It’s a heavy-going piece for those of us who aren’t economists. But the conclusion is clear: “30 years into the microfinance movement we have little solid evidence that it improves the lives of clients in measurable ways.”

For many years we’ve been bemoaning the paucity of impact studies in our field. But now comes news that even those few studies that did exist may have overestimated the good that microfinance does (at least what’s measurable).

The Center for Global Development’s David Roodman and NYU economist Jonathan Morduch have just published a working paper  that revisits impact data based on household surveys  from Bangladesh in the 1990s. And it makes pretty sobering reading.

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At the end of the pilot Fonkoze identified three absolute criteria to qualify for graduation, and several general criteria.

There is probably no need to convince any reader of this blog that microcredit can be useful for those with the stability and skills to operate a microenterprise. But what about the very poorest people? Last week I was in Haiti to review a pilot program CGAP and the Ford Foundation has started to see how a careful combination of safety nets, livelihoods activities, and financial services can create pathways out of extreme poverty. This sequencing, that we call the “graduation model” because the aim is to move people out of extreme poverty, is being tested in nine pilot sites.

“Chemen Lavi Miyo” –or “Pathway to a Better Life”–implemented by Fonkoze in Haiti is the furthest along with 95 percent of the women having graduated in early 2009–18 months after they began in the program. But how to measure what it takes to “graduate” out of poverty?

One-hundred fifty families in Boukan Kare, Twoudino, and Lagonav in Haiti participated in the pilot. Fonkoze selected only women-headed households with several children but none of them in school. Families had to be food insecure and often hungry; totally lack assets; and without access to health care to qualify for the program. The picture for the women initially selected was pretty grim.

Over the course of the 18-month pilot, women were provided with assets necessary for two of income-generating activities, materials to build tiny homes with sturdy roofs, and latrines. Fonkoze also provided small, short-term cash stipends to create some “breathing space” for new entrants in the program. In one location people were also directed to a free healthcare provider. Participants were trained how to make the best use of their asset, and most important, each member got weekly visits from Chemen Lavi Miyo staff to help boost their self-confidence.

The idea was to determine “success” as something achievable for the ultra-poor on the program. Although the “graduation indicators” used in Haiti are context-specific, they resonate with a set of concerns we are seeing in other sites across the globe. Graduating out of extreme poverty seems to mean achieving food security, stabilizing income, accessing healthcare, and having a plan for your-own future.

During my recent mission in Benin, I tried to understand why, after it experienced a major boom, Benin’s microfinance sector is encountering serious difficulties. This is important because Benin has been an example for the microfinance industry in the region.

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I just got the annual report from Compartamos in Mexico.  Putting data there together with some MIX data, here are their interest rates:

 Interest income (almost all from portfolio) divided by average gross loan portfolio:

    2005   88%
 2006   82
 2007   85
 2008   71

I asked Compartamos management whether the steep decline in 2008  was due to competition. They told me that there is considerable competition in the Mexican market, but that the competition is not driving prices much, yet at least.  Last year’s substantial reduction in Compartamos’ interest income was due to implementation of a longer-term pricing policy, including a feature that gives lower rates to groups that repay well and have more members, both of which lower Compartamos’ costs.

Compartamos says that their own price drop hasn’t driven down competitors’ prices as much as they expected.  Note that this is in line with classical competition theory as described in a Focus Note David Porteous wrote for CGAP  a couple of years ago:  in the early phases, as a market is becoming saturated, competition first focuses on product features rather than price.

I see that their admin costs as % of portfolio dropped by about 5% last year. Analysis by Adrian Gonzalez of the MIX shows that the learning curve is probably the biggest factor pushing down costs:  mere age drives costs down, even after controlling for things like loan size, portfolio volume or numbers, etc.  Because Adrian had no statistical variable to represent competition, he could not control for competition in his regression analysis, but most microfinance markets are not competitive yet, so the strong cost reductions we’re seeing in the MIX data are probably mainly learning curve rather than competition.

Because Compartamos’ costs didn’t drop as fast as their interest income did, their profits were down last year, but still plenty fat:  15% return on assets (down from 20% in 2007).  They’re still not very leveraged, so that translates into a 39% return on equity (down from 46% in 2007).  

Last week Compartamos announced that due to the recession its past-due loans will to the highest level in their history.  But that will be about 2.5% (PAR30?) by the end of 2009–still darned low.  They’re slowing new branch openings (20 this year, down from 60 last year), and will stop hiring new loan officers in the cities for a while.

The investors who paid monster prices to buy Compartamos shares in the mid-2007 initial public offering have gotten clobbered.  The share price was over $6 shortly after the IPO. By November of last year it had crashed to $1.33, suffering along with almost all other bank stocks.  Its latest price was $2.86–which made it one of the best-performing stocks in Mexico for the first half of 2009.

Here’s my narrative….  The 2007 public offering produced an “irrationally exhuberant” buzz, and new investors bought shares at ridiculous price/earnings multiples.  By June of 2008, sanity had returned and the trading price settled to a more defensible level ($3.85).  Then the universal panic about bank shares drove their price down to the low of $1.33 near the end of last year.  But eventually the market figured out that Compartamos was largely immune from the asset quality problems affecting other banks, and the price has climbed back to nearly $3–still far below the price right after the IPO.  Given how strong earnings have remained, one would expect to see further price gains as (or if ?) investors get less nervous about banks generally, and it becomes clearer that Compartamos is unlikely to have a serious default problem.  (If their loan portfolio were seriously shaky, I think it would have shown up by now, since most of the loans are short-term.)

