Continuing the quest for evidence of enough return on investment in IGAs to increase household income.
My last post (#25) reviewed the conclusions of Finance Against Poverty by David Hulme and Paul Mosley (Routledge, London, 1996). Their research in seven countries was excellent but inconclusive without the benefit of field experiments (RCTs). Still, it was enough to make a strong case that we are unlikely to find significant income effects in more than about half the borrowing households. It is not surprising that microcredit helps some earn higher incomes but not others.
Moreover, Hulme and Mosley propose a different rationale for microfinance: borrowing households may benefit from positive impacts on their capability to manage vulnerability to risk, even if their incomes are not raised significantly.
Continuing to draw from a paper written a decade ago by my Freedom from Hunger colleagues Barbara MkNelly and Mona McCord, let’s see what the late 1990s research of the Assessing Impacts of Microfinance Services (AIMS) project of USAID added to the Hulme and Mosley conclusions.
The AIMS project included over a dozen desk reviews on impact evaluation topics, in-depth longitudinal impact studies in three program sites and the development and testing of a range of practitioner-oriented client-assessment tools.
The AIMS conceptual framework departed from the then-conventional approach in that it started with the household rather than the enterprise. Traditionally, evaluations of small-enterprise credit programs typically focused on enterprise returns and employment creation or hired labor. This is because historically the target clientele was of a higher socioeconomic status and was typically engaged on a full-time basis in a single enterprise activity that used hired labor.
Microfinance client households typically do not have a single source of livelihood support, but rather a mix of activities depending on seasons and market opportunities, among other factors. They are also less likely to make a distinction between household and enterprise funds. The AIMS conceptual framework recognizes that decisions about microenterprises can be understood more clearly when considered in relation to the overall household economic strategies. It clarifies how microenterprise interventions can contribute to household economic security, enterprise stability and growth, individual well-being and the economic development of communities.
According to the AIMS framework, a key area in which microfinance is expected to have an impact is a reduction in the risk faced by very poor households. Even if the weekly amount of income earned was relatively unchanged, access to microfinance services facilitates regular and secure earnings which allow for consumption-smoothing and improved ability to plan for the future.
In their March 2000 AIMS synthesis study, Microfinance, Risk Management and Poverty, Jennefer Sebstad and Monique Cohen proposed that, especially for the extreme poor, the key impact is not necessarily income level but their ability to deal with risk and vulnerability. They further suggest that in order for households to survive, they generally need a minimum level of assets and a minimum ability to cope with risk. In their study, risks were defined as shocks and economic stress events that result in an economic loss. Vulnerability was the inability of individuals and households to deal with risk. Assets were also included and defined in terms of their ability to reduce vulnerability by assisting individuals and households to protect against risks ahead of time and manage economic losses following a shock or economic stress event. The study focused on clients and practitioners from seven microfinance programs operating in Bangladesh, Bolivia, the Philippines and Uganda. Overall, the results of their study support that microfinance helps clients protect themselves against risk. They emphasize the important role that assets play in reducing poverty and vulnerability of clients and include several key strategies that clients use with program loans. These strategies include the following:
- To build a mixed base of physical assets that can be drawn upon in times of hardship. Assets include investment in housing, vehicles and equipment or items such as jewelry or livestock that can be readily liquidated.
- To diversify sources of household income through investment in new opportunities as they arise in order to smooth, increase and stabilize income and consumption.
- To strengthen other coping mechanisms by building social networks, saving, minimizing expenditures and maintaining access to multiple sources of credit.
I will revisit this seminal paper by Sebstad and Cohen in Theme Four (“More Household Savings & Better Consumption Smoothing?”) and Theme Nine (“Efficiency and Effectiveness of Various Pathways to the Ultimate Impacts?”). So why cite this paper here, given it does not really present evidence about ROI for microcredit loans to IGAs?
My purpose is to document an inflection point in the intellectual history of microfinance. Already in 2000, thought leaders in microfinance were turning away from focus on poverty-reduction impacts (which would be due to major ROI of loans)—probably because of disappointing evidence-to-date of increases in household income and consumption. In effect, they were developing a new and apparently more evidence-based rationale for microfinance.
But they may have been too soon discouraged. Let’s keep looking in the next posts.