Summary of the State of the Microcredit Summit Campaign Report for 2011

On March 8 the Microcredit Summit Campaign released its annual report for 2011. After reading the report, I’d like to share some interesting quotes and key takeaways:

• Providing integrated financial services (beyond just credit) is important to unleash human capital.
• Entry of commercial organizations, as well as organizations focused on community-managed rural and financial services (e.g. self help group movement, savings group and village associations), into microfinance is a sign of the vitality of the sector.
• There is space and demand for multiple market players offering various microfinance services.
• While some practitioners want to distinguish between financial access and poverty alleviation, others are afraid that such a distinction will result in mission drift.
• Poverty alleviation should not stop at financial inclusion; it should ensure that the poor have access to services such as savings, insurance, education, etc.
• Focus on growth and quick profits resulted in some MFIs stripping down other services and focusing on extending more credit; such concentration results in many MFIs working in the same areas, which in turn results in greater market saturation. As Adrian Gonzalez, Lead Researcher at the Microfinance Information Exchange (MIX,) mentioned in the report: “I can’t find any direct correlation between MFI failure and high growth rates, unless the rates are very high, like 200 percent a year. What I did find, though, was a correlation between market saturation and the likelihood that an MFI would fail. When clients have available loans from many lenders, payment discipline can begin to break down, leaving some organizations vulnerable.”
• I found it very interesting that the report mentioned a recent study on "Neuroeconomics and Its Lessons for Microfinance." This research suggests that psychological harm can be caused by microfinance institutions that do not create relationships of trust with their clients and end up using clients to enrich the MFI.
• The report also addressed randomized controlled trials (RCTs) conducted by Dr. Duflo and Dr. Karlan. These trials showed that microfinance programs did not result in poverty alleviation and thus were not very effective. However, others, like Sam Daley-Harris, CEO of Microcredit Summit Campaign, have questions about the underlying assumptions of the study. In particular, Daley-Harris noted: “I have two questions when I look at the RCTs. First, what kind of MFIs are they studying? If they are studying an MFI that is solely focused on access and isn’t managing their operations to ensure social performance, then you shouldn’t expect positive change; you should just expect access, nothing more. Second, why do the researchers expect to see measurable change within 12 to 18 months, the normal duration of these trials? Twelve to 18 months is too short a period to see such change.” Richard Rosenberg, Senior Advisor at CGAP, went even further, stating: “To draw any conclusions from [the RCTs] about the poverty alleviation effects of microfinance, I think would be lunacy. There’s only three of them, only two on microcredit, and before I started to say something about external validity, I would want to see five or more of those all coming up with the same things in different settings.” Christopher Dunford, President of Freedom from Hunger, emphasized the need to triangulate the information from RCTs with other sources of data that can help in interpreting the results. At Freedom from Hunger, they use “impact stories” based on in-depth interviews with randomly chosen clients, including those who have dropped out.
• The report also extensively addressed the importance of savings by highlighting such initiatives as Grameen II, the community-managed savings group model, and Oxfam's attempt at linking savings groups to formal bank accounts (such as an Oxfam program in Ghana that links shea nut growers with fair trade companies).
• Finally, the report introduced the Seal of Excellence for Poverty Outreach and Transformation in Microfinance. “With such incredible growth in microfinance there is a need for some certification, some objective measurement that makes it clear to the outside world that these are the goals of those microfinance institutions that are committed to reducing poverty and these are the institutions reaching those goals,” said Chuck Waterfield, founder of MicroFinance Transparency. “Efforts such as a Seal of Excellence on Poverty Outreach and Transformation are needed — and needed now.”