1. Is microfinance the solution to anything? The evidence for (and against) its contribution to poverty reduction Ruth Stewart, PhD Universities of London and Johannesburg 19 th November 2012

2. 2 Outline 1.Microfinance and the private sector - what we thought we knew 2.A new knowledge on microfinance 3.Where does this leave us?

3. Extended from loans, to savings, insurance, transfers etc 44 billion dollar industry High interest rates (10%-200%, commonly 30%) Asian ‘model’ spread internationally in the 1980s Has seen ‘mission creep’ Bit of background on microfinance… Financial services for the unbanked Small loans to build sustainable businesses Initially small, self-help groups and credit unions Increasingly involves the private / for profit sector 3

4. The silver bullet? 4

5. Private sector Invest in financial infrastructure Microfinance services Greater financial wealth Poor people Profit Reduced poverty Invest via intermediaries Invest in microenterprise How might the private sector reduce poverty via microfinance?

6. Assumptions within this model 4. Greater financial wealth means reduction in poverty 3. Microfinance enabled / enhanced microenterprises lead to greater financial wealth 2. Microfinance leads to investment by poor people in microenterprises 1. Poor people access microfinance services 6

7. 7 Micro- credit Micro- debt

8. Big assumption is that microfinance ‘works’ 8 Poor people access microfinance Engage in economic opportunities Increasing wealth/ Reducing poverty Poor people are accessing microfinance Assuming that increased financial wealth equates to reduced poverty Microfinance enables engagement Engagement leads to greater financial wealth 154 million

9. Our research to explore whether microfinance works Commissioned by UK’s Department for International Development to address:  Whether microfinance enables poor people to engage in economic opportunities  Whether this microfinance-enabled engagement leads to increased wealth Initially focussed on sub-Saharan Africa (financial and welfare outcomes) Extended our scope worldwide (financial outcomes only) 9

10. Principles we worked to Important to consider all potentially relevant studies Not all research is ‘good quality’ – there is a need to assess risk of bias and exclude studies which we don’t have confidence in There are inherent risks of bias within some study designs – not all are able to establish causality or attribution We must also reduce any risk of bias within our own methodology 10

11. 11 International agencies Systematic reviews AID Impact Search thoroughly for evidence Filter for relevance Assess for potential bias Synthesize findings

12. 12

13. ASSUMPTION: Microfinance leads to investment by poor people in microenterprises 13 Poor people access microfinance Increasing wealth/ Reducing poverty Poor people are accessing microfinance Assuming that increased income equates to reduced poverty Microfinance enables engagement Engagement leads to greater financial wealth Engage in economic opportunities

14. 14 Engage in economic opportunities Micro-credit: should enable the poor to invest in income generating assets such as stock for sale Micro-savings: should enable those with variable income to improve financial planning, eg across the agricultural year. Savings are less likely to increase engagement in economic opportunities, although they may sustain engagement for those who already have an income. THEORY: Microfinance leads to investment by poor people in microenterprises

15. 15 Engage in economic opportunities Micro-credit: does sometimes influence poor people’s engagement in economic opportunities EVIDENCE: Microfinance leads to investment by poor people in microenterprises Micro-credit combined with savings: evidence suggests that these do not impact on income diversification, although borrower/ savers are more likely to have more than one business. Micro-savings: does not significantly increase poor people’s engagement in economic opportunities.

16. ASSUMPTION: Microfinance enabled / enhanced microfinance leads to greater financial wealth 16 Poor people access microfinance Engage in economic opportunities Increasing wealth/ Reducing poverty Poor people are accessing microfinance Assuming that increased income equates to reduced poverty Microfinance enables engagement Engagement leads to greater financial wealth

17. ASSUMPTION 3: Microfinance enabled / enhanced microenterprise leads to greater financial wealth 17 Increasing financial assets Increasing savings Increasing expenditure Increasing income Poor people access microfinance Engage in economic opportunities

18. THEORY: Microfinance enabled / enhanced microenterprise leads to increased income 18 Micro-savings: should enable better financial planning, which might smooth income, and potentially increase longer-term income, e.g. using savings to extend or sustain a business, covering seasonal shortfalls Poor people access microfinance Engage in economic opportunities Micro-credit: should increase incomes eventually, but repayment obligations may delay increase

19. EVIDENCE: Microfinance enabled / enhanced microenterprise leads to increased income 19 Micro-savings: Commitment accounts increase the value of savers’ businesses, but do not increase their business profits.. Ordinary savings accounts have no effects on clients’ income. Poor people access microfinance Engage in economic opportunities Micro-credit: some data suggest increases in borrowers income but others show reduced income, and some shows income is lower the longer borrowers are involved in micro-credit Combined micro-credit and micro- savings: appear to increase income in some studies, but not in others, but each of these studies are prone to bias.

