Microfinance Focus, August 16, 2011: Counting the net number of people who crossed from below the USD 1.25 a day consumption in India between 1990 and 2010, a study by India Development Foundation (IDF) shows that nearly 9 million Indian households involved in microfinance - including approximately 45 million family members moved above USD 1.25 threshold during the last two decades.

According to the IDF report which was released by the Microcredit Summit Campaign, a program of the US-based advocacy group RESULTS Educational Fund, the movement out of poverty is highest for clients who have been associated with an MFI for a period of 4-6 years.

Surveying more than 15, 000 Indian households, the study finds that 37% of all clients were poorest (below the USD 1.25 a day consumption threshold) when they joined an MFI and the percentage of poorest clients when they joined is much higher in rural areas (40%) compared to urban areas (25%).

A net of 12% of all NBFC, NGO-SHG and SHG banked linkage clients crossed the threshold from below. In the case of NBFC-JLG, a net of 10% crossed the threshold from below.

27 MFIs and 6 SHG Bank linked NGOs participated in the study from across 14 states and 63 districts of the country.

The survey was largely completed, however, before the microfinance crisis in Andhra Pradesh erupted at the end of 2010 greatly reducing the number of households served.

"This report is good news, coming out seven months after a similar survey showed significant progress in Bangladesh," said Sam Daley-Harris, Director of the Microcredit Summit Campaign. "Neither survey was designed to assign causality to microfinance, but there is a significant correlation in both India and Bangladesh between the presence of microfinance and movement out of poverty in the rural areas of both countries, especially in the early years. The survey period in Bangladesh reflected significant movement out of poverty between 1990 and 1998 followed by a dramatic drop due to massive floods in 1998. In India, the 'flood' might be seen in the crisis in the microfinance sector but that crisis is not reflected in these findings."

This report comes in the wake of a tremendously successful initial public offering (IPO) in 2010 by SKS in India followed by serious charges about some microfinance practices in that country and a strangling backlash by the Andhra Pradesh government.

"SKS did microfinance and low income households a major disservice," explains Sanjay Sinha, Managing Director of MicroCredit Ratings International Limited (M-CRIL). "It sold dreams (in the form of over-ambitious growth targets), obtaining unbelievable valuations of the order of seven times book value for its equity. Other large MFIs soon followed, copying the SKS growth model. Multiple lending was inevitable and over-indebtedness followed."

"While it is clear that changes are needed in Indian microfinance, it is critical that we not throw out the baby with the bath water. Families in rural communities need access to financial services from microfinance institutions that know their clients and are committed to improvements in their lives," said IDF lead researcher Shubhashis Gangopadhyay.

Globally, microfinance has also been faced with criticism from the academic community. A series of randomized control trials (RCTs) have questioned the effectiveness of microfinance as a poverty reduction tool. But these studies, touted for their rigor, have been met with questions of their own.

"Two of the problems I have with the RCTs that have been done to date are that they haven't studied programs that are known for their deep commitment to ending poverty, and they typically cover a 12- to 18-month period, which is too short a time for real change to take place," said Chris Dunford, President of Freedom from Hunger.

These two surveys, IPOs in India and Mexico, and RCTs will be among the issues discussed at the Global Microcredit Summit to be held November 14-17, 2011 in Valladolid Spain. The work on these surveys is part of the Microcredit Summit Campaign commitment to fulfilling the United Nations Millennium Development Goal of cutting poverty in half by 2015.