Measuring the Impact of Microfinance: Taking Another Look

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Jun 2010
River Forest, United States of America, June, 10 2010 - Grameen Foundation has released a new publication by Kathleen Odell, an assistant professor of economics at Dominican University’s Brennan School of Business in River Forest, IL.

Alex Counts, President and CEO of Grameen Foundation, includes the following from the foreword:

The debate about microfinance’s effectiveness in reducing poverty and addressing other societal problems, and related discussions about how to make microfinance even more potent, has often degraded into polemics and unsubstantiated claims, and sometimes become very technical in nature. The media and other stakeholders, such as regulators and social investors, have been increasingly confused by conflicting claims about what we know and don’t know. This paper should help to inform these important discussions, which go to the heart of how we think about making microfinance the most effective tool that it can be and how can we set expectations appropriately about its potential and current limitations.

Here are a few excerpts from Professor Odell’s Executive Summary:

This paper is a survey of several significant microfinance impact assessment evaluations released or published between 2005 and 2010. It is an update of a comprehensive impact assessment literature survey released in 2005, which was sponsored by Grameen Foundation and authored by Nathanael Goldberg. In the years since Goldberg’s paper was released, there have been a number of important developments in microfinance impact assessment, making this current survey a much-needed update.

The release of a handful of prominent microfinance impact assessment evaluations in 2009 precipitated a good deal of media coverage. Stories published in the Economist magazine, the Boston Globe, and the Financial Times presented the new research with a negative slant, collectively suggesting that microfinance isn’t as powerful an anti-poverty tool as suggested by many of its proponents. These media stories should be read with a healthy dose of skepticism, as even the authors of the research papers cited in the articles have made public statements disputing the oversimplifications and negative interpretations appearing in the press. One aim of this paper is to summarize the results of these new studies, disentangling the media interpretation from the actual findings reported.

and

Ultimately, the question, does microfinance work? is impossible to answer, because microfinance is not a single tool but a collection of tools. MFIs around the world serve different types of clients. These institutions offer various services including loans, savings accounts, insurance products, and various combinations of these services. MFIs also operate in diverse environments around the globe: some are urban, some are rural, some are in South Asia, some are in Africa, some are in Eastern Europe, and so on. Given this extreme heterogeneity, one of the greatest errors researchers and practitioners can make is to over-interpret the empirical results that are available to us, since each study necessarily applies only to a very specific context. Rather, keeping both the general and the specific questions in mind, each impact study must be interpreted as a small piece of a growing body of knowledge about how microfinance, in all its forms, functions in the world and how it affects the lives of the poor.

The research into the impact of microfinance that has emerged over the last five years offers some encouraging results. There is evidence from a number of studies (using a variety of methodologies across different settings) suggesting that microfinance is good for microbusinesses. This result is observed across different microfinance services, including microcredit and microsavings instruments. Based on the studies in this survey, the overall effect on the incomes and poverty rates of microfinance clients is less clear, as are the effects of microfinance on measures of social well-being, such as education, health, and women’s empowerment. Hopefully, the next wave of research will provide further insights into these critical questions.



 

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