#tbt: There is No “Silver Bullet” by Jake Kendall

Delegates from the 2000 Microcredit Summit in Zimbabwe

Lea en español *** Lisez en français

We are pleased to bring you this #ThursdayThrowback blog post, which was originally published in The State of the Microcredit Summit Campaign Report, 2011. We hope this will encourage you to reflect on the idea that all new ideas are old.

>>Authored by Jake Kendall, Research Fellow, The Bill & Melinda Gates Foundation

The poor are diverse and so are their needs for financial tools


Download the full 2011 State of the Campaign Report in our Resource Library

The past few years have seen the release of an initial round of results from randomized field trials looking into the impacts of various savings, credit and insurance services on the livelihoods of poor clients. They have been somewhat disappointing to those in the financial inclusion field who expected that they would provide clear marching orders.

Despite failure of many of these studies to find much of a poverty reduction impact on average, digging beneath the surface shows what appears to be a wide variation in both the rates of uptake of the products and in the impacts of the products on different segments of clients. This is not surprising. Financial services are primarily used to manage gaps in income or to generate lump sums for large purchases, investments or emergencies. Individuals will differ in their need to for these services. Thus, we would expect to see differences in uptake and impact. The early evidence seems to confirm that this is the case.

As examples, two recent studies of microfinance credit offerings — Banerjee, Duflo, Glennerster, and Kinnan (2009) studying Spandana in India and Karlan and Zinman (2009) studying First Macro Bank in Manila — do not show any improvement over 14-18 months in basic welfare indicators from providing credit to the general population. They do, however, show large changes in investment behavior or in other outcomes for specific subgroups — e.g. in the India study, entrepreneurs expanded their businesses and those who had similar traits to entrepreneurs launched new ones.

There have been a few studies of the impacts of savings accounts recently as well. Studying rural savings in Kenya, Dupas and Robinson (2009) found savings accounts had impacts when given to women. The study found that women who participated were investing 45 percent more, had 27 to 40 percent higher personal expenditures, and were less likely to take money out of their businesses to deal with health shocks than women who were not offered savings accounts. On the other hand, there were no impacts for the men. Studying Green Bank of Caraga in the Philippines, Ashraf, Karlan and Yin (2006, 2010), find that “commitment savings accounts” do increase average savings among women and increase feelings of empowerment relative to those with regular savings accounts. However, they also found that only 28 percent of those offered the accounts decided to accept them. Studying Opportunity International Bank of Malawi (OIBM) Brune, Gine, Goldberg, and Yang (2010) recently produced data showing that Malawian farmers with “commitment savings accounts” had significantly higher investments in farm inputs, but because the study group is only farmers, it is not at all clear how these impacts would play out in other livelihood groups offered similar accounts. Thus, in the savings studies as well there seem to be very different responses from different groups.

The conclusions we can draw from these studies are limited. It seems clear (and again, not very surprising) that demand for and impact of the different products is often correlated with differences in gender, education, wealth, livelihood segment, etc. That said, the studies to date do not give very fine-grained or particularly insightful segmentations of their study samples. It’s not always easy in academic studies to get sample sizes large enough to do this. There are fundamental limits as to what RCTs can tell us regarding how different individuals or groups respond to a single treatment. Nevertheless, it would appear that a rich direction for future research would be to frame the academic evaluations of financial products more along the lines of how marketers and practitioners would frame them, by focusing on distinct customer segments and assessing the uptake or impact among these different groups.

In a possible exception to the above trend, Jack and Suri (2010) document that, after its launch in 2007, the M-PESA money transfer and e-wallet product reached over 70 percent of all Kenyan households and over 50 percent of the poor, unbanked, and rural populations by 2009. New accounts have even grown by 40 percent since then. The researchers have preliminary results indicating that M-PESA users are better able to maintain the level of consumption expenditures, and in particular food consumption, in the face of negative income shocks. While it’s almost certainly true that, here again, different segments of clients have different uses for the product, clearly most Kenyan households have some financial need that M-PESA fulfills, and by connecting people with the ability to transfer funds, M-PESA may simply be allowing them to transact with a wider and more diverse set of counterparties who can help with whatever particular need they may have.

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