Does Microcredit Really Help the Poor? Take II

by Richard Rosenberg : Monday, January 25, 2010

I appreciate the vigorous discussion on microcredit impact. A few responses:

–(for Michael) When people think about “getting out of poverty,” they are usually thinking in terms of income and/or consumption. Most impact studies focus on these variables rather than wealth, so I’m not aware of evidence bearing one way or the other on your interesting suggestion that housing microfinance may be more helpful.

–(for Elie Hassenfeld) The statements about loan demand and desertion rates were based on my and my colleagues’ anecdotal experience. I know of no source for broad data on these topics. Many individual MFIs keep such data, but I have no idea which ones might be willing to share it.

–(for V. Rengarajan) The question of how far down the poverty scale microfinance reaches is an important but difficult one. The Microcredit Summit publishes data about millions of “poorest” clients–that is, people in the bottom half of the group below the poverty line, or living on less than $1 a day. I have been told (I can’t vouch for it myself) that with the exception of Fonkoze in Haiti, most of the MFIs that are studied using the Grameen/CGAP or IRIS/USAID poverty scoring tools turn out to have far fewer extremely poor clients than their management has thought. Let’s not assume that reaching such clients is always and necessarily beneficial. It’s far from obvious that indebting people who aren’t likely to have the regular cashflow to make payments on the loan is a good thing for them.

–(for Sophie Chitedze) Randomized controlled trials aren’t the only way to know about microfinance helping poor people. The private knowledge of experienced people like you is also an important source of knowledge. The problem is in the public forum: it’s a lot easier for a third party (like me, for instance) to assess the reliability of an RCT than it is to assess the reliability of often-conflicting reports of personal experience.

–(For FCRWizard)So far I’ve heard of only one RCT study of microfinance plus, and my recollection is that the people who got the “plus” did better than the people who just got the loan. I hope that there are many more studies of this question using rigorous methodology.

–(for Anita Sharma) I certainly agree with you that we need to look more broadly than just income changes. On another point, I think that your overall feel about the findings of the Banerjee study may be a bit more optimistic in tone that the authors’overall conclusions were.

For those who are interested, the topic of this blog is treated in more detail in CGAP’s Focus Note No. 59: ‘Does Microcredit Really Help Poor People?’

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  1. January 28th, 2010 at 11:43 am, Holden Karnofsky ()

    As a followup on Elie’s comment and your response: we have collected information on dropout rates from MixMarket, as well as some limited information on the reasons for dropping out.
    Best,
    Holden Karnofsky

  • January 28th, 2010 at 9:48 pm, V.Rengarajan ()

    Thanks Rich for your response. I quite agree that reaching such clients (the poorest) with ‘micro credit’ alone may not be necessarily beneficial. However in the process of inclusion of such clients in particular under Micro finance umbrella, sequencing the MF services such micro saving, micro insurance coupled with capacity building etc., depending on the priority needs of the demand side is a ‘sine quo non’. as this would facilitate their graduated elevation in the poverty pyramid. That is to emphasize ‘putting the last (micro credit) first’ to these clients for the purpose of outreach is suicidal. Provision of a package of MF services as referred to above could be made severally by other development partners jointly with MFI s. if latter alone find difficult. In India both central and state governments provide free premium micro insurance for ‘health’ to the poor.The focus is therefore on integrated and graduated approach for out reach of needed MF services to the poorest irrespective of type of supplying agencies so long ultimate goal-sustainable poverty reduction is common to all

  • January 29th, 2010 at 7:06 am, Dr S Santhanam ()

    Numerous studies using a variety of econometric models / tools have found out that micro-credit does help the poor and it does not help the poorest. Though the initial efforts were to assist the poorest, somewhere midway, the policy makers (this includes CGAP as the acronym stood for Consultative Group to Assist the Poorest till 2002 and thereafter it preferred to call itself as Consultative Group to Assist the Poor), donors, funders and the practitioners gave up their efforts to support the poorest. So, the MDGs relating to alleviating poverty will remain a distance dream.

