Industry Practitioners confront claims of ‘Microfinance Failure’

Microfinance Focus, April 09, 2010: Afflicted with faulty media reports and researches over the real impact of microfinance in poverty alleviation, industry practitioners like ACCION International, FINCA, Grameen Foundation, Opportunity International, Unitus and Women’s World Banking have come together to confront the claims with their first hand experiences of the microfinance sector. In a press release issued by ACCION, these organizations have expressed their perspective on how microfinance has proved its effectiveness over a time.

 While operating in more than forty countries across five continents, they bear witness to the world of opportunities that microfinance institutions opened for their clients which were previously closed to them by formal financial sector. Micro-loans enabled poor people start an income generating business and to increase the productivity of an existing business. Increased income generated from these businesses allowed them to pay school fees to educate their children, stabilize food sources, and pay for other expenses that lead to the improvement of the health and well-being of their families. Critical financial tool like saving account facilitated the safe accumulation of assets, while micro-insurance reduced their vulnerability to risk. In aggregate, these services helped the poor improve their lives and begin to work their way out of poverty.

 However the question, whether microfinance has made a quantitative improvement in the lives of borrowers, has often been raised by researchers and supported by media. But ACCION report claims that some studies are wrongly interpreted in the media and these are conducted over a short timeframe and with small sample sizes. Identifying the inherent challenges faced by researchers while studying the quantitative impact of microfinance, the report says that they often have to ask narrow questions over a relatively short period of time which does not always allow the time necessary for impact to manifest itself. Due to increased penetration of microfinance, researchers also find it difficult to locate homogenous geographical regions that contain both clients who have access to financial services and those who have none.

 The participating MFIs believe that the real impact of microfinance lies in its ability to create inclusive financial systems and inclusive societies–-societies where the individual is not shut out of what that society has to offer. In their view, microfinance specifically allows households and enterprises to benefit from financial inclusion in seven distinct yet related ways:

1. Facilitating economic transactions

2. Managing day-to-day resources: Low-income families can use credit and savings to tap into past or future income, helping them to both take advantage of immediate opportunities or, for example, to survive the annual ‘hungry season.’

3. Accessing services that improve quality of life through such tools as school fee loans, health insurance and home-improvement loans.

4. Protecting against vulnerability: Savings, credit and insurance provide sustainable and low-cost coping strategies. If a household loses a source of income, it might not have to withdraw a child from school, sell a valuable asset, or fall deeper into poverty.

5. Making productivity-enhancing investments

6. Allowing poor households, particularly the women who run them, to borrow against these assets helps them capture the existing financial value, facilitating long-term investments.

7. Building economic citizenship: Financial services foster independence. Microfinance can help clients to grow more self-confident and, with that economic citizenship, to step out and become involved in local government, garnering the respect of their communities.

 The report states that we need to be reasonable and measured in our claims for what microfinance can accomplish. To thrive, microfinance requires a host of favourable conditions, including a sympathetic regulatory environment, political stability, mission-driven practitioners, cost-effective delivery, capital adequacy and–-most of all–-clients ready and able to leverage its services. A host of critical and complex issues must be consistently considered and thoughtfully debated, including consumer protection, fair lending, transparency, acceptable profits, measureable impact, and capital-market investment, to name but a few.

 ‘Financial access’ and ‘building inclusive societies’ are more forthright terms to describe what microfinance delivers, without risking either simplification or exaggeration. Microfinance takes effort to understand, and patience to exercise. It is but one mechanism in the toolkit of global poverty alleviation – although one that has clearly demonstrated scale, sustainability, results, and enormous further potential.

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