the “middle” and “upper” poor. These households have a greater range of investment opportunities, more information about market conditions and can take on more risk than the poorest households without threatening their minimum needs for survival. In other words, to use credit effectively, households need to have already reached a “minimum economic level.”

Quoting Hulme and Mosley directly:

While microcredit may not alleviate extreme poverty in terms of income measures, in terms of non-income measures it may still provide important benefits such as consumption-smoothing and income diversification which ‘protect’ the existing statuses of households by providing a safety net that contributes to crisis-coping capabilities.

These conclusions are consistent with findings in earlier posts of Theme Three, that major income effects are unlikely to be seen in households that are not investing in IGAs, that only about half of borrowers are investing in IGAs, and so, we are unlikely to find significant income effects in more than about half the borrowing households. A researcher might prefer to say the impacts are “heterogeneous” – microcredit helps some earn higher incomes but not others.

Moreover, Hulme and Mosley propose a different rationale for microfinance (alluded to at the start of this post): borrowing households may benefit from positive impacts on their capability to manage vulnerability to risk, even if their incomes are not raised significantly.

The Assessing Impacts of Microfinance Services (AIMS) project of USAID confirmed and expanded on this theme of microfinance assisting the poor to manage risk. I’ll parts of Barbara’s and Mona’s summary of the AIMS project findings in the next post.