Measuring the impact of microfinance

Dear Colleagues

I have just sent a message to the MicroFinance Practice YahooGroup listserve. The message was a response to a series of messages about measuring the impact of microfinance. The messages are set out in sequence below.

This is the first of the series: On Thu, Apr 8, 2010 at 10:11 AM, Bruce MacDonald wrote:

Colleagues,

I would like to draw your attention to a newly released positioning paper. The paper, put out by leading industry practitioners, responds to several recent studies questioning the ability of microfinance to show any demonstrable effect on helping to alleviate poverty. I invite you to read what FINCA, Grameen Foundation, Opportunity International, Unitus, Women's World Banking and ACCION have to say, collectively, on the topic, here http://www.accion.org/Document.Doc?id=794 .

Bruce
Bruce J. MacDonald | SVP, Communications | ACCION International
Tel +1 617.616.1546 | Fax +1 617.625.7020 | bmacdonald@accion.org |
www.accion.org
Helping Millions Help Themselves

This is responded to by a critic of the report

From Charles Rock
Is this link in Bruce McDonald's email the right one?
It appears to be simply a brief public relations ('positioning paper'?) release about the difficulty of proving anything but that Accion, et al still have faith that what they promote is beneficial. And that studies in process may support their view in future. Does not really respond to critics in substantive way.
Am I missing something?
Charlie Rock

Dr. Charles P. Rock, Professor of Economics,
Rollins College, Winter Park, FL 32789 USA
crock@rollins.edu
Pessimism of the intellect. Optimism of the will.

and a response from a person who appreciates the contribution of the microfinance

Farhat Abbas Shah Shah
Dear Bruce,
I congratulate the microfinance sector for this big achievement.No doubt microfinance has provided this impact. in spite of all financial crisis, the sector has done a lot for the poor and the national economies as well.The study encourages the microfinance practitioners,who are committed and have devoted their lives for poverty alleviation.
Regards,
Farhat.

And then another critic of the metrics and the performance of the microfinance sector:

Milford Bateman
I agree with Charlie. When I read about this story a couple days ago, I seriously thought it was a spoof cooked up for April Fools Day. If indeed it is true, which seems to be the case, then it is quite staggering. I simply cannot understand how it is that these institutions feel justified in now ignoring any and all evidence from careful studies and surveys, and will instead now rely upon lots of their own carefully selected uplifting anecdotes whenever asked for 'evidence' that microfinance makes a positive impact. This is a sign of real desperation on their part. If the whole microfinance paradigm is now pretty much dead in the water, as many of us are coming around to realising, at least these pioneering institutions could let it die with some dignity and be part of the effort to find new and better local financial models of benefit to the poor, and not try to prop up microfinance zombie-fashion by resorting to such strange theatrics.
Milford

My message attempted to suggest that the problem is not simple ... but multi-faceted.

Dear Colleagues

The posting by Bruce MacDonald and the positioning paper jointly prepared by Accion, Finca, Grameen Foundation, Opportunity International, Unitus and Women's World Banking is really quite embarrassing ... and my expectation is that this will add to the dialog without adding to clarity about the issues in question. These six organizations are well known and I am surprised and disappointed that they do not seem to be able to figure out how to measure the impact of microfinance in a credible way.

There are many economists and other academic researchers from prestigious institutions ... Yale and MIT were referenced in the paper ... who have engaged in studies of microfinance performance, and I would observe that the methodologies being used are expensive and ineffective. I would argue that as a practical matter, measuring the behavior of one variable (microfinance) in a situation where there are many variables is not going to get a meaningful result simply by using tiny surveys and mega-statistical manipulation. My impression is that we are not looking for the answers to the right questions.

Professor Yunus has observed that poverty is a result of a systemic dysfunction of the socio-economic system not simply the result of the behavior of poor people. This is exactly what I have seen during field assignments in more than 50 countries around the world over a period of more than 40 years. The dysfunction of the socio-economic system is a serious matter ... with hundreds of different issues that contribute to dysfunction. I wrote a booklet on this some years ago expecting to have about 100 issues, but ended up with more than 300. Every community has its own set of issues that need to be sorted out ... and it is not particularly helpful to do research work to get "averages" about this ... essentially the failed World Bank and academic methodology.

Community specific information is needed. The performance of the community has to be associated with the specific resources available to the community and the activities taking place in the community. There has to be understanding of the surplus production situation in the community ... is this possible or not. If it is possible and there is a lack of working capital, then microfinance may be very valuable ... but if it is not possible adding working capital will not solve the problem.

In short ... the data needed to understand performance is management information ... which I have defined in the past as the least amount of information that informs decision makers reliably. Reliability is reflected in good outcome from decisions made using the management information.

My experience with high performance development has been that there is fast progress when all the linkages in a community are respected and there are multi-sectoral interventions for development in the community. Where microfinance is part of a multi-sectoral set of interventions, there can be great progress ... where it is done on its own, the outcome depends entirely on the possibilities for the specific community.

In my view the reason why microfinance has become so popular as a development intervention is that the MFI can become a sustainable entity based on a financial construct that flows funds round and round ... whether or not it does any good in terms of progress out of poverty. This contrasts with the typical project construct of the official development assistance (ODA) community where the money is disbursed and eventually the project is closed down with little or no sustainability for anything. The MFI is a whole lot better than the typical failed project!

But in terms of socio-economic development performance neither the project nor the MFI on its own has been very good. The mere fact that some 4 billion people on the planet remain in poverty suggests that the socio-economic system is dysfunctional and that ODA has been surprisingly ineffective.

My own view is that there can be progress as soon as we start measuring the right things ... and start holding to account those that are making decisions about the allocation of resources and the performance of organizations using the resources. And when we measure the right things, I think we will find that microfinance can be a very valuable part of the portfolio of development interventions.

Sincerely

Peter Burgess
http://communityanalyticsca.blogspot.com