2009: The Year Microfinance Died

If  microfinance was born in 1976 with Muhammad Yunus' $27 loan, 2009 was the year it died.

Ok, not really, but it did catch a lot of flak. Once heralded by some as a "silver bullet" to end poverty, this year people got real about what microfinance is and isn't and owned up to the limitations.

This reality check was fueled mostly by the release of several studies on microfinance, which used randomized controlled trials for the first time to measure microfinance's impact on its clients. The results were not so hot; with no study illustrating the transformative change people expected.

Then, not shortly after these studies were released, Kiva, the largest microfinance proselytizer in the US, took a fall from grace (at least in the blogosphere), admitting that its microfinance loans did not actually create a "person to person" connection. Since then, GiveWell, a powerhouse of a charity evaluator, has unrelentingly pounded against the microfinance ivory tower and recently discouraged people from donating to Kiva and other US microfinance charities, including the Noble-Peace-Prize affiliated Grameen Foundation.

Microfinance certainly has taken a hard fall, but I'm not sure if that's its own fault. I think we've built it up too much and overreacted to the recent detractions from the typical rosy narrative. Abhijit Vinayak Banerjee, Esther Duflo and Dean Karlan, three professors who worked on the aforementioned studies, recently wrote a guest post on Nicholas Kristof's blog about the microfinance critiques and the response. They concluded:

[A]s we see it, microcredit seems to have delivered exactly what a successful new financial product is supposed deliver—allowing people to make large purchases that they would not have been able to otherwise. The fact that some people expected much more from it (and perhaps they are right, may be it will just take longer), is perhaps inevitable given how eager the world is to find that one magic bullet that would finally “solve” poverty. But to actually blame microcredit for not promoting the immunization of children is no different from blaming immunization campaigns for not generating new businesses.

I think that sums up the whole year in microfinance perfectly. Microfinance only does what normal loans do: gives access to credit. It provides a service where there was none before. (For a broader perspective on the effects of the microfinance sector on development, see David Roodman's forthcoming book.) This certainly can't hurt, but it might not help as much as people expect.

If you are still interested in investing in finance-related programs (as I am), you do not need to admit defeat. Remember, microfinance isn't limited to microcredit--it can encompass all financial sectors, including savings, which actually might create more transformative change than microcredit.  If you want to improve the economic situation for the underserved, look for organizations that provide services beyond one type of finance, like the Village Enterprise Fund, which gives business training on top of their start-up grant capital. A combination of services might have a larger effect than just microcredit alone.

Of course, they might not. We will see just have to see what the next year brings.

(Edit: If you are serious about investing in microfinance, check out this guide from Good Intentions are Not Enough.)

Putting my money where my blog is

I have a confession.  For as much as I talk about it, I've never actually made a social investment. So, I decided to own up and finally do it. After much deliberation, I chose the Village Enterprise Fund to support. 

I chronicled how I came to VEF for Yes! Magazine. I laid it out as a simple three-step guide to social investment, so if you have never done it before, or if you are a casual donor interested in taking the next step with your donations, check it out.  I hope my example can help.

Frequent readers of this blog will notice I don't use the same language in the article as I do here. I don't actually even mention the word "investing" once. Some people are uncomfortable with business-y terminology and I didn't want to exclude through word choice. As long as people are doing it, it doesn't matter what they call it.

Personal thanks to Holden at GiveWell for talking through this process with me.

Generosity Abounds

or: How I Learned to Stop Worrying and Love Emotions


I recently had a (kind of) discussion with Sasha Dichter about his proposal for a month-long "Generosity Experiment," where he decides to give to whomever asks him, whether they be family, friends, organizations, or just people on the street. My initial reaction was "AHH! NOO! STOP!" I was able to recompose myself and offer this more timid and respectful response:

I’m not sure if I support this. What would you say to someone who told you to buy anything anyone offered you? Your generosity experiment is the same concept, but instead of buying a product, your donations are going to a service: change within the charity’s area of focus.
I don’t want most of the products out there and I don’t want to support most of the charities out there. I have no issue with other people supporting those charities, assuming that they have a good reason to. I just don’t think “because they asked me” is a good enough reason.

Basic social investment stuff. Dichter responded with this:

Jeff, solid points all, and aligned with why I try to be very discriminating most of the time. What about the personal angle of generosity as a practice?

I was not placated. I responded with this:

I think being generous as a practice is a wonderful thing, be it personal, professional, or casual, but we have to remember who is being helped by our giving. I feel like its irrelevant what we learn about ourselves through giving when looking at the broader goal in mind, i.e., helping others. If our donation to the homeless man on the street could have been better used at an organization that provides services to the homeless, then our money should go there. If it is actually better spent by giving it to the homeless person, then it should go there. But determining that takes discernment and thought, and not indiscriminate generosity.

