Over the past two months, I have been asking whether the poor do more profitable business and earn more household income because of their use of microfinance services. Lynne Davidson Jarrell has provided us her summary of the main points of the thirteen posts.
What does all this mean for Freedom from Hunger?
For 25 years, Freedom from Hunger has designed, tested and taught independent partner organizations worldwide (mostly in West Africa, the Andes, Mexico, India and the Philippines) a couple of forms of microfinance that deliver credit and savings services to and through groups of 10–30 women living in very poor, rural areas.
Some of these groups are trained and offered credit and savings opportunities by microfinance institutions of various types (MFIs, rural banks, NGOs and credit unions)—what we most often call Credit with Education. Others are trained by NGOs to become independent savings groups that provide credit from their own savings only—Saving for Change (developed jointly with Oxfam America and the Strømme Foundation of Norway).
Do the women who join and participate in these groups use their loans or savings or both to start or expand businesses? Are their returns from their investments in these businesses sufficient to significantly increase their annual incomes?
What we’re learning
First, to gain any benefit from the microfinance programs of our partners, women have to join; that is, they have to form a new group or join an existing one. The ability to do so is limited, of course, by program availability in their community. Their desire to do so is another thing, depending on their personal situations and their perceptions of the program requirements and benefits. From the general literature, I estimated that maybe half the people in a community with access to microfinance actually join. Even that guess may be too high. Note the figure of only 27 percent in Hyderabad that Lynne mentions. I’ve just learned that our recent study of PADME’s Credit with Education program in Benin found that 30 percent of the women in study communities had joined Credit with Education groups. I’ll ask in a later Theme whether this selection of women from the community is biased toward or away from the poorer households, the ones more likely to be chronically hungry. (Preview: apparently not much bias one way or the other; the profile of group members is similar to the poverty profile of the whole community, in West Africa at least.)
The population-level impact of microfinance is diminished by only partial participation of the eligibles in each community served. This is an important issue for Freedom from Hunger and other proponents of microfinance–how to attract higher percentages of the eligibles, especially from the poorer ranks.
Second, for women to increase personal and household income, they have to take a loan or accumulate savings and then invest the money in a business. Current disposable income can be increased by taking a loan or using savings to pay off higher-cost debt. This can enable increased household consumption, but it does not increase total household income. That is, the poverty-reduction aspirations of microfinance proponents are achieved only if loans or savings or both are invested in income-generating activities (IGAs). The general literature indicates that only about half of those who receive microfinance services are using them to start or grow businesses (there is wide variance around this (my guesstimated) mean; it sure would be good to have more and better data on this!). Freedom from Hunger’s experience confirms this general observation. So, the business profitability and household income benefits of microfinance for whole populations of poor people seem to be further diminished because only a quarter or fewer of the eligibles are using microfinance to invest in IGAs.
Third, those women who do use microfinance to invest in IGAs need to earn a fairly big return on their investments in order to generate enough business profits to significantly increase household incomes. The good news is there is solid RCT-based evidence of positive impact on business success of borrowers and savers who are already engaged in business. Freedom from Hunger’s own research indicates the reality of increased business profits and even take-home income. The bad news is that the business profits and incomes are still quite small on average. Our research in coastal Ghana shows that many women do quite well in their businesses, but by comparison, our research in highland Bolivia shows that how well women do in their businesses depends a great deal on the local business opportunities as well as their own skills and assets.
The many, many microfinance success stories we see on websites are not fabricated. Many clients have invested loans in their microenterprises, they grew these into real businesses, and they substantially increased their incomes and overall quality of life for their families, some escaping poverty altogether. Success happens when people have access to microfinance services, more than if they did not have access, but I have to conclude that only a minority of clients do so well. How big or small the minority is a very important question for further research. The data may already be there in the monitoring systems of at least a few microfinance providers.
Business education seems to be effective for increasing the probability of successful investment of microfinance loans in business, but again, average increase of profit (and therefore household income) remains modest. As I write this, Markus Goldstein reports on a broader review of impact studies of business training, which basically finds that business training can help micro-entrepreneurs but probably not much, as far as 14 studies with low statistical power can tell us.
On average, access to microfinance services, even combined with business education, seems much more likely to enable clients’ businesses and households to mitigate financial setbacks and smooth consumption through the year than to generate business growth or substantial increase of household income.
From the perspective of the classic microfinance theory of change (in which access to microfinance leads to substantial increase of household incomes), this conclusion from the evidence to date is disappointing.
It is disappointing to all microfinance providers and supporters that microfinance seems to foster poverty alleviation (making lives easier but not much less poor) rather than poverty reduction (a drop in the number of poor households), at least for the (large?) majority of microfinance clients. However, from Freedom from Hunger’s perspective, this news is not so disappointing, because our mission is poverty alleviation. We seek to help households become food-secure—no longer chronically hungry—and households achieve food security through consumption-smoothing and financial shock abatement, which may be fairly reliable outcomes for those who use microfinance services. Theme Four is an exploration of the evidence for such outcomes for microfinance clients.
Now I can expand Freedom from Hunger’s Theory of Change diagram to include what we’ve learned in Theme Three. I refer you to post #18 for details of how to read this diagram.
Notice the evidence of impact on business profits and household income is strong, since some of the evidence is derived from randomized controlled trials. Some women members of microfinance groups, like those supported by Freedom from Hunger’s partners, do have more profitable businesses and even have more household income because of their investment of microfinance loans or savings in their micro-enterprises. So the oval is dark blue (= strong evidence). But the proportion of women members of such groups who experience this benefit is low; the magnitude of impact on the average member is quite weak. So the width of the arrows from both credit groups and savings groups is the narrowest on the five-point spectrum (= low likelihood of impact). As always, these broad-brush conclusions are subject to revision as new, good-quality evidence is reported.
Onward to Theme Four: More Household Savings & Better Consumption-Smoothing.