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.