Microfinance: The Good Housekeeping Seal of Approval?

In response to a glib comment of mine, one reader asks:

You seem to be consistently unimpressed with microfinancing efforts. Why?

Unimpressed is probably the wrong word. I’d say skeptical, at least until some of the actual evidence comes in. What little we have suggests that microfinance is usually a good thing, but not in the ways we expect. (Follow this blog for the emerging story.)

Now, I don’t think we need a randomized trial before scaling every intervention. But I might like to see a little evidence before something becomes the largest and most expansive micro-development intervention in human history.

The main reason for my glibness: microfinance seems to gone from a sometimes-sensible intervention to the Good Housekeeping Seal of Approval for every NGO effort. What can we do to help the poor? Microfinance. How to build governance and local capacity? Microfinance sounds good. How to be more tasty and less filling? Why not microfinance?

Knee jerk policy norms aren’t limited to lending. Had a civil war? You need a Truth and Reconciliation Commission. Printing your own currency? An independent central bank is clearly the solution. Having an election? Why, you must need international monitors.

After a point, these things promulgate not because they are good or bad in the specific context, but it is because this is what good countries or NGOs do. Most are probably good for most places, but not always.

My colleague Susan Hyde has a book coming out on the subject, with the most attention how the norms of international election monitoring arose. Here’s a paper partly on the subject.

Unless it’s been written, the microfinance-as-norm dissertation has yet to be written. Anthropology PhDs: this is a chance to get zesty.

9 thoughts on “Microfinance: The Good Housekeeping Seal of Approval?

  1. nice post. I’d call this institutional isomorphism – I’ve seen this most associated with sociological institutionalists (Meyer and Rowan 1977 and cohorts of followers). They even posit the same theory of institutional spread – i.e. “seal of approval” type of thinking. I haven’t seen that applied to microfinance, though.

  2. I like this post for its maturity. When another one size fits all intervention is proposed , with little evidence of its effectiveness, I tend to try to convince the proponent with a barrage of data and abuse. Your balanced response is a lesson to me.

    Development fads might be like successful memes. A meme is good in multiplying itself, but does not necessary benefit its “carrier”. In this case, it helps the reputation of the one propagating the development idea by jumping on the bandwagon, without helping the beneficiaries. Developments go on against all evidence.

    A good analogy is also the charts in pop culture. Apparently it can be proven that an initial rise in the charts is not caused by the quality of a song, but rather by luck and promotion. The ones above the fray afterwards just keep rising because they stand out.

    Within the sea of interventions, there are few winners, and a lot just lingering on. When a “good vibe” is created on a particular intervention, everybody donor has an interest to copy the percieved success. Nobody wants to be seen as a loser, and so what you are doing you will present it as a success. In development, percieved success is success.

    The success of mirages such as budget aid, UN-reform or education reform proves that evidence based work is not the rule. Moreover, evaluations will rather look at how good you did the intervention (specialists in the field) than whether it was the right intervention.
    In any case, you will be reassigned before reality caches on. Nobody ever got fired for buying Microsoft.

  3. >Unimpressed is probably the wrong word. I’d say skeptical
    >microfinance seems to gone from a sometimes-sensible intervention to the Good Housekeeping Seal of Approval for every NGO effort

    I would not claim microfinance is a panacea for all sorts of problems, but I have some points to make that I don’t think get enough credit in your blog post.
    1. The poor benefit from having financial services offered to them (saving and borrowing), especially given their vulnerability to external shocks.
    2. Microfinance can be self-sustaining with a relatively low initial investment, unlike all sorts of excellent and not-so-excellent interventions.
    3. If the poor are more vulnerable to rent-seekers (extortion/bribes), an objective, rule-based and flexible financial services provider is better than one that can arbitrarily call in loans or one that shows no flexibility at all on repayment. (I’m not saying all NGOs are perfect, but many are quite good and honest.)

    And yes, I agree that more and better evidence on microfinance is needed. And researchers should look in less obvious places. For example, does the financial sustainability offered by microfinance allow NGOs time to learn about service delivery and to expand delivery of other programs? Can microfinance be used as a lever towards greater access to information/opportunities?

  4. I tend to agree with everything you’ve said. In my limited experience, I also believe you’re correct it’s ubiquitousness is not a reflection of it’s actual worth. You’re also right that microfinance has yet to be proven to particularly effective in promoting growth or reducing poverty, though it can change the household’s ability to cope with income shocks, provide financial flexibility and invest in capital as commented on by Vivek.

    However, some of his other ideas, while not necessarily untrue, illustrate the general smitteness of people with microfinancing. Often times for microfinance to “self-sustaining” it requires the institution to “upscale” considerably in terms of clientele and loan size. As with all such statements this is not universal, but many heavily socially motivated MFIs (who seek to serve the poorer of poor and more women) still require subsidization. His second comment on rent-seekers is also true at first glance, and while many would prefer a NGO to a neighborhood thug it is misguided to think that the debt traps sometimes seen in microfinancing is a positive development step.

    Interesting thoughts, thanks.

  5. I am sorry to come back in here, but NGOs are in development normally seen as a legitimate partner for donors. This is questionable. They don’t have any roots in the community (otherwise we speak of civil society organisation or Community based organisations) and don’t have the expertise of financial institutions. Although they can get lucky in delivering a more or less sustainable service, as they are not organisations accountable to their costumers, but to an external board and a donor, they don’t empower the beneficiaries. If the micro-finance model works, they will have to change their accountability structure anyway. Meanwhile, as they are professionals paid by donors and not with contributions of the community, they will outcompete and kill home grown financial services offered by civil society organisations or private sector actors.

  6. Good points. I do think it’s important to distinguish between two ways in which “microfinance” gets used. The group-lending-for-productive-investments model is I think what you’re talking about, and your criticisms there are right on. However, that shouldn’t be confused with microfinance in the broader sense of offering a range of financial services of the poor, such as insurance, savings vehicles, or more flexible types of loans for different purposes, as a lot of MFIs are starting to do these days (Collins et. al.’s Portfolios of the Poor book provides a great illustration). I think some of the new microfinance approaches are very promising and the same critiques don’t really apply.

  7. For the old-timers on the list, in the early days of the Internet there was a well-known credit for poor people guru, let’s call the person “Jane”…. and “Jane” made a similar point to Vivek… the test of microfinance and credit is right there in the marketplace… if they recover the loans, then the presumption must be that they do good… unless they are causing systemic risk (we now know) or are Ponzi schemes (we now know) or have a number of other negative feedback effects (paradoxically reduce savings rate?). Most other micro-development projects are really public goods, and so impact