Wednesday, December 30, 2009

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.)


  1. I just read the article describing the RCTs of microfinance. In fact, the trial that looked at poor people demonstrated less poverty. The trial that looked at middle class families did not show economic improvement. This doesn't surprise me, as the poorest families have the farthest to go, and therefore we will see the economic gains more clearly and easily.

  2. It is my hope that what the nonprofit/philanthropic community learns from microfinance's experiences in 2009 is the danger of putting too much stock in any one approach/fad/silver bullet--few of our charitable interventions would stand up to that kind of overinflated expectation. I wrote about that part--the danger in fads--recently, and your comments align with my thoughts.

  3. It's exciting that these impact studies were picked up by the mainstream press. I hope that the continued work on impact evaluations of a variety of programs garners the same attention. You can read more about the ongoing work of Innovations for Poverty Action, which implemented the Philippines microcredit impact study referenced, at

  4. Microfinance is dead? Yes and Not. It dependes from which angle you assess the performance.
    There is a methodological approach that deserves to be clarified. In the microfinance movement there are three big categories of providers delivering services for "enterrpise development", "income generating activities" and "food security". These categories of MFI deserve different approach and modalities of interventions.
    Indeed in the first case the objective is based on the intent to create a return on investment, which contribure to capital formation. By contrast, income generating activities aims at increasing a person's disposable income by having social empowerement and self-reliance as a primary goal and business development as a secondary goal. The third category targets the subsistance sector. Under the above situations the expectations of the financial providers should be different because the reasons behind the interventions are quite different. Once this point has been spell out it will be easier for the funds' providers to set out the objectives of their interventions and accordingly the scope of financing. This approach will affect the ROI's expectations and once lenders are aware of that, there shouldn't be surprise. And not astonishing title!
    Ascanio Graziosi