  • February 11th, 2010 at 9:55 pm, V.Rengarajan ()

    Rich,Elie,Holden
    I would like to share some sources on Drop outs
    1. National Council for Applied Economics Research (NCAER) study- “Incidence of members’ drop out was reported by 43% of the SHGs. The drop out rate was 8.2 % of the members.. The most significant of the reasons was the dissatisfaction of the members of SHGs with 43.5 % members reporting the same.
    2. Light and Shades study conducted by EDA Rural systems and APMAS in 2005 also reported a member drop out rate of 9.8%. The study also estimated that the proportion of defunct and broken group was 7% in a sample of 214-SHG (6 years old) taken across four states in 2006.
    3. Baland, Jean-Marie, Rohini Somanathan and Lore Wandewalle, 2008 “Microfinance Lifespans: A study of Attrition and Exclusion in Self Help in Self Help Group in India, in Suman Barry, Bary Bosworth and Aravind Panagariya.pp 158-210 New Delhi Sage Their study in 2007 found in 2007 in a sample of 1102 Professional Assistance for Development Action (PRADAN) promoted groups, that 10% of the groups formed between 1998 and 2006 were no longer active in three tribal districts of Orissa and Chattisgarh.
    (1,2 &3 source – Srinivasan’s Micro finance India –state of the sector report 2008)
    4. Masudul Quader in his response in this blog for the topic “The struggle to be responsible- What leads to the good providers down the road to bad practices” date Nov 11th 2009 (by Kate McKee) pointed out “ Drop out occurs at the rate of 30-40% in poverty pockets where project supported by multilateral donors like World Bank were implemented by DSK. So in three years time 100% poorest of the poor were dropped, result of course were rate of recovery 99%.(Bangla desh)
    5. In my empirical study using longitudinal survey , the attrition rate of the members of sample SHGs , observed , ranges from 10% to 20% (South India)
    This recurring dropout syndrome in SHG based micro financing system (Indian & Bangladesh) which causes exclusion of financially included poor (mostly the bottom half) , merit immediate attention of the policy makers, investors, practitioners and the researchers in MF arena for working some strategy for remedtion

  • February 28th, 2010 at 11:04 am, Azhar Nadeem ()

    Microcredit really help the poor in some cases but in other cases it really hurts people.
    1. When credit is not used in Income generating activities
    2. When Multiple MFI’s lend to same Individuals without assessing genuine business needs

  • March 17th, 2010 at 6:48 am, Richard Rosenberg ()

    Thanks to V. Rengarajan for the interesting statistics about drop-outs from Indian SHGs. I don’t know enough about SHGs to argue with his implication that the reported drop-out level is a bad thing. More generally, I have been a little confused by the widespread assumption that dropouts from a microcredit program represent a failure. Isn’t this more or less equivalent to an assumption that people ought to be in debt all the time, and that the particular microcredit program is the only source of that debt? The fabulous study Portfolios of the Poor by Collins et al. should caution us against assuming that someone who has dropped out of an SHG has no other access to financial services.

    Rotating savings and credit associations (ROSCAs) have been one of the more widespread and durable sources of poor people’s financial services for a long time. These groups form, dissolve, and re-form all the time.

  • March 18th, 2010 at 9:24 pm, V.Rengarajan ()

    Thanks to Rich for the ‘interesting’ response.
    I wish to share some points for my arguments to declare the reported dropout level in SHG system as bad thing on two accounts viz Denial of empowerment benefits to the deserving poor drop outs(not mainly micro credit access only ) and involvement of cost for the Self Help Promoting Institutions.(SHPI) To elaborate further
    On denial of empowerment benefits
    1.SHG system provides scope for multiple empowerment benefits like social, political ,cultural empowerment besides economic empowerment – As an advisor for a national NGO for three years, among other empowerment benefits I could witness about dozen SHG members nurtured by the NGO, participated in local Panchayat election and have become ward members of their respective local governance and some others have become Micro insurance agents linked with mainstream insurance companies. A socio political empowerment of women through SHG was possible without much reliance on micro credit at all. The main focus of these SHG/NGO is for holistic empowerment of women through SHG and micro credit is incidental one. Tamilnadu women development project, supported by the state government focuses on holistic empowerment of women through SHG/NGO system .Micro credit is one among the inputs 2.SHG system facilitates more social security to poor women in general and marginalized women (deserted, widows, separated, handicapped etc) in particular in patriarchic society
    3. SHG system enables the poor to access MF plus services ( savings, insurance, updated information on social and political and gender and community issues and facilitate participation and action collectively for mutual benefit. in the process of empowerment and poverty reduction ,
    4. Over a period of time , SHG federation will be able to manage SHG system self reliantly and democratize the poverty reduction process by themselves. without much depending external agencies including MFI/NGO.There are some beginings
    All these holistic empowerment benefits are therefore denied to the poor who are dropped out and not necessarily credit accessibility alone inputs since SHG is not only the source of micro credit as you also mentioned.
    It is irony that in some cases the poor are pushed out or thrown out as they could not withstand the group /peer pressure coupled with MFIs’ rigid norms in regard to maintenance of mandatory level of savings and prompt repayment (the significant reason reported for drop out– dissatisfaction with SHG, among others )for gaining good rating and further funding . In addition, group defunct/ mortality further increases the plight in this regard. After all these dropouts are also MFI’s clients ultimately while the SHG is also the main delivery conduit for MFI for their micro credit operations. So when SHG is shaky or unstable., it would certainly give some impact on MFI credit operations. on supply side and loss of empowerment benefits to the poor on demand side.
    On the cost front for SHPI
    From the view point of Self Help Promoting Institutions (SHPI) (MFI/NGO/Bank) also there is a concern on the cost (for promotion/nurturing etc) due to this drop out/group mortality phenomenon in India. On an average it is $ 190 per group for NGO, $77 for the bank, for maintenance $24 for the NGO and $20 for the banks. NABARD support per group $65.(Srinivasan’s report). Promoters cost of SHG promotion $259 per SHG(CGAP occasional paper on Study on sustainability of SHG in India ) In the group ‘re-form’ as you remarked in the last line How to ensure the inclusion of drop outs in? But even in that case does it not incur additional cost. for re-formation. of the group.?
    In Indian policy context, SHG- Bank linkage assumes importance as one of the financial inclusion strategy But this recurring drop out phenomenon in SHGs is therefore not certainly good thing for the stated mission in whatever context.
    I agree with you on the financial service role of ROSCAS for the poor. But again it confined only with finance where as SHG facilitated financial plus (holistic) services which alone help ushering in candid women’s empowerment and poverty reduction .
    In fine, let us think beyond the access to micro credit in SHG-MF system in India in the process of sustainable poverty reduction. But unfortunately over a period of time politicization with the means of indiscriminate deployment of micro credit as the be all and end all, has very much demoralized the poor SHG members and corrupted the noble system as if micro credit through SHG is the only source for empowerment.! It is indeed sad that the present events in MF-SHG arena particularly after the MFI’s foray, lead to people always in debt ( Multiple lending and multiple borrowing) as you also pointed out… The famous adage on rural debt in India is “ Poor Farmer is born in debt, live in debt, die in debt and bequeaths debt” Living in debt becomes the way of Indian life. This is irony
    In view of the above rationale, CGAP and NABARD in India as well may therefore conduct intensive research on the various causes for the drop out and group mortality phenomenon in SHG system in the regions where SHG is predominant form of micro financing for remedial action, instead of touching the subject at surface level. For any Poverty reduction approach, one need to look at ‘ profile of the poor’ much beyond financial perspectives .

  • March 30th, 2010 at 10:13 pm, Dr S Santhanam ()

    I too agree with Rich’s dilemma. Causal relationship of drop outs would need to be studied. Equally interesting observations from Dr Rengarajan. The minimalist approach of providing micro-credit only was found to be one of the causes for people getting deprived of the benefits of mF. As mentioned by Rengarajan, SHGs have the inbuilt mechanism of keeping the people together. In my research work relating to social capital and poverty reduction, I observed that those who were members of SHGs gained from non-financial activities such as networking,improved communication, sanitation, literacy etc., with micro-credit helping them to improve their cash flows at household level. During the initial stage of SHG programme in mid 1990s, it was thought that SHGs would be only intermediary phase for unbanked poor to come together to take advantage of banking facilities and once members improved their economic status would approach banks directly and not through SHGs. But, over time, this did not actually happen and SHGs continued with some members moving out and some inducted as new.

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