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3ie-LIDC Symposium: no evidence that microfinance lifts people out of poverty

The 3ie-LIDC Symposium 'Does microfinance lift people out of poverty?' held at the London School of Hygiene and Tropical Medicine brought together the perspectives of academics, policy-makers and microfinance practitioners to examine the current evidence of impact of microfinance interventions.
 
In the words of Prof. Howard White, Executive Director of the 3ie: 'A lot has been said about microfinance, but to-date there have been few attempts to measure its impact and, until very recently, no systematic attempts to summarise what evidence there is.'
 
Dr. Ruth Stewart from the Institute of Education presented results of a systematic review of 15 studies on microfinance and poverty in sub-Saharan Africa. The review found evidence as to whether microfinance actually increases income to be questionable. Similarly, no conclusive positive effect was found on children’s education, women’s empowerment or job creation. However, some studies have shown a positive effect of microfinance on health outcomes.
It was found that microloans are rarely used to fund future income-generating activities. A major issue was also the high interest rates that force borrowers to take new loans from other institutions to pay off old debt, which means they can actually end up worse-off than before accessing microfinance.
In conclusion, Stewart argued that microfinance benefits some, but harms others. It has to be rolled out with caution and better research is needed into what works.
 
Dr. Maren Duvendack from the International Food Policy Research Institute talked about her systematic review of 74 papers. The review has revealed weaknesses of many impact evaluation studies – many are poorly designed and based on invalid assumptions. Duvendack argued that almost all impact studies are vulnerable to bias.
 
The review has found very little evidence of microfinance being pro-poor or pro-women. Existing studies suffer from weak methodologies and inadequate data. It is unclear under what circumstances and for whom microfinance works.
 
In conclusion, the speaker called for more and better research, as well as capacity building for beneficiaries (financial literacy training) and more accommodating policies.
 
Dr. Milford Bateman from University of Juraj Dobrila Pula, Croatia, argued that impact evaluation studies are often deliberately biased, aiming to prove a positive effect of microfinance. Donors are uncritically favourable to microfinance because of its attractive ‘self-help’ aspect.
According to Bateman, microfinance evaluations tend to ignore three key factors:
• Displacement of employment/ negative spillovers - new enterprises get created through microfinance, but they compete with existing ones and often put them out of business. Microfinance interventions wrongly assumed that demand for microfinance would be endless (‘fallacy of composition’).
• High client failure/ exit – microenterprises fail more often than other businesses, but only successful ones are included in the studies.
• Systemic transformation – impact on the whole community.
Claire Innes from DFID, in her discussant’s response, agreed that evidence of the impact of microfinance is too thin and better data is needed to inform future interventions.
 
Innes emphasised that microfinance is not an end in itself, but a tool. It must be part of an integrated financial sector development programme and should not be seen as synonymous with microcredit.
 
Priya Lukka from the Asian Foundation for Philanthropy claimed that microfinance is a mixed market, with many players and too little regulation. Most loans are used on immediate consumption and not savings that would secure future income. Many borrowers are caught in a repayment spiral, taking new loans to finance old ones.
 
There is still hope for microfinance as poor people need access to finance, but more and better regulation is needed, as well as further research.
 
A lively discussion that followed focused on issues of whether to write off microfinance or whether interventions can be designed in way that benefits the poor.
The Symposium is part of the 3ie-LIDC Seminar Series ‘What works in international development?’. Six seminars have taken place this year on various topics in impact evaluation including:
Does Internet-based medical education work?
Can agricultural interventions improve children's nutrition?
 
Further resources: