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Tracking the Impacts of Micro-Finance

Written By Lindsey Engh of Lumana

Microfinance has a variety of outcomes. There are huge, best-case scenario outcomes that microfinance experts usually preach: escape from poverty, empower yourself, send all your children to school, invest in your business, create jobs, and access quality healthcare. Then there are smaller outcomes, such as ONE rural villager sending their child to school, or ONE person being able to expand their business based on a micro-loan. The best way to talk about these outcomes is by story-telling, or using qualitative methods such as interviews and group meetings to find out how microfinance has made an impact in the lives of individual clients. This is a very important part of outcome analysis in microfinance.

However, microfinance also has more economic and quantitative outcomes to measure as well. These include measuring net impact, like how much a client’s income has actually increased since receiving a micro-loan, or how much they are putting away for savings each month. These outcomes are hard to measure by story-telling, but are equally important.

In the past six months, the first two extensive and rigorous evaluations of the impact of microfinance have been published. One was done in India, lead by Esther Duflo and Abhijit Bannerjee of J-PAL the other in the Philippines led by Dean Karlan and Jonathan Zinman of IPA. The main research questions for both are centered around the question, ‘does access to microcredit have a significant impact on household expenditures and welfare?’ Their findings included both economic data and some story-telling, through a case by case approach.

Their findings? That microfinance has a positive, but mostly small impact. For example, access to microcredit has an important effect on household expenditure patterns and the creation and expansion of businesses, but no effect on health, education, and women’s decision making in the short term – which are the main qualitative, story-telling outcomes that has made microfinance so popular in the first place.

I have been discussing how transparency is important in microfinance. If followers believe that microfinance can change a client’s life by directly benefitting their health, education, and decision making, but data and other studies (such as the two above) shows that in the short-term, microfinance only really impacts a client’s income, this is not transparent. It’s important to show advocates and followers exactly what a loan can do for clients. That’s why it’s so important that Lumana has integrated both qualitative story-telling AND quantitative changes, such as aggregate household expenditure, to fully outline our impact and outcomes.

This week, six major microfinance organizations issued a response to these two studies. Several other bloggers and microfinance advocates found this response wanting, because they felt the general idea of the response stated that despite the news from these two rigorous, academic evaluations, they are going to continue telling nice stories and operating exactly as they have been, continuing to say that microfinance directly impacts health, education, and women’s decision-making, among other major poverty indicators.

It’s important to be realistic about the impacts of microfinance, in order to further innovate and progress the field. At Lumana, we believe that microfinance is an enabler – this means that microfinance can open the door to basic financial services, which we believe are the building blocks for any one person to start saving money and raising their income. However, we also believe that poverty is a definition for many other problems, such as a lack of health and sanitation rules, clean water, and education. Poverty is a complex puzzle.

That’s why it is important to share information and data, because it takes a lot of different knowledge and work to create a sustainable difference in the lives of developing communities. If an academic source comes out with an evaluation saying that microfinance, in itself, can only have a certain number of outcomes for an individual, then that information should be used to bring in other services or products to a developing area that can deliver those health, education, and decision making outcomes.

At Lumana, we believe that although we can’t solve all of the problems in the villages in which we work, we can share our knowledge of the area and our clients with other organizations who can help to solve those problems.

Saying that microfinance delivers only small outcomes isn’t a negative, or defeated, outlook on microfinance at all. It is a realistic view from a different source, meaning that microfinance delivers the basic financial infrastructure that is important to an individual’s well-being. We need a cadre of charities, donors and policymakers who will look at rigorous evidence that shows small gains and celebrate, not lament—and then look at the data again to see how we can extend or expand those small benefits.

Buzz on the Leaked PSD

The global development blogosphere is abuzz with commentary on the leaked draft Presidential Study Directive (White House review of U.S. global development policy).  We are working on our own analysis of this document, but in the meantime, browse what the pundits are saying about “A New Way Forward on Global Development.”

First, the original article that started all this buzz, posted by Josh Rogin to Foreign Policy’s blog The Cable.

Read what devex, the development professional’s news source, has to say here.

The Center for Global Development’s blog gives us their quick take on the good, the bad, and the unknowable.

Three members of MFAN (the modernizing foreign assistance network) have contributed their original insights to the raging policy debate: read the summary here, or see the individual contributions by Jim Kolbe, Carol Peasley, and Jim Kunder.

The Stimson Center’s blog Budget Insight provides a deep analysis of the promise and pitfalls of this document, with a heavy emphasis on the pitfalls.