Note that this price evolution affects, not only new purchasers of shares, but also the insiders who annoyed a lot of people by getting rich off of the IPO.  They still own a big chunk of the company.  As shareholders, they’re still sitting pretty, but not nearly as pretty as they were in the fall of 2007.

Cobbe Family portrait of William Shakespeare

I woke up to a mortifying email today.  It turns out that I was wrong to say in my recent CGAP Note about online lending platforms that “Kiva” derives from a Swahili word meaning “agreement.”  It turns out that it means no such thing.  Apparently the founders of Kiva, from whom I borrowed this turn of phrase, got it wrong.   Which led me to thinking about all the other misnomers in microfinance, ranging from names that organizations have outgrown to names that now seem, based on the organizations’ behavior, downright ironic.

Take for example the place where I now teach each summer - the Boulder Institute of Microfinance, which once upon a time held its courses in Boulder, Colorado, but now offers it courses only in places like Chile and Italy.  Apparently the continued use of the word “Boulder” in its name is meant to refer, not to the actual geographical place, but rather, to any beautiful place framed by mountains and serving wonderful wine.  (For the benefit of the Boulder Institute of Microfinance staff, did I happen to mention more than once that I adore teaching in beautiful, mountainous places while drinking good wine? Please invite me back!)

Then there are the unintentionally ironic names.  My all time favorite in this category is Compartamos, which, I am told, means “to share” in Spanish, except apparently when it comes to sharing with clients the large windfall profits of a well-timed, initial public offering (IPO).

So what does “Kiva” mean?  More importantly, in this world of microfinance misnomers, does it really matter?  After all, didn’t Shakespeare once write “What’s in a name?  That which we call a rose by another other name would smell as sweet.”

Absolutely. Access to finance is much more than poor people simply getting credit. Access to finance is - or should be - about delivering a wide range of “appropriate” financial services that include savings, payments, credit, and insurance to the  people in  need of them. In a sense, finance is similar to sanitation, electricity, or water. The key is to supply those financial services taking into consideration the market it is intended for.

A  natural question arises concerning whether financial institutions are willing to provide these services in the midst of a financial crisis. That may well depend on  the  product,  but many are. While it may be difficult to finance a mortgage today,  opening a bank account may have become easier. Consider for example, the case of Latin America. Due to the crisis, many banks have experienced a shortage of liquidity and resources from international markets. To overcome this deficit, banks  have aimed to expanding their depositor base by offering new products and targeting  new  market segments. In Colombia during the last year, the  number  of  adults  with a bank account increased considerably, so that now more  than  half  of  the adult population hold an account. In Mexico, banks are pushing  regulators to pass the law that would allow them to contract agents and expand  their  depositor  base. These situations present an opportunity for many people  to  get  access to a bank account and a chance to fortify the system. So, even with a credit squeeze and financial crisis, these trends show that it still makes sense to promote an access to finance agenda.

A couple of weeks ago, I attended the 12th Annual Microfinance Center (MFC) Conference in Serbia. It was my first time at a MFC Conference, well-known to be the premier microfinance event for the ECA region, especially for networking and making deals (and some social entertainment as well). 

I was struck by the numerous “mea culpas” of practitioners and investors alike in discussions about the problems facing the microfinance sector, such as overindebtedness, now starkly exposed by the financial crisis.  One microfinance manager from Bosnia shared with the audience–in a plenary session no less-that her institution had gotten caught up  in the wave of high growth and apparent infinite demand at the expense of carefully analyzing clients’ needs and capacity to repay. An investor confessed that they had sent inappropriate signals to practitioners, focusing on outreach numbers with insufficient attention to whether strong fundamentals where in place. 

With this kind of frank talk and a recommitment to the basics and keeping clients at the center, I am certain things will be looking up at next year’s MFC Conference. Click here to listen to participants from the conference.

People tend to agree there is no one definition of “microfinance,” yet it does not seem to stop the ongoing debate over whether certain models are “right” or “wrong”– the “wrong” designation often paired with finger pointing at those whose missions seem to have shifted (or drifted) over time. Such shifts may take the form of, for example, providing [bad] consumer loans instead of [good] entrepreneurial credit,  or pursuing what seem like obscenely high commercial returns. 

With so much time and energy devoted to debating the subject, people must believe there is a distinctively right and wrong way to go about this. But is there? It seems to me if anyone truly had the right answer, we wouldn’t remain 2+ billion short of worldwide financial inclusion.

What do you think? Is the microfinance brand at risk? Do we need to set boundaries around microfinance to keep it from being tainted?

There’s been an interesting discussion on the DevFinance listserve about whether microfinance is really a good thing and in particular whether it diverts savings and other resources away from things (e.g., small business finance) that may produce more macroeconomic development and more jobs for poor people.  In a June 1 posting, Milford Bateman talked about

“…enormous implications for countries where the financial sector is rapidly becoming dominated by MFIs and microfinance, such Bangladesh, Bolivia, Cambodia, Bosnia, etc. It is then incumbent on the microfinance industry to explain, if most savings are being increasingly monopolised and recycled through MFIs into simple non-tradable goods and services, where and how exactly that country is going to grow and develop and so sustainably reduce poverty?”

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Many countries around the world have tried introducing special savings schemes to help people increase their savings. But do these schemes really work for low income individuals?

Matched savings schemes, where the government encourages people to pay into health, education or retirement savings accounts by agreeing to contribute an equivalent amount up to a set limit, have proved to be effective in rich countries like Singapore. But they are costly for the government.

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