Microfinance Focus, August 12, 2011: Almost all impact evaluations of microfinance suffer from weak methodologies and inadequate data which can lead to misconceptions about the actual effects of a microfinance programme, thereby diverting attention from the search for perhaps more pro-poor interventions.

These findings were highlighted in the Systemic Review ‘Evidence of the impact of microfinance’ published recently by EPPI-Centre, Social Science Research Unit, Institute of Education, University of London.

Assessing the validity of available evaluations, the review finds no robust evidence of positive impacts on women’s status, or girl’s enrolments. This may be partly due to these topics not being addressed in valid studies, the report says.

The review discussed two significant studies - Pitt and Khandker 1998 and USAID funded studies in India, Zimbabwe and Peru which, partly as a result of their prominence, have been replicated. The replications fail to confirm the original beneficent findings, and conclude that there is no statistically convincing evidence in these studies to either support or contradict the main claims of beneficence of microfinance. This is partly because of their weak research design.

There have been four major reviews examining impacts of microfinance including Sebstad and Chen, 1996, Gaile and Foster 1996, Goldberg 2005 and Odell 2010. These reviews concluded that, while anecdotes and other inspiring stories purported to show that microfinance can make a real difference in the lives of those served, rigorous quantitative evidence on the nature, magnitude and balance of microfinance impact is still scarce and inconclusive.

The EPPI Centre review suggests that it is of interest to the development community to engage with evaluation techniques and to understand their limitations, so that more reliable evidence of impact can be provided in order to lead to better outcomes for the poor.

Microfinance activities and finance have absorbed a significant proportion of development resources, both in terms of finances and people. The report claims that there are many other candidate sectors for development activity which may have been relatively disadvantaged by ill-founded enthusiasm for microfinance.

Even within the microfinance sector, the putative success of basic models of lending such as the Grameen Bank and related models may well have diverted attention from opportunities for alternatives.

Also, the financial products offered by MFIs must become more flexible and adjust to rapidly changing circumstances faced by poor people. Many MFIs have already moved in that direction, providing more diverse and flexible products.

The reviews policy recommendation focuses on the need for more and better research. Thus, to have obtained a clearer picture on the impacts of microfinance, on whom, where, and when and the mechanisms which account for these effects, more and better quality quantitative evidence was required at an earlier stage in the diffusion of this intervention, it says.