Grameen Foundation did a real service for those interested in microfinance impact research by commissioning two excellent review papers: Measuring the Impact of Microfinance: Taking Stock of What We Know by Nathanael Goldberg (2005) and Measuring the Impact of Microfinance: Taking Another Look by Kathleen Odell (2010). Both authors are solid researchers in their own right and bring that depth of understanding of methodology as well as of microfinance to bear on the diverse and often contradictory studies. There also are three recent and equally excellent books that review microfinance and related research into the financial lives and behavior of the poor: Due Diligence by David Roodman, Poor Economics by Abhijit V. Banerjee and Esther Duflos, and More Than Good Intentions by Dean Karlan and Jacob Appel. Nonetheless, my favorite of the bunch is Kathleen Odell’s white paper.
Odell’s paper is more focused and compact than the books, but it covers the same literature (including the now famous trio of RCTs reported out in 2009) and more. It builds on and updates the successful approach chosen by Goldberg. Even more important, Odell values the whole body of rigorous research, not just the experimental and quasi-experimental research that credibly seeks to confirm or deny the causal link between microfinance services and benefits for the poor. That is, Odell also values research that establishes associations (correlations) between microfinance and various benefits, even though these research designs cannot demonstrate causation.
Odell provides this important caution on page 30:
Understanding the scope and limitations of impact assessment evaluation is essential. The idea that any one study can definitively answer the question of whether microfinance is working is unrealistic. It is the body of evidence (not the results of a single study) that will ultimately serve as a guide to microfinance practitioners and funding agencies.
She goes on to offer her general conclusion:
This survey is an attempt to piece together the most recent contributions to that body of evidence, and overall, a few things are clear. There is evidence from a number of studies (using a variety of methodologies and from different settings) suggesting that microfinance is good for microbusinesses. Various studies showed increases in business ownership, investment, and profits. Importantly, this result holds for microsavings as well as microcredit. [T]he overall effect on the incomes and poverty rates of microfinance clients is less clear, as are the effects of microfinance on measures of social well-being such as education, health, and women’s empowerment.
The number of published reports from RCTs on microcredit and microsavings has grown rapidly in the past few months, further expanding the body of evidence. David Roodman summarizes these results in his post on the CGAP microfinance blog. He reports on five studies of microcredit, in Bosnia-Herzegovina, India, Mongolia, Morocco and the Philippines. In four of the five, Roodman finds evidence of positive impact on investment in enterprise and/or enterprise returns. He also reports on three studies of microsavings, in Kenya, Malawi and Chile, and two of these offer evidence of enterprise impacts.
Roodman’s blog post notes these patterns in the RCT results:
- Except in Manila, wherever the impacts of microcredit on microenterprise (investment, profits, new business starts) were examined, they were positive. By and large, microcredit and microsavings do stimulate microenterprise. Of course the stimulus is statistical, not an iron rule. Not everyone who uses these financial services opens or expands a business.
- There is hardly a sign that microcredit affects poverty. In Mongolia, those offered group microcredit (but not individual microcredit) spent more on food. In Bosnia and Herzegovina, those offered individual microcredit spent less. That’s about it.
- But most of the studies look at impacts over 12–18 months. This leaves open the possibility that microcredit has bigger benefits only over the longer term.
- None of the microcredit studies has looked at the impact of combining credit with other services, such as classes in nutrition or accounting.
- Like microcredit, microsavings stimulates investment in business activities, at least when in the form of a commitment account, one that makes it expensive or impossible to withdraw money before some specified date. This is particularly interesting because loans too can also be viewed a commitment device. Once you borrow the money, you are under a strong compulsion to set aside money for those payments, which is a kind of obligatory saving. Both commitment devices are stimulating investment.
- But even within the short periods of these studies, savings is measurably boosting income and spending. This raises the question of why credit has not shown similarly rapid and positive impacts, and makes me a bit pessimistic that following up after a couple more years (as is being done in Hyderabad) will change the picture.
- Finally, more with savings than with credit, there are hints that savings helps people sustain spending during important events such as serious illness or the birth of a child. This is just as you might expect. In Kenya, Dupas and Robinson found that in households offered savings accounts, spending fell less when someone in the family got malaria; but the effect wasn’t very significant statistically. The paper on Chile—preliminarily—finds something similar for a completely liquid account, one allowing deposits and withdrawals at any time.
It is significant that the tentative conclusions drawn from studies of the 1990s have been confirmed in large part by the more recent experimental studies that allow us to attribute several beneficial effects to microfinance access and use. Such confirmation supports Odell’s inclusion of non-RCT studies in the “body of evidence”—for the purposes of getting early indications of probable cause and effect, of guiding more expensive and sophisticated research toward testing the more plausible hypotheses, and providing more geographic and programmatic angles from which to pursue “responsible generalization” (the object of research, according to Roodman).
Here is my preliminary summary of what we have learned so far in Theme Three.
Those who already have business activities in which they invest their loans often experience business growth, perhaps even increased household expenditure, but even then, the impact is usually quite modest. Microsavings seem to have more measurable impact but again more on those who have businesses at the outset. But microfinance in general seems to have little impact on household income or welfare (health, education, empowerment) indicators, at least within 18 months of joining a program (the typical duration of access to microfinance for the study subjects).
Whether credit or savings, the impacts on business development and household income are found predominantly among those already engaged or predisposed to engage in business—which makes perfect sense. The average return on investment of microfinance loans or savings in business development among the poor, therefore, depends on the proportion of poor microfinance clients who are using their loans and/or savings to invest in businesses rather than consumption. That proportion seems to average about 50 percent, with wide variation from one setting to another. Even for this 50 percent or so of microfinance clients, seldom is the return high enough to generate major increase in household income and expenditure.
In the last few posts of Theme Three, I will explore what we’ve learned so far from savings group programs and from the integration of financial and business education with microfinance in terms of their impact on business outcomes and household income.