Micro Credit: Questions Haunt
By Tom Heinemann
24 June, 2012
[Following are extracts of two articles by the Danish journalist Tom Heinemann (firstname.lastname@example.org) and published on the Norwegian television website, NRK, www.nrk.no/brennpunkt.]
Built on Foundations of Sand
A group of researchers lead by Maren Duvendack, was assigned by DFID to make a Systematic Review of a great number of evaluation reports and impact assessments on microfinance projects. Their job was to find the documented evidence that the projects work as planned, and contribute to eradication of poverty.
I think that the enthusiasm for microfinance might have been build on foundations of sand and we might have been better advised to look for alternatives, says Duvendack, when interviewed by NRK Brennpunkt.
The challenges in the microfinance sector are well acknowledged by now, and also widely discussed. A series of studies have been published the past years. But these two stand out as special, because of their broad scope of untypical methodology. Duvendack’s group and a group headed by Ruth Stewart both chose «Systematic Reviews» as their methods. In Stewart’s case, her group scanned through an initial pile of 6,000 reports from microfinance projects in Sub-Saharan Africa.
What you end up with is a system which is about making profit, but is also making a profit of the poorest people in the world, and those two things don’t sit comfortably together, Stewart says.
Now is the time for changes in policies. Among those who are changing focus, are Norwegian aid authorities.
For governments, such a new focus can be more on assessing quality of existing projects, more evaluations. There are discussions over tools, as Credit Checks and Debt Registers, tools that more mature finance markets have dealt with for decades, but which the microdebt markets have lacked. There is also a discussion over a potential maximum interest rate.
The Duvendack report is now part of the advice British authorities bases their future policies on. Maren Duvendack is a researcher at the ODI (Overseas Development Institute).
– What did you find in your work?
– We found out that most of these studies were based on weak methodologies and inadequate data, says Duvendack.
– Based on our review, we could not reach any firm conclusions, as to whether microfinance work or does not work because the evidence was limited and rather weak.
Lack of Evidence
The researchers were surprised by the lack of evidence that microfinance removes poverty.
– I thought it was amazing that the evidence is actually rather weak and not very convincing, giving that there had been so many microfinance impact evaluations over the last two decades, and still after two decades we don’t know how microfinance works, and for whom it actually works, she says.
After more than two decades, where Norad and others have given massive support for microfinance projects, mainly microcredit loans, these researchers say it is wrong to say microfinance is the only possible solution to the poverty problems.
By the end of 2010, another Systematic Review was published. This time from Sub-Saharan Africa, written by researchers from the University of London and from Johannesburg, South Africa.
Again, the conclusion was that most of the previously made impact assessments were worthless. Only 15 of the 6,000 reports the team scanned through was considered of such a quality that one could learn from them.
Good for some
Despite the lack of quality on most reports, the researchers did find some good news:
– We found that microfinance does do good for some people, particular in areas for example like investing in housing, which clients seems to benefit from. Not necessary being able to build your own house but they do benefit, Ruth Stewart says.
Negative effects on education
But there were negative effects also. In some cases, the children paid the price when the families’ micro loans where difficult to handle.
– For some people microfinance was actually reducing their levels of education of their children, so it was doing harm.
Ruth Stewart tells us about boys in Malawi who had to repeat years in school and girls who where completely delayed in school enrollment. The fact that their parents, in these cases, took out loans were damaging the children’s education.
– So the idea that we treat the poor differently, and somehow expect that a very small loan at a high interest rate is going to produce those kinds of things, it doesn’t make sense, Stewart says.
Debt-spiral of micro loans
Roy Mersland, researcher and Centre director at the Norwegian Centre for Microfinance research, said to the newspaper Fædrelandsvennen that Mohammed Yunus should have been given an award for innovative banking instead of the Nobel Peace Prize.
Roy Mersland still believes in microfinance as a tool for eradicating poverty. But his opinion is that many have had an unbalanced approach to the sector.
- At first, we had many years where those who believed in microcredit only presented the positive sides of microloans. The past year, the pendulum has swung. There are more critical research reports.
-And in the media, one is suddenly more interested in the negative effects. The truth is probably somewhere in between, and has been, all the time, he says.
NRK wonders what, in his opinion, has been the achievements in the microfinance research the past years.
- All research is founded on theories and hypothesis. One such theory behind microfinance is that of «financial intermediation», that it is important that money is in circulation. In other words, that local savings are made accessible for those who want to invest in, for instance, a house or in a new business.
- This theory is still strong in our research community, but there are others that have been more difficult to find proof for.
- Which ones?
- One of the theories has been that lack of capital has been one of the most important factors for the poor. If a lack of access to credit is stopping them from starting new businesses and projects, then small and quick loans could be a good answer to this challenge. With help from new research, we can now see that this theory needs to be developed further. Of course, capital is a required factor in developing new business, but capital is not enough in itself, Mersland says.
Mersland acknowledges the challenges with interest rates in some projects are very high, and that poor families take multiple microloans. This can in some instances lead to a debt-spiral of microloans.
One possible answer to the problem is to have credit checks and a national register over microloans.
Mersland believes this may be a good idea.
Another suggestion which is being debated is a possible maximum interest rate on microloans. Mersland sees that high interest rates may contribute to institutions not doing enough to keep their costs low.
Yet, he is critical towards a strict maximum interest rate:
- If interest rates are cut so low that there is no margin left for the companies lending out money, we risk that they of out of business. That would be very unfortunate for the customers.
- When millions of poor families choose these loans, it is because they think this is the best alternative, amongst many. We should be careful, and not take away this option that they see as best in their own situation, he says.
- What new knowledge have we gained from research in this area that helps on the negative side-effects we know from some microfinance projects?
- Well, this is not new knowledge, but the theory on income smoothing has been strengthened the past years. The poor does not have a smooth low income. Even in Norway, a rich country, we do a lot to smooth the flow of income. We have “holiday-money” in the summer, and a month with half tax-levels before Christmas, and we have pensions when we get old.
- Imagine a poor farmer with all his income bound in the crops he can harvest twice every year. His income does not come evenly throughout the year. Small loans can smooth his income, and have a stabilizing effect on a family’s economy.
- Are you talking about cash loans now?
- In a Norwegian context, cash loans have a negative sound. But in the contexts we are talking about here, small loans to smooth a family’s consumption may have a positive effect. We should also not forget the other tools within the microfinance sector. Microcredits are not the only tools. I believe, in the future, we will se more focus on insurance and savings, other financial tools that have already proven well on a micro level.
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