Another Look at How We’re Measuring Microfinance’s Impact

Kathleen Odell is an assistant professor of economics at Dominican University’s Brennan School of Business. Her new paper examines major microfinance studies conducted since 2005 and is a follow-up to a 2005 Grameen Foundation report by Nathanael Goldberg which examined studies conducted between 1970 and 2005.

Clients of Maata-N Tudu (Ghana)

On Thursday June 10 in New York, I introduced Grameen Foundation’s newly released paper, Measuring the Impact of Microfinance: Taking Another Look (which I authored) to a surprisingly large and attentive audience at J.P. Morgan.  An estimated 360 people were in attendance to hear my brief introduction and the 45 minute panel discussion that followed.  The discussion was moderated by  Christina Leijonhufvud, Head of Social Finance at J.P. Morgan; the panel included Camilla Nestor, Vice President of Microfinance Programs at Grameen Foundation, Jonathan Morduch, Professor of Public Policy and Economics at New York University and co-author of Portfolios of the Poor: How the World’s Poor Live on $2 a Day and the newly released Economics of Microfinance, Second Edition, and Neil MacFarquhar U.N. Bureau Chief at the New York Times, and author of recent NYT article, “Banks Making Big Profits From Tiny Loans.”

The title of the lunch-hour event was “Does microfinance reduce poverty? A debate on the social impact of microfinance as a development tool.”  In the invitation, the “debate” was outlined as follows:

Microcredit has been successful in increasing access to capital by the poor but does it actually reduce poverty for the people it intends to help? Join us for a discussion on the effect of microfinance on the lives of poor people. Hear leading experts examine the value of microcredit as a tool for fighting poverty.

By the end of the hour, a few things were clear.  The most obvious conclusion was that 60 minutes wasn’t nearly enough time to come to any resolution on the question at hand (Does microfinance reduce poverty?) – it was barely enough time to outline the question itself.  Having spent the last six months engrossed in the literature on the social impact of microfinance, I anticipated that the discussion might center on some of the latest impact assessment research, upcoming studies, unanswered questions, and possibly the surprisingly incendiary debate about the merits and disadvantages of various impact assessment methodologies.  In fact, the panel discussion, and the questions that followed, was largely concerned with the relationship of microloan interest rates, profits, and social impact.  Given the venue and the audience, this turn really isn’t surprising.

Jonathan Morduch made the important point that one of the major advances in thinking about microlending was that it is actually acceptable for MFIs to charge interest rates that may initially seem quite high, because the cost of the loans is high.  Camilla Nestor also pointed out that the cost of capital for lending is very high in the developing countries where MFIs operate – often 20% or more – and that microloan interest rates must account for this.

Someone asked the panel whether, in general, social impact increases as profit margins go down.  I thought there were two great answers to this question.  First, a very poorly run institution might report low profit margins due to mismanagement, and we certainly wouldn’t expect such an institution to have a big social impact.  And second, while large profit margins for an MFI might be a cause for concern, we should look closely at where those profits go.  In many cases, they may be reinvested in the community, and if this is the case a very profitable institution could still be fulfilling a social (as opposed to financial) mission.

But what about the question of the hour?  Does microfinance reduce poverty?  At first glance, this question seems simple enough.  But the longer one spends thinking about it, reading about it, and talking about it, the more complicated it becomes.  And while this complexity explains why 360 people were willing to give up their lunch hours to attend this discussion, it’s also pretty challenging.

The latest impact assessment research indicates that microfinance has positive impacts on microbusinesses, increasing investment and profits.  There’s good reason to be optimistic that over longer time frames these business effects might translate into increases in incomes and consumption levels.  But there’s still so much we don’t know.  A number of outstanding questions are outlined in the conclusion of Measuring the Impact, but this event raised even more directions for future research.  Especially interesting would be studies of the relationship between interest rates, profit margins, and social impact.  So far, I haven’t seen any research that takes on these questions, but it would be great to know more about this critical issue.

Tags: social performance