Recording and summary of microfinance debate now available

Last week we blogged about a recent debate hosted by the All-Party Parliamentary Group on Microfinance. RESULTS supports the secretariat of the APPG and was greatly privileged to have been involved in the organisation of the debate. If you weren’t able to attend the event you can now download and listen to a recording and also a summary of the arguments made by each side from the APPG’s website. If you are interested in learning more about the pros and cons of microfinance then the recording is well worth a listen. Having had longer to digest the arguments for and against we have added some additional thoughts on the subject below. We would welcome comments from others to help inform RESULTS’ future advocacy work to ensure that microfinance has the greatest possible benefits for the poor.

The debate was not on the question of whether or not microfinance works – the huge sums raised in initial public offerings as well as the rate at which new microfinance institutions (MFIs) are being set up are proof that the concept ‘works’ – but rather whether microfinance works as a tool to alleviate poverty or not.

Despite excellent points from both sides, the answer to this question was left at least partly unresolved. Those who argued against the motion claimed that individual entrepreneurship does not contribute to long term, sustainable development but did not convince the audience that it has no positive impact. Those who argued for microfinance reinforced well-known arguments about the impact of microfinance at the individual and household level but did not address the charge that it can also cause some clients to take on loans and businesses that they cannot sustain and fall deeper into poverty. For every example of a person who has had their life transformed by microfinance, it was argued that there is a counter example of someone who has been pushed further into debt.

One of the main conclusions from the event was that we can no longer talk about microfinance as one, homogenous sector. Even within the parameters of this debate some people were clearly talking about microcredit whereas others used the broader definition of microfinance to include a full range of financial services. Another clear distinction was between those MFIs that operate with a purely social motive and those that are entirely profit-driven (plus others that are at different points along the spectrum).

Even among those MFIs that have a social motive (i.e. are looking to use microfinance as a tool to help alleviate poverty) there are differing views on the ways in which this end can be achieved. Some see microfinance as having a direct impact on the household welfare of the poor and this is good in itself. Others have a different theory of change about how to reduce poverty and value microfinance because poverty reduction is contingent on economic growth and greater financial inclusion leads to economic growth.

One of the possible reasons for the complexity of the debate is the fact that microfinance originated from such an ambitious mission – pioneered by Muhammad Yunus and the Grameen Bank in Bangladesh – of enabling the very poorest people to lift themselves out of poverty through income-generating activities. The challenges against microfinance were often related to the limitations of this original model and the extent to which microfinance now is succeeding against the original mission. Perhaps it is time to measure the success of microfinance against a new benchmark that reflects the way that microfinance really looks today?

One catalyst for this and similar debates was a series of randomised control trials published in 2009 which argued that microfinance had no positive impact on its clients. Supporters of microfinance argue that these trials were flawed and only looked at the impact of microfinance over an 18 month period which would be too short for real results to be demonstrated. It is clear that more studies are urgently needed to fill in our collective knowledge gaps about the true impact of different types of microfinance and to identify which aspects of microfinance are effective at helping the poor to escape poverty and which aspects may have the opposite effect.

Amongst the arguments for and against microfinance, there were actually quite a lot of points on which both sides agreed.

Firstly, microfinance is a diverse sector with different models being implemented.

Secondly, both sides would agree that microfinance, even if it was perfect, would not be sufficient on its own to end poverty. It is part of a package of tools.

Thirdly, both sides recognised that regardless of whether it ‘works’ or not, there is no denying that there is a huge demand for microfinance and the poor clearly need and can make use of a range of financial tools.

Finally, both sides agreed that there is an important need for investment in small and medium-sized enterprises (SMEs) – referred to as the ‘missing middle’. Opponents argued that microfinance has blocked out support for SMEs and expanded the informal sector whereas supporters argue that there is a need and space for both.

Regardless of which side of the fence you sit on, there is much from this debate that can challenge traditional thinking about microfinance. RESULTS looks forward to working even more closely with the APPG on Microfinance to find answers to many of the unresolved questions raised.

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3 responses to “Recording and summary of microfinance debate now available

  1. Pingback: Tweets that mention Recording and summary of microfinance debate now available | RESULTS UK – The Power to End Poverty -- Topsy.com

  2. Mark Napier

    It is fairly clear though that the debate needs to move on from whether MF is a good or bad thing. It may well be a sub-standard product when sold by commercially minded MFIs but even then it is still likely to be the “least bad” option for the poor. It means we need to keep emphasising things like consumer protection to make sure that it works better including much more exposure of abusive practices, where these occur (although, for sure, we are beginning to see much more of this now, especially from India).

    There also needs to be much better research (and here I agree that RCTs are not the only answer) on the household impact of microfinance – both on growth (at a micro level) and vulnerability. This calls for multi-year panel data which it is surprising the donor community has not yet initiated.

    But the criticisms are scarcely justification for doing away with it altogether and no one is seriously suggesting this anyway.

    The main problem with traditional MF, as I said at ODI back in July, is that it is just too small and unscaleable to be the systemic solution. According to the Mix, there are still only 7.9m MF borrowers in sub-Saharan Africa, in a continent of 900m (and these include big numbers from Equity and Capitec which are really banks). And although there are 17m depositors these numbers are boosted by the postal banks which are arguably not really MFIs at all but quasi-banks. For sure, OI or Grameen can point to some parts of the world where MF has become the dominant provider – but still, outreach, as you well know, is often confined to certain localities, typically in urban areas.

    Surely the message though is that financial access of any kind is dismally poor in developing markets. It was really good that there seemed to be consensus last night that the more urgent problem was probably in areas like agricultural finance and SME – and, I would add, low income housing, where no doubt MFIs can (and do) play a role, but so too can banks. The difference between these kinds of finance and traditional microcredit is that with traditional microcredit you can live with a flawed mainstream financial system (lack of credit information, restrictive banking regulations, inadequate payments systems, lack of long term finance etc) – but with things like agriculture finance, or SME finance, you can’t – because loan terms have to be longer (and loans larger).

    But this is still all “microfinance” and so I hope the APPG will buy into this broader definition of MF and turn its attention to these areas in forthcoming events. In short, there needs to be (i) more and better investment by donors in financial system reform in developing countries (some donors, including DFID, are doing fairly well in this area, but could do more and could do it much more quickly!) and (ii) more support for experimentation around things like smart subsidies (a fraught area, I know) to crowd private sector financing in to difficult areas.

    I also think that there should be multi-donor collaboration at a global level to devise facilities that (i) would help commercial banks push out loan terms (3 years, not 6 months); and (ii) address the critical issue of the financing gap around micro-equity.

  3. There has been a lot of criticism about blocking out funding for SMEs – why don’t we realize that micro-enterprises can graduate to the level of small enterprises as well.

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