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Does microfinance reduce poverty?

Wednesday 17 November, 2010

The short answer is “yes,” of course it does.  Why else pose the question?  The topic was explored @ this event “‘Does Microfinance Reduce Poverty?” sponsored by the Grameen Foundation & Bankers without Borders.  Bill Daley, brother of Chicago Mayor Rich & Chair of J.P. Morgan Chase Bank’s Corporate Social Responsibility group, welcomed guests by letting us know Bankers without Borders has worked on 41 volunteer projects as a partner of the Grameen Foundation.

Most of the content of the event centered around an update by Kathleen Odell, “Taking another look,” to this report “Measuring the impact of microfinance.”   She explained the 2 main changes were:

  1. moving beyond just loans into offering savings plans & insurance, &
  2. using randomized controlled trial methodology (RCT).

There are many problems to confront when addressing this issue.  How does 1 define poverty?  There are both economic & social measures of income.  How does 1 separate cause from effect?  Do incomes rise as a result of microfinance or are borrowers simply the most entrepreneurial?  RCT creates a control group to make comparisons more relevant.  Coverage of 3 2009 studies in India, Philippines, & Kenya were inconclusive specifically related to income, but mentioned many positive effects, such as increased investment, employment, & more children attending school.  The conclusions were:

  • avoid oversimplification & generalizations because contexts differ
  • effects were encouraging re:  ownership, business investment, & savings
  • long-term horizons are required

There are a couple of questions which still beg exploration:

  • do increases in incomes lead to increased savings?
  • what are the macroeconomic effects of microfinance?

Alex Counts, Pres. of the Grameen Foundation, explained a bit more about his organization.  Grameen now has 3000 volunteers who spend varying degrees of time in various countries.  They’ve built 50 organizations which address structural issues in the world’s poorest countries which are home to the world’s poorest 1B people.

Beth Houle of Opportunity International, a Chicago-area based organization which does microfinance world-wide & about which I’ve written, talked more practically about the cost of market research in these countries.  They surveyed 5500 clients over the last 5 years & found they wanted savings products & regulated microfinance banks.  They have a client retention rate of 55-75%, but there are few other good metrics, which begs for more research.  They’ve asked donors for funding, but need to clarify the cost/benefit ratio to determine how helpful this information is.

Q&A

  • A Bankers without Borders volunteer spoke about her experience when she spent 2 weeks working in Tunisia.
  • some outcomes of long-term research are unforeseeable because cultural shifts take time & it’s difficult to maintain control groups over extended periods of time
  • 70% of the GDP of Africa is related to agriculture, so assisting farming is important & a focus of OI.  To be able to eat rice raised on their own land is an achievement
  • triple bottom lines increase environmental awareness, but create dilemmas in whether or not to encourage the use of fertilizers.  30K solar panels have been installed in the 3rd world
  • HIV/Aids is a business issue because loan repayment is at risk if people die
  • Governments & the Center for Financial Inclusion are creating codes of conduct the last 2 years to fight predatory lending.

In sum,

  • there are waves of studies out there, but all have limits & value
  • microfinance is not just about loans, rather also about who is the fastest & most efficient as well
  • real accountability is needed for more social change.
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