A Few Key Takeaways from the World Bank Forum on Microcredit

>>Authored by Larry Reed, Director, Microcredit Summit Campaign

The diagnosis of the six randomized evaluations that spanned six countries on four continents, in both urban and rural areas with different borrower, lender, and loan characteristics, was that they showed no significant impact on the poverty level or living standards of the clients.

In some studies, it was concluded that the top 5-10 percent of clients did have some significant impact on their income and assets. One study showed some positive impact on women’s empowerment while another showed that depression seemed to go down for clients who had taken a loan, but their stress levels went up. Basically, it was all rather inconclusive, yet it also opened a transformative dialogue about how we can learn from our mistakes and what we need to do better to meet the needs of our clients.

On learning from what we know does work

The results of the randomized evaluations suggest that microcredit alone doesn’t have a transformative effect on the poor. However, despite its shortcomings, it is recognized that microcredit enhances the range of choices available to the poor and allows them to manage their circumstances as they consider appropriate.

Furthermore, microcredit still serves, in many cases, an important role as a risk absorption tool, acting as an insurance product that allows the clients to react to shocks and emergencies. In these instances, credit provides stability and prevents the clients from falling deeper into poverty. It has long been recognized that credit is not suited for many people, so insurance products should not be built around a credit product. In fact, several panelists said that microinsurance may be more needed than microloans particularly in sub-Saharan Africa,

For his part, Alex Counts (Grameen Foundation) invited the audience to focus on the five percent of clients — equivalent to millions of families — who moved out of poverty with microcredit. We should do this because we should want to understand (isn’t it our job to understand?) what it was that helped them compared to those less successful (or unsuccessful).

More research is needed to stimulate this conversation around what is working and what is not and to promote models that can serve as examples for adaptation and replication.

On understanding your clients

The research presented at the World Bank forum showed us that we need further analysis on what poor people really want and in understanding the heterogeneity of needs. It is important to study the particular context of each country, region, and community. Different circumstances lead to heterogeneous needs, so we need to offer a variety of products and services that actually meet the specific needs of the clients.

In addition, we need much more work on tracking how the money is being used. Perhaps we should not only look at factors like change in profits, wages, or consumption to test the success of microcredit products. Clients sometimes use their loan for personal needs, like for health issues or for social obligations such as weddings and funerals, and in order to see the impact of microcredit on the overall quality of life for clients, we need to know where the money is going.

Knowing more about these two dimensions will enable better product design, promote innovation, and help microfinance evolve in a manner that is both sustainable and beneficial to the extreme poor. It comes back to what Dean Karlan said, “Understand your clients.”

On the implications of digital innovations

Innovations in financial technologies are increasing client outreach and reducing transaction costs (to nearly zero), but they are also creating new transparency challenges that could pose serious risks to the clients if they are not addressed.

The main concern is the lack of adequate regulation for digital financial services. Client protection measures need to be in place to raise awareness of the risks linked to loans and ensure that customers understand the terms and conditions of the loans they are taking out. This is particularly important when we consider the rapid pace of growth and expected outreach of the new digital services.

When looking at agent networks, serving 100,000 clients after five years was a big achievement; today, however, they are expected to reach 1,000,000 clients after only one year of implementing a digital service.

We need to carefully assess the risk of inflicting harm to a large number of people at the base of the pyramid to ensure that digital financial services are being provided in a responsible way that brings no harm to the clients. Keeping this in mind may inspire innovative ideas for consumer protection and improve the quality of existing products.

On their recommendations for further research

In the coming years, Abhijit Banerjee (J-PAL) stated that research should focus on answering the questions: Why is there a low demand for microcredit products? What do clients need? What are the right products to offer them and the right channels? Where does the money go if it doesn’t reduce poverty?

Esther Duflo talked specifically about the graduation pilot programs, which are targeting the ultra-poor and already show some positive results on poverty levels. The results of this research will buoy efforts to promote the adoption of graduation programs as a poverty alleviation tool and underscores the need to segment the poor for the purposes of understanding the impact of microcredit and designing adequate products.

Are we measuring the real story? Jaikishan Desai, one of the researchers of the RCTs, posed this question to the audience. This seemed to go beyond how do we interpret the data to what is the purpose of measuring the impact of microcredit? Is microcredit and microfinance supposed to be the cure of the world poor or should it be used as a tool to include ignored segments of the population and reduce risk to those most vulnerable? Are we looking for a change in poverty levels or should we be focusing on the impact credit has on maintaining stability?

Other questions that were not resolved included, was the length of the study a factor? Do we need more long-term or short-term assessments? What about the generational impact? Could it be that we won’t see the effects of microcredit on clients unless we track progress through the next generation?

What impact does an MFI’s staff incentives and governance have on its clients? Does this impact the type of loans they receive and the quality of the product?

Relevant Resources

Erin Scronce | March 4, 2015 | World Bank blog

James Militzer | March 5, 2015 | NextBillion

Ben Schiller | March 10, 2015 | Fast Company

Chris Blattman | March 3 | Washington Post

 

Photo credit: Fundación Paraguaya

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