New Study Examines the Question, Does 'Microfinance' Work?

Grameen Foundation's new report finds many positive outcomes

One question has dogged "microfinance" since the term entered the philanthropic vocabulary: Does this endeavor to alleviate poverty in countries around the world work?

Grameen Foundation, a U.S.-based nonprofit organization, released a report on Thursday, June 10, that reviews recent studies on the effectiveness of microfinance in alleviating poverty. The new report, Measuring the Impact of Microfinance: Taking Another Look, was written by Kathleen Odell, who teaches economics at Dominican University's Brennan School of Business. It is an update of one the foundation commissioned in 2005 that reviewed nearly 100 studies conducted between 1970 and 2005 measuring the effect of microfinance.

In the original report, Measuring the Impact of Microfinance: Taking Stock of What We Know, Nathanael Goldberg wrote that a wide range of evidence showed that microfinance programs can increase incomes and lift families out of poverty. "Yet it would be imprudent to issue a blanket statement that 'microfinance works,' for the simple reason that there is no one 'microfinance' to test," he wrote. The programs he looked at served different types of clients with a variety of services and operated in widely varying regions.

Goldberg noted that the evidence he had examined pointed in two directions: On the one hand, there was much to be enthusiastic about; on the other hand, much remained to be discovered about the sundry ways microfinance works, and does not work, for different types of clients.

In her updated report, Odell writes that several things became clear in her attempt to pull together evidence from recent research into the effectiveness of microfinance. A number of studies, using various methodologies and from different settings, suggest that microfinance is good for microbusinesses, with increases in business ownership, investment and profits. "Importantly, this result holds for microsavings as well as microcredit. Microsavings in particular appears to be a promising financial instrument whose potential is only beginning to be discovered."

But Odell found that the evidence was more ambiguous about the overall effect of microfinance on the incomes and poverty rates of clients, and on measures of social well-being such as education, health and women's empowerment. This is because no single assessment study can answer the question whether microfinance works universally. Each study has to take into account some important distinctions, such as what exactly is being studied--microlending, microsavings or some other financial service. What is the motive of the institution offering the particular service? To what extent can a particular study's findings be generalized beyond the particular place it took place and the population it considered?

She ends her report with questions awaiting further research:

  • ? As borrowers continue to operate their businesses, will incomes rise and poverty rates fall? Will new studies be able to replicate earlier positive results about social outcomes?
  • ? To what extent do loans and savings programs alleviate the day-to-day uncertainty of poor people face?
  • Will additional studies in other settings find similar positive results of microsavings programs?
  • ? Can the very poorest borrowers benefit from well-designed lending programs?
  • ? Is there convincing evidence of microfinance programs' effects on poverty rates, rates of inequality and economic growth in a variety of settings?

According to the foreword to the new study, Grameen Foundation gave Odell complete editorial control of the final report, just as it had done with Goldberg before her, in order to ensure independence and credibility.

Grameen Foundation was founded in 1997 by Alex Counts with a loan from his mentor Dr. Muhammad Yunus, founder of Grameen Bank in Bangladesh. Yunus and Grameen Bank were awarded the Nobel Peace Prize in 2006 "for their efforts to create economic and social development from below." The foundation operates independently, but is part of the Grameen family of companies.

Michael S. Fischer (msf7@columbia.edu) is a New York-based financial writer and editor and a frequent contributor to InvestmentAdvisor.com and WealthManagerWeb.com.

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