Is it April Fools’ Day, or Groundhog Day? When will researchers catch up with microfinance leaders?

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

We are capitalizing on the occasion of the Month of Microfinance to bring you articles throughout April on our 100 Million Ideas Blog that reflect the results of this year’s Listening Tour. We received written feedback from 151 people and conducted 27 interviews with thought leaders like Beth Porter (UNCDF), Syed Hashemi (BRAC University), Essma Ben Hamida (enda inter arabe), and William Derban (Fidelity Bank). This feedback from the industry forms the basis of the Campaign’s theme for 2015 of financial inclusion to end extreme poverty and the six pathways that we think show promise in getting us there:

  • Mobile money linked with agent networks in low-income communities;
  • Agricultural value chains that reach to small scale producers;
  • Savings groups (aka village savings and loans associations);
  • Conditional cash transfers linked with mobile delivery and asset building;
  • Ultra-poor graduation programs; and
  • Microfinance savings and/or borrowing groups linked with health education, health financing, and health product delivery.

These six pathways will be reflected in the 2015 State of the Campaign Report, the 18th Microcredit Summit, and Campaign Commitments to be featured this year. From the start, the Microcredit Summit Campaign has advocated scaling up microcredit (and, by extension, “microfinance”) as just one part of a larger effort to end poverty. We have held up as paramount the continued innovation and client-focused development of financial tools, creative ideas for delivering these services to remote and hard-to-reach areas at affordable prices, and the promise that microfinance can help create positive and durable changes in the lives of those being served. These six pathways are a continuation of that promise.

Fazila Begum struggling Member of Grameen Bank Shakhaerchar branch_597(2...

(We met Fazila Begum in 2007. She was a struggling member of Grameen Bank, Shakhaerchar branch.)

When will researchers catch up with microfinance leaders?

From the very first loan of $27 that Mohammad Yunus gave to 42 women in Bangladesh, the heart of microfinance has always been about getting to know the needs of people living in poverty and designing products and services that help them loose the bonds that keep them in poverty. The aim of Yunus and many other founders of the movement was not to build financial institutions, but to empower people women to create a better future for themselves and their children. To do this they had to get to know people living in poverty and their cash flows, needs and aspirations in order to develop combinations of helpful products and services.

So when our team listened to the presentations of academic researchers made at the World Bank covering six randomized control trials of microcredit programs, we came away more than a little underwhelmed. Their big conclusion, after spending several years and millions of dollars on research: “Understand clients.”

Even more alarming was that many of the researchers and the audience seemed surprised by the news. We have been engaged with leading microfinance groups around the world and have seen how they have learned — on their own — the lessons that the researchers presented as well as how they adapted their programs to address them long ago.

Here are some examples of research findings presented at the World Bank gatherings and actions previously taken by leading MFIs:

 “Credit alone, on average, has neither large positive or negative effects.” Very few of the leading MFIs that have focused on reaching people in poverty and facilitating their movement out of poverty have ever offered only credit. Grameen, from the start, had group savings and the 16 Decisions. The Village Banks developed by FINCA offered group savings and a group insurance fund. Many also provide training in business, marketing, health, nutrition, and sanitation in their group meetings.

“When only credit is available, people may use it when what they really need is savings, or insurance or other financial products.” Microfinance leader BRI in Indonesia has been offering individual voluntary savings accounts since the 1980s and now has over 35 million savings accounts and 8 million borrowers. While many of the group lending systems provided loans, savings, and insurance bundled into one package, many of the leading MFIs have begun unbundling those services in the last two decades.

Grameen II, instituted in 2001, provides a range of financial services to clients, including voluntary savings and micropensions, and it removed the group guarantee on loans. Opportunity International began providing microinsurance in 2002, expanding from life insurance to health, casualty, and crop insurance and then spinning off MicroEnsure as a subsidiary that now reaches over 10 million clients.

Bangladesh villagers_SRahman&GBonaga

(Villagers in Nangolkot, Noakhali, Bangladesh Photo credit: ©Shamimur Rahman and Giorgia Bonaga)

“For 5-10 percent of the clients, credit has a very large positive impact on business growth and income.” Aris Alip, founder of the CARD network of mutually reinforcing development institutions, saw this happening in the villages where CARD provided group-based savings and lending services. He also saw that those 5-10 percent that grew benefited the community by providing stable employment to others. In 2008, CARD created an SME Bank to work specifically with fast growing microbusinesses and to see if, by providing appropriate products and services to this group, they could increase the percentage of growing businesses to 15 or 20 percent.

“For the ultra-poor, a gift of an asset has significant positive impact.” This learning came directly from the work of BRAC and its ultra-poor graduation program. BRAC found that those who live on less than $.50 per day face so much vulnerability in their lives that they do not want to take on more debt. They developed a system of regular stipends of food or cash, a gift of an asset like an animal or a sewing machine, business training, savings, and regular mentoring. This program has now been replicated in several countries, and studies of these programs show strong positive impact.

The Relief Society of Tigray (REST) has combined this programs with the government’s Productive Safety Net Program so that the government provides the stipends and the assets, REST provides training and mentoring, and Dedebit Bank provides savings and lending facilities.

We are glad that these studies have proven out the innovations implemented by many leading MFIs. But if researchers want to get ahead of the learning curve, they could start to engage with some of these leading institutions on the questions that they are asking now.

Here are some suggestions we have for new areas of research:

Research question 1: Conditional cash transfers (CCTs) seem to play an important role in providing some regularity in lives that are filled with unpredictability and vulnerability. How can these be linked with other services, like savings and insurance, to help beneficiaries move from resilience to asset building?

Research question 2: Are there some financial services that consistently provide benefits and rarely cause harmful effects so that they should be recommended for all? It looks like savings could fit this category, provided the savings mechanism is safe and the account maintains its value over time.

Research question 3: How do we refine our understanding of the situations in which credit is most likely to be helpful? And, what role do other services, such as group meetings, access to health care, insurance, and savings, improve the likelihood that a person will benefit from credit?

Research question 4: Graduation programs that start with a donated asset, group meetings, mentoring, and community involvement and lead to other financial service like savings and credit have proven to have a positive impact. Can we start to determine under what circumstances a person will need all of these services — and which people might need only one or two — to start moving from extreme poverty?

Instead of taking more time and money to prove that we need to understand clients, we suggest that researchers work with microfinance institutions that already listen to their clients and develop with them research agendas based on that growing understanding.

 

Financial Inclusion Photo credit: by Geoff (originally posted to Flickr as Pilgrim’s path) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

 

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