This discussion (as well as the other comments on the post) represent the tension between giving with your head and giving with your heart, or as I've usually thought about it, the difference between social investments and giving. I think I've always had a knee-jerk negative reaction to anyone who claims emotional reasons for his or her giving, because it's hard to work towards efficiency and build systems of accountability when people are just motivated by "doing a good thing," rather than "getting something done." I am not interested in people who are looking to "feel good" or for "personal growth" through service or giving, because ultimately, the people in the position to give are usually not the ones who need the help.

But that does not mean the emotional side of giving (or social investing) should be ignored. I think I've always assumed emotions have no place in effective philanthropy and anyone motivated by their emotions must be a do-gooder who doesn't understand what it takes to get things done. But emotional connections can be used to increase giving and to make connections between donors and organizations. And you can't dismiss the emotional toil that comes from seeing and working to change an imperfect world.

I think Philanthropedia's philosophy of “choosing a social cause with one’s heart, but choosing an organization with one’s mind” is the best way to combine the emotional side of giving with the scrutiny needed for social investments. It recognizes the emotions that are a part of any motivation to create change while still leaving room for accountability and effectiveness. It separates those out who are motivated by their emotions from the ones who act solely based on them.

I now realize that the heart does have a place in social investments. I don't know why I did think that before. Maybe its because, deep down inside, I'm afraid of my own feelings, or maybe its because I'm a cold-hard capitalist underneath it all. I still don't agree with Dichter's "Generosity Experiment" in practice, mostly because I don't have the income to support that, but in theory, it helped me see that emotions are a key part of social investments.

Something good has begun

Late at night, when I can't sleep, my thoughts turn to the good things to come. I think about what the future social investment market will look like. Will it, I wonder, look anything like the current investment market? What will change? Obviously, it will not be a one-to-one transfer: We can't trade dividends on social change or purchase futures in the numbers of lives saved. What will be the differences between a social investor and a traditional investor?

I don't know enough about philanthropy or traditional investments to tell you. But two organizations are shaping that future social investment market today.

Philanthropedia has created a "mutual fund" for social investors. Using a panel of experts, it constructs a list of organizations working within a certain cause (right now they have climate change, education and Bay Area homelessness) that a person can divide their donation amongst for maximum impact. Each organization is weighted within the mutual fund based on their effectiveness.

The Social Impact Exchange has created a sort of "stock market" of non-profits. Its Investment Clearinghouse (free registration required) has a list of high impact and effective non-profts for investors to scrutinize. Sean at Tactical Philanthropy says that this Clearinghouse serves as a sort of non-profit stock market not because you can watch the shares go up and down, but because it lets charitable organizations "go public" and reveal information to individual investors in the hopes of gaining more support. (Edit: For more info on the Social Impact Exchange, read one of its founders' response on Tactical Philanthropy.)

I think that this quality--accessibility of information--will be key to any sort of future social investment market and its resulting "investment products." Philanthropedia offers a neat way to get people thinking about social investment, but the concept of a mutual fund might cause people to just take the advice and not think critically about their donations. Philanthropedia does provide reviews of the organizations within the funds, but most of them are just basic information combined with quotes from their experts. I would prefer to see more information on the organizations to allow the donors to make their own decisions on who to give to.

The Social Impact Exchange, on the other hand, does offer more room for critical thinking. It provides an almost-overwhelming availability of information on its "public" non-profits as well as resources for scaling social initiatives. (It's a "Knowledge Center" as well as a Clearinghouse.) I prefer this wealth of information to Philanthropedia's method, which isn't much more than a marketing technique to encourage donors to invest. Clever marketing isn't a bad thing, but I am not sure that a mutual fund is actually something the social investment market can support, as individuals are getting social returns, not monetary. Diversifying a "portfolio" will not get you greater returns that fully supporting one organization, especially for small donors.

Evaluation based on impact and effectiveness should never be discouraged, regardless of its packaging, but information access must always remain at the foundation of any evaluation. Anything that gets good information out to donors helps create the reform needed. I don't know what the future social investment market will look like, but I do know that without information allowing individuals to think critically about their donations, that market may never arise.

(Thanks to Sean at Tactical Philanthropy for pointing me to both these organizations. To read his more detailed, more eloquent vision for the future, see his 2008 Financial Times column.)

BIG EDIT: Philanthropedia responded. They make an excellent point, saying that they do not include too much information in their reviews so they don't overwhelm people (I would say the Social Impact Exchange is currently guilty of that, but their market also isn't causal donors.) I would like to see every individual behave like a serious investor, but that probably isn't likely, and Philanthropedia's method and marketing meets them half way, like the post says.

Also, the post includes a great quote from one of Philanthropedia's founders, saying that its philosophy is about “choosing a social cause with one’s heart, but choosing an organization with one’s mind.”

Good stuff, all around.

Boycotts or positive reinforcement?

