KF9 Ilmari Soininen UIMCEC, Thies, Senegal
Over the last four months working in microfinance in urban Senegal, I have come across many clients who report increased income thanks to their loans. Fishmongers, clothing salesman, taxi drivers, you name it. Indeed, this has come to be expected – put the capital into the entrepreneur’s hands and he will surely put it to the most efficient use, and help bring his family out of poverty.
Makes sense. But trying to tease out exactly by how much the client’s income has increased is not as straight forward. Clients rarely keep good track of revenues and expenses, so the bottom line at the end of the month can be pretty hard to decipher. Often I wonder after the interest payments, did the client really increase his income or was it a mirage simply reflecting more money coming in and out?
My experience is consistent with the broader lack of evidence to link microfinance with increased incomes and reduced levels of poverty. In “Does Microcredit Really Help Poor People?”, an excellent recent report for CGAP, Richard Rosenberg examines recent research and looks to answer this question.
The trouble with discerning the real impact of microloans is that there are a multitude of other factors at play. Often entrepreneurs who seek out micro-financing are savvier than their counterparts, so any positive outcomes could not be attributed solely to access to financing. However, randomized controlled trials (RCTs) allow researchers to more accurately look at the direct effects by comparing two groups which are statistically identical. Several RCTs examining clients in India and the Philippines found no effects on income and consumption levels in the 12 – 18 month time frames measured (see the article from the Economist for a good summary of the findings).
But, as Rosenberg suggests, perhaps we are aiming at the wrong target. As he points out, those who live on $2 per day, don’t earn exactly $2.00 each day. There is often extreme volatility in income, and microfinance can play a very useful role in smoothing consumption, especially for emergencies. In other words, microfinance can not always change the level of income, but it can change its’ structure. These benefits are not always appreciated. I would further add that the organic development of microfinance institutions is in itself highly valuable. UIMCEC, for instance, has grown not by a push from donors to expand, but by a demand from clients for more branches. As Rosenberg puts it, people have voted with their feet. In countries with weak public institutions, the MFIs are often the only formal institution people trust.
Understanding these more subtle effects of microfinance can make it seem less shiny, less sexy. But poverty is itself complex, multi-faceted and deeply opaque. A blind faith in the effectiveness of microfinance will not serve us well. I urge you to read Rosenberg’s very accessible article for yourself. If you want to delve deeper, read the RCT studies. Step back, and think about it for yourself. Then make a loan with a better understanding of how microfinance WORKS./>