More Due Diligence Needed

What if not all microfinance programs are the same? 

What if some focus on providing the tools and support needed to help their clients move out of poverty while others focus on reaching maximum scale with a single product?

If that is true, then it would become hard to generalize about whether microfinance is an appropriate tool for the very poor unless one differentiates between the types of programs observed. Unfortunately, while David Roodman, in his recent book Due Diligence: An impertinent inquiry into microfinance, is very specific about the variety of outcomes microfinance programs can generate, he makes no effort to recognize the differences among the many microfinance programs employed globally.

His analysis relies most heavily on just two studies from 2009 which examine the data from a few programs studied within a very short timeline of 12-18 months. While his book references many studies that have widely ranging scopes and methods, Roodman chooses to focus on a very limited set of data to draw generalizations about the wide variety of microfinance programs in use globally.

Yet, if not all microfinance providers are the same, it would follow that some might place more emphasis on helping their clients climb out of poverty than others who might emphasize greater financial performance of the institution itself. A study that focuses on institutions aiming to maximize client benefit and movement out of poverty might show different results than a study that fails to make a distinction among its test subjects. It would be less meaningful to measure the success of microfinance towards alleviating poverty when the studies conflate results from institutions that seek a maximum movement by their clients out of poverty with institutions that seek maximization of scale and financial performance. While not quite comparing apples and oranges, it is, however, much like putting apples and oranges in a barrel and still expecting apple juice. In fact, this failure to differentiate between these types of institutions would obscure a potential correlation between efforts made by institutions to alleviate poverty and their clients’ movement out of poverty.

Our belief is that the way in which microfinance is implemented matters greatly to the very poor. We suspect that those MFIs which judge their success according to the measureable improvements in the lives of their clients end up designing very different programs and, we also suspect, have very different results from those that focus on market share, share price, and investor interests.

How would we identify those MFIs that focus on seeing improvements in their clients’ lives? First, they would take steps to ensure that their products and services did no harm. They would implement the Client Protection Principles of the Smart Campaign and seek to be assessed against those standards. Second, they would have a clear social mission and a social performance management system that aligns with the guidelines developed by the Social Performance Task Force. Third, they would have a way to determine the poverty levels of their clients and movement out of poverty over time, and they would use this information to improve their products and services so that they could do a better job of meeting their client’s needs.

These are the types of MFIs that we want to recognize with the Seal of Excellence for Poverty Outreach and Transformation in Microfinance. Doing so can enable the industry to learn from the best practices of MFIs that can show that their clients have climbed out of poverty and found secure footing at a new level. In addition, the development community can learn to differentiate between those institutions which prioritize the accrual of financial benefits to the institution itself and those which seek to facilitate the movement of its clients out of poverty—and most importantly to judge each appropriately according to its purpose.

As the Seal of Excellence moves into testing phase, members of the developing team have been struck by the diversity of approach and program design. We find that those institutions which focus on the poorest client segment often mix credit with other interventions, such as savings, insurance, health care, and education, to help their clients overcome the barriers that have kept them trapped in poverty.

Roodman points to the measurable importance of savings and the perceived importance of a variety of other financial services, yet still he rules out credit as a potentially beneficial financial tool for the very poorest. Our concern here is about a silo effect on the data, which could mask the co-supporting nature of diverse financial products—credit and non-credit—on a client’s financial position. We think more research should be done regarding how different combinations of microfinance products and the mixing of financial products with other development interventions can increase the likelihood of movement out of poverty.

Certainly, there may be times when credit is not an appropriate financial product for one client who instead might need to emphasize savings. But to another client, credit could be the necessary first step to building savings. To another it may be a combination of the two—structured as best fits the needs of the client with the flexibility to change and grow with the client as her situation changes. And to yet another, microfinance services may need to be combined with adequate health care or education.

This brings us back to the central question: What if not all microfinance programs are the same? What if providing the tools and support needed to help their clients move out of poverty is a picture that changes from place to place and from client to client? If this is true, then generalizations such as those which Roodman makes become difficult. We would call for more analysis and rigor applied 1) to selecting a more appropriate sample of institutions to study if one seeks to evaluate impact on poverty alleviation, and 2) to looking at how different combinations of microfinance products and services affect movement out of poverty.

We applaud rigorous research into microfinance and its effects on poverty. We propose that this research seek to better address the complexity of the industry by accepting the obvious fact that not all microfinance institutions provide the same set of products and services. Once we do that, we can start to ask instead: “What types of microfinance, in combination with what other products and services, have the greatest impact in helping people move out of poverty?”

– Larry Reed, Director, Microcredit Summit Campaign
– Jesse Marsden, Research and Operations Manager, Microcredit Summit Campaign

One thought on “More Due Diligence Needed

  1. On a related topic, the Washington Post published an op-ed by David Roodman. Read "Microcredit doesn’t end poverty, despite all the hype" here: response, Campaign director Larry Reed published a letter to the editor taking on March 14 issue with Roodman's broad conclusion."David Roodman has done a great service to the microfinance community, showing us where our words do not match our evidence. Unfortunately, he painted with too broad a brush in his March 11 Outlook article, “Why loans for the poor don’t end poverty.” He used a small amount of evidence to draw conclusions for a large and diverse industry. …" Read "A too-generalized look at microfinance" here: just today, March 23, the Center for Financial Inclusion published a post on their blog from the Microfinance CEO Working Group. In their post, "“The hype is long over” – Microfinance CEOs respond to Washington Post article “Microfinance doesn’t end poverty, despite all the hype”", leading microfinance organizations ACCION, FINCA International, Freedom from Hunger, Grameen Foundation USA, Opportunity International, Pro Mujer, VisionFund International, and Women’s World Banking respond to Roodman's op-ed as well."This may surprise you. As the CEOs of eight global microfinance organizations, we largely agree with the substance of David Roodman’s March 8 op-ed … [but], We have much more we need to do, but continuing to debate about whether microcredit – by itself – can end poverty is distracting us from the far more important question of what we can do to assist the poor."Read the post here:, on March 20, the Microfinance Gateway published "Does Microfinance Work?" (Microfinance Voices) a review of the response to David Roodman's new book, "Due Diligence: An Impertinent Inquiry into Microfinance".Read the review:

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