As promised, this is the follow-up to my last post to lay out my issues with one of the major alternative charity evaluating sites, GiveWell.

First, I want to say that I greatly admire what GiveWell has done. In my last post, I said that the book on modern philanthropic reform will start on December 1st, 2009, but if I write it, it will probably start with GiveWell's founding. What they decided to do was truly revolutionary and their amazing blog opened up a world to me that I didn't know existed.

GiveWell aims to direct donors to the most effective charities to get the most out of their money. Their in-depth research is ongoing, but so far they've been able to identify a short list of top rated charities. I do not take issue with their selected charities or the methodology they use, I just wonder if directing people towards organizations already complying to the criteria of accountability and transparency is the best way to encourage other organizations to hold themselves to the same standards.

In a recent post, Holden Karnofsky, of GiveWell's co-founders, asked this question: If we have no information on a charity, and no way to determine its effectiveness, should we assume the best or the worst about its effects? I think the answer is neither: we encourage the organization to prove its effectiveness and let us, as the social investors, decide. I think this is were GiveWell falls short. Instead of encouraging and rewarding charities who are taking steps towards the end goal (transparency and accountability) they reward those already achieving that goal and leave the others behind.

Now, GiveWell's critical voice alone could be enough to whip other charities in to shape, but I am doubtful. It comes down to a question of if you think it is better to create change from the inside of a system (like say through shareholder activism) or from the outside (like say with a boycott.) I think it is better to work from within to encourage (assuming the system has avenues for change) rather than resist it as a whole. GiveWell's dismissal of any organization without programmatic evaluation will cause confusion, possibly resentment or even the reactive dismissal of GiveWell's concept of accountability and effectiveness.

GiveWell is a charity evaluator, not a reform organization. It is trying to get a message out to consumers, not change an industry. But I would hope that they realize that all the effective change organizations in the world are not limited to their 10 top-rated charities and that they would want to see other organizations share their fundamental ideas about philanthropy. I hope they can start to share their expert knowledge with other charities and help them become as effective as they should be.

12/1/2009

Today was a big day. If anyone ever writes a book about modern philanthropic reform, December 1st, 2009 will be the day the story begins.

Philanthropic actors issued a joint press release today urging people not to donate based on a charity's financial overhead, but on its effectiveness. This critique is nothing new, but the release is important because Charity Navigator,  a major charity evaluation site that ranks charities solely on overhead costs, was one of the co-signers. Essentially, Charity Navigator conceded that its method is wrong and joined the other major charity evaluator (GuideStar) and three other alternative evaluation sites (GiveWell, Great Nonprofits and Philanthropedia) in calling for a better system of evaluation based on effectiveness and accountability.

GuideStar and Charity Navigator endorsing the work of the alternative evaluators would warrant a post by itself, but Charity Navigator stepped up this call to action with some actual action. In conjunction with the joint press release, Charity Navigator announced a complete overhaul of their ranking system, set to go up by Spring of 2011. They will not change their four star system, but instead expand their analysis to include three criteria:

1. Financial health – Is the nonprofit sustainable? Does it have robust financial strength to survive in good times and bad? Is the overhead not at the extreme end of the continuum?
   
2. Accountability – Does the organization have ethical practices, good governance and transparency? Is it accountable to its constituents?
   
3. Outcomes – Can the nonprofit supply information about meaningful and lasting change in the communities and lives of the people it serves? Can they show evidence that these changes are as a result of their efforts? Do they have systems and processes in place to effectively manage their performance?

Ken Berger, CEO of Charity Navigator, said that the new definition of the four star rating will relate to the level of risk of investing in a nonprofit: "[A] zero star nonprofit would be a very high risk social investment and a four star would be low risk."

The evaluation alternatives of GiveWell, Great Nonprofits and Philanthropedia are good starts towards a better evaluation system, but they are not perfect (as GiveWell notes). I take issue with their methods: GiveWell seems to punish the lack of accountability rather than encourage (more on this later), Great Nonprofits seems to be nothing more than a place where people tell each other about how great their nonprofit is, and I am not sure if Philanthropedia's model has much room for expansion (also more on this later).

Charity Navigator's methodology probably has its flaws, just like the other evaluators, and Berger does not lay out a lot of details. (Mostly because they don't have any. With the help of its team of advisers, Charity Navigator hopes to have a first draft of the methodology done in Spring 2010.) But Charity Navigator's (and Berger's) commitment to evaluating based on accountability and effectiveness, combined with the company's resources and scope (the site gets 3 million unique users each year, according to Berger's post) could be the start of far-reaching reform.

Berger says that this is the "battle for the soul" of the nonprofit industry. I agree with him. Regardless of Charity Navigator's eventual methodology, the battle can't be won unless individual donors use evaluation resources and think critically to make the smart decisions for better social returns. Start as soon as you can.