Wednesday, April 14, 2010

Does microfinance work? How valuable is microfinance?

Dear Colleagues

My response to the dialog about the value of microfinance is that it is a total disgrace that the experts have such poor metrics. Why on earth is it that so much expensive brain-power is unable to come up with some clear metric based conclusions?

It seems from my observations over the years ... essentially since 1974 ... that there has been a very serious lack of understanding in the official relief and development community about accountancy and its role in the management of resources. The corporate world uses accountancy very effectively to control their assets and have a good understanding of their operations ... with the notably exception of the modern corporate banking sector that seems to believe in the economic equivalent of the engineer's impossible perpetual motion, and has not let the principles of good accountancy get in the way of this belief!

In my early days of developing management accounting systems, the idea of "key item reporting" was central to helping to understand why the company's resources were being used. When I apply this idea to the modern discussion about microfinance it very quickly becomes apparent that the key items are very big externalities. Professor Muhammad Yunus talks about the hard work of poor people, yet they remain poor ... and then goes on to talk about the dysfunction of the economic system. I would agree ... but exactly what are the elements of this dysfunctionality?

My booklet (available at Lulu ... ) talks about hundreds of issues that impact relief and development, many of which are very big issues that have nothing to do with microfinance and its role in development. If we broaden the dialog about microfinance to ask whether development interventions ... that is interventions to reduce poverty and improve the quality of life and standard of living ... are working or not, then we might get into a much more productive conversation.

My conclusion based on a long time observing development interventions is that microfinance works a whole lot better than most of the interventions funded by the international community ... both the NGO community, and the official development assistance (ODA) community including the World Bank, the UN and the various bilateral organizations. To its credit microfinance aims to help by making money available to beneficiaries who must then repay ... and to everyone's surprise poor people, especially women, have had a very good record in repaying. In some cases the quality of life of poor people has improved a lot ... in some cases not very much. Rarely has the quality of life of poor people deteriorated as a result of socially motivated microfinance ... but this might be about the change.

Banks ... stockmarkets ... capital markets ... have a very limited appreciation of any social metrics. When financial metrics come to dominate in the microfinance sector it is entirely possible that there will be a micro-version of the sub-prime housing finance fiasco that would have bankrupted the banks ... not to mention totally wrecking the global economy ... if government had not bailed them out! While the banks have been "saved", the crisis for the banks' clients continues ... with no end in sight. Financial metrics are good ... but only when they are balanced by equally good social metrics. At the present time the social metrics dimension of the microfinance industry is a shambles ... and will remain in this state until the measures are as much about the externalities as they are about the microfinance performance itself.

The Key Item Reporting that is needed for social metrics for microfinance to be useful has to include information about the community. With a value accounting methodology it is possible to see whether a community is progressing or not ... that is, if the quality of life is improving or not. The second question is then what is it that is making the progress (or lack of) happen? In most cases the lack of progress is because something critical is missing. Typically, microfinance does not address these missing elements ... and for all practical purposes microfinance merely serves to make poverty a little less intolerable. With community value analytics these things that constrain development can be identified ... and then the decision makers who control the allocation of resources might do a better job of getting resources where they are needed for socio-economic progress.

I cannot for the life of me understand why the answers to these questions were not been obtained years ago. Maybe it is because the well educated economists have tried to solve the problem of pathetic data with more and more sophisticated statistical analysis. Bluntly put ... this is not how you manage anything if you are serious about getting results. You need the rather plain data acquisition that is the expertise of old fashioned accountancy ... which becomes quite practical as modern mobile information technology proliferates. You need to be able to understand cause and effect ... never mind getting statistical correlation all about averages that, in my view, does nothing practical to improve decision making.

I think there is light at the end of the tunnel ... people in developing countries are very smart, and at some point they will drive the reform about metrics that is needed, even while the sophisticated rich country experts resist the paradigm shift.


Peter Burgess

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