20. THEORY: Microfinance enabled / enhanced microenterprise leads to increased savings 20 Micro-savings: the availability of savings accounts, and particularly commitment accounts, should encourage and facilitate saving any available profits…if there are profits… Poor people access microfinance Engage in economic opportunities Micro-credit: savings are likely to reduce whilst repayments are made, but credit is also often linked to compulsory savings

21. EVIDENCE: Microfinance enabled / enhanced microenterprise leads to increased savings 21 Micro-savings: does significantly increase people’s savings, but not for everyone Poor people access microfinance Engage in economic opportunities Micro-credit: The best available evidence suggests that micro-credit reduces people’s savings. Slightly less reliable evidence suggests borrowers’ savings increase, or do not change. Combined micro-credit and micro-savings: has no significant effect on levels of savings, although these results are not 100% reliable

22. THEORY: Microfinance enabled / enhanced microenterprise leads to increased expenditure 22 The relationship between microfinance and expenditure is complex. Not always clear what changes in levels of expenditure mean, Can relate to increased investment in productive goods, an increased quality of life, or just an indication of more cash to spend. Poor people access microfinance Engage in economic opportunities

23. EVIDENCE: Microfinance enabled / enhanced microenterprise leads to increased expenditure 23 Micro-savings: has no significant impact on expenditure Poor people access microfinance Engage in economic opportunities Micro-credit: no significant effect of credit on business consumption, although there is a decrease in consumption of food for some households. Less reliable evidence shows increases in expenditure Combined micro-credit and micro-savings: appears to increase spending on housing and consumer goods, but the data aren’t 100% reliable

24. THEORY: Microfinance enabled / enhanced microenterprise leads to accumulation of assets 24 Micro-savings: ought to enable clients to accumulate funds gradually and therefore enable them to invest in non-financial assets in the longer term. Poor people access microfinance Engage in economic opportunities Micro-credit: is expected to increase clients’ accumulation of non- financial assets for use in their businesses. But requirements to repay debts may lead borrowers to sell non- productive non-financial assets to raise funds quickly

25. EVIDENCE: Microfinance enabled / enhanced microenterprise leads to accumulation of assets 25 Micro-savings: using a commitment account increases savers’ accumulation of non- financial assets; ordinary accounts have no significant impact Poor people access microfinance Engage in economic opportunities Micro-credit: no significant impact on the accumulation of assets at the household level, but some evidence of accumulation at the business level Combined micro-credit and micro-savings: varied impacts, with some signs of clients selling assets to repay loans

26. Big assumption is that microfinance ‘works’ 26 Poor people access microfinance Engage in economic opportunities Increasing wealth/ Reducing poverty Poor people are accessing microfinance Assuming that increased income equates to reduced poverty Microfinance enables engagement Engagement leads to increased income

27. Poverty reduction isn’t just about financial wealth (Evidence from Africa) There is some evidence that microfinance enables poor people to be better placed to deal with ‘health shocks’, but this is not universal. There is some evidence that microfinance enables people to improve their housing There is some evidence that micro-credit damages children’s education Credit increases food security for some but worsens it for others. There is no reliable evidence that microfinance empowers women There is not enough evidence to allow us to conclude on whether financial interventions targeted at women are more or less effective for them.

28. So… on the basis of the evidence for and against microfinance… is it the solution to anything? People use microfinance – fulfills a need (2.5 billion still have no access to formal financial services) It increases poverty for some, and decreases it for others It is a major industry in itself 28 No silver bullet

29. Why might micro-credit increase poverty?  Loans at high interest rates which need to be repaid quickly  People don’t necessarily invest their loans  No guarantee that investment will yield profit - competition, economic environment, lack of entrepreneurship etc 29  Short-term vs long term horizons  On the part of the poor  In the evaluation of microfinance  Micro-savings has less potential for good, and for harm

30. 30 Impact on poverty SHORT TERM LONG TERM WEALTH OUTCOMES NON-WEALTH OUTCOMES TIME SHORT-TERM FINANCIAL OUTCOMES Microfinance SHORT-TERM NON-FINANCIAL OUTCOMES Invest in health, education etc Invest in financial wealth SHORT-TERM AND LONG-TERM FINANCIAL AND NON-FINANCIAL OUTCOMES

31. Assumptions within this model 4. Greater financial wealth means reduction in poverty 3. Microfinance enabled / enhanced microenterprises lead to greater financial wealth 2. Microfinance leads to investment by poor people in microenterprises 1. Poor people access microfinance services 31

32. Private sector Invest in financial infrastructure Microfinance services Greater financial wealth Poor people Profit Reduced poverty Invest via intermediaries Invest in microenterprise How might the private sector reduce poverty via microfinance… in light of the evidence? ? ?

33. Where does this leave us? 33  Don’t believe all you hear about microfinance – if it sounds to good to be true, it probably is  Think it through logically… follow the money  Test out the theory using rigorous research designs  Remember that microfinance isn’t one thing – we still don’t know enough about which services work, in which combinations, or the circumstances in which they work, or for whom  Bear in mind short-term AND long-term horizons

34. 34 Thank you r.stewart@ioe.ac.uk