Over the past five months, I have been asking whether the poor can better smooth household consumption and manage financial shocks because of their use of microfinance services. Lynne Davidson Jarrell has provided us her summary of the main points of the fourteen 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 diversify their income sources and accumulate assets? Are they thereby better able to help their families to smooth consumption and mitigate the impact of financial shocks? Does microfinance build their households’ resilience in the face of their inherent vulnerability?
What we’re learning
First, it is evident that microfinance is not lifting the majority of clients and households out of poverty or even sustainably raising their incomes. More dependably, access to microfinance seems to diversify income sources and build assets enough to smooth consumption and manage shocks.
This is disappointing news to many in the microfinance industry who have been counting on their work to reduce poverty for large numbers of their clients. For Freedom from Hunger, however, the news is actually quite encouraging, because food security (a.k.a. consumption-smoothing) has been the historic aim of our organization. Naturally, we would prefer to be part of a success story of massive poverty reduction worldwide, but we have long been more modest and realistic in our expectations of microfinance as a sustainable delivery channel for poverty alleviation services of various types. And truly, is it not a remarkable achievement to create and grow programs that help the chronically food-insecure attain enough to eat and other basic necessities throughout the week, the month and the year? From that stable ground, the poor are in a much better position to seize whatever opportunities are provided by health and education services and a decent economy. If financial services by themselves cannot provide these opportunities, they do seem quite capable of helping the poor provide the stable ground to stand and build upon. That is the significance of consumption-smoothing, risk mitigation and resilience in poor households.
Moreover, Freedom from Hunger can take satisfaction from the evidence discovered in Theme Three that the kind of microfinance we support does help many clients who are already engaged in business to do better business. A small minority of clients are probably using the services we have helped create and support to boost their determined climb up the ladder out of chronic poverty.
Second, there is evidence that we can increase the resilience-enhancing effects of microfinance by helping our partners offer well-designed, well-delivered financial education. The evidence for this enhancement is still quite weak, but the few good studies seem to show that even very simple education, perhaps especially very simple education, can substantially enhance resilience effects of microfinance. What is often dismissed as mere “product promotion” or marketing may in fact be very effective financial education, even if covering only a little of the knowledge content we associate with full financial literacy. Much of the lack of evidence of impact of financial education may be due to too much content and complexity in the financial education designed by Freedom from Hunger and others – as well as the challenges of maintaining good quality and coverage in the education delivery by microfinance providers and others.
Third, we must not underestimate the importance of providing access to both microcredit and microsaving services to enhance household resilience. The design features should allow considerable flexibility in the use of loans and savings in order to have this resilience-enhancing effect. Emergency access to loans and savings is especially important for mitigating shocks, such as health crises.
Fourth, credit groups supported by microfinance providers and savings groups supported by non-financial service organizations seem equally capable of helping poor households to enhance their resilience – as long as the credit groups are also given voluntary savings options with good liquidity and as long as the savings groups can offer their members sufficient, timely borrowing opportunities. I would say that credit groups are less likely to have good savings opportunities than savings groups are to offer good borrowing opportunities. On the other hand, loan sizes and availability from savings groups are more limited than for credit groups. So it is hard to say that one type of group is more likely to be resilience-enhancing than the other.
Now I can expand Freedom from Hunger’s Theory of Change diagram to include what we’ve learned in Theme Four. I refer you to post #18 for details of how to read this diagram.
Notice the evidence of impact on savings (assets in general) and consumption-smoothing (and shock-coping) is strong, since much of the evidence is derived from randomized controlled trials. Many households of women members of microfinance groups, like those supported by Freedom from Hunger’s partners, have more diverse income sources, more assets, better consumption- smoothing (especially food security) and better shock-coping because of their access to microfinance loans or savings. So the oval is light blue (= good evidence). It is not dark blue (= “greatest” evidence), because we still need solid research that demonstrates better consumption-smoothing (defined as reduced variance of consumption or expenditure). Since likelihood of impact on resilience of the average member household seems quite high, I have made the arrows from both credit groups and savings groups the maximum width on the five-point spectrum (= strongest likelihood of impact). As always, these broad-brush conclusions are subject to revision as new, good-quality evidence is reported.
Onward to Theme Five: Increased Social Capital & Improved Self-Confidence?