InterAction shares its thoughts on the paper in its blog here.

The USGLC applauds the document, and summarizes it here.

Bill Easterly’s blog AidWatchers is more skeptical about the effect this PSD would have if it were released as the final document.

George Mason professor Philip Auerswald writes about what it means to “elevate development” in his blog, “The Coming Prosperity.”

And of course, in case you missed it, we posted our own little piece about the PSD soon after it was leaked.

Policy News Roundup – May 6

compiled by Eugenia Ho, Global Washington volunteer

New Timing for Strategic Reviews

The interim findings of the Quadrennial Diplomacy and Development Review (QDDR) were expected to be released in January.  After months of delay, it is likely that they will not be released at all.  However, the QDDR still expects to release its findings in September, which is when the discussion on the progress of the Millennium Department Goals will be held at the UN General Assembly meeting.

Discussion with USAID Administrator Rajiv Shah

 “Our time to change is now” according to USAID Administrator Rajiv Shah, at an event hosted by U.S. Global Leadership Coalition in Washington DC.  He rolled out the four overarching themes that will guide USAID reform:  recommitting to the Millennium Development Goals; investing more in country-led plans for growth; increasing the focus on science and technology to assist development; and improving implementation of development programs in conflict areas.  Shah also stressed a new commitment to transparency.  To watch the video of the event, please click here.

Despite billions wasted, more foreign aid needed: Oxfam

Oxfam International released a report coinciding with the gathering of international development ministers from the G8 nations last week, suggesting that foreign aid dollars have been wasted on corrupt and ineffective foreign-aid programs over the past several decades.  The report recommends that governments and donor agencies such as the UN should make aid funding more predictable, so recipient countries can plan better. The report also recommends strict transparency and accountability conditions for aid funding, requiring the money to be used to pay for public services.

Foreign Aid Reform: Spaghetti, Leaks and Hope

The National Security Council (NSC) has leaked a document which calls for the elevation of development as a central pillar of U.S. national security; it calls for a strengthened development agency (USAID) and independent development voice at the table when relevant policy is debated; and it calls for greater coherence in U.S. development policy through the framework of a quadrennial U.S. Global Development Strategy.  Although there are still many important issues to be debated and discussed, the vision outlined for the future has a lot to cheer for.  Click here  to view the full draft of the leaked NSC document.  Also see the Global Washington blog post about this document.

Hearing on Human Rights and Democracy Assistance:  Increasing the Effectiveness of U.S. Foreign Aid

The House Foreign Affairs Committee will hold a hearing on Human Rights and Democracy Assistance:  Increasing the Effectiveness of U.S. Foreign Aid, on Wednesday, May 12, 2010 at 9:30am.  For more information (and to see the live webcast), please click here .

The Gulf of Mexico Oil Spill‏

While the disaster is continuing to materialize and the cause is still under investigation, the recent event of the explosion of the Deepwater Horizon drill rig and the subsequent oil spill has led to discussions on its impact on U.S. energy policy, especially efforts to increase leasing acreage and oil and gas production in the Outer Continental Shelf (OCS).  Governors of California and Florida have already withdrawn their support for the idea of expanding offshore drilling, and some congressmen have warned that they can no longer support energy reform legislation if it includes such provisions.  In this article, Frank A. Verrastro, senior VP and Director of the Energy and National Security Program at the Center for Strategic and International Studies in Washington, D.C. answers critical questions relating to the impact on U.S. energy policy.  Policy changes as a result of this oil spill may have direct and indirect implications for developing countries.

Book Review: Development and its Discontents

In her new book, “Missionaries, Mercenaries and Misfits,” Kenyan newspaper columnist Rasna Warah explores the root causes of poverty and inequality in Africa and the value of development.  She concludes that by treating poverty as a “problem” to be solved with technical expertise and outside assistance, “development” in the form of donor-inspired policies ignores, and even contributes to, the very issues that are at the heart of Africa’s underdevelopment.  This book is reminiscent of Dambisa Moyo’s popular book “Dead Aid,” and is critical of World Bank officials and global development activists alike.

Nigerian President Yar’Adua dies after long illness

Nigeria is one of the top 10 recipients of US Foreign Aid, according to 2008 USAID figures.  Although the Vice President, Goodluck Jonathan, has now sworn in as President, following the death of President Yar’Adua, there will not be an election in 2011.  Will instability in Nigeria change the level of US foreign aid to the country in the next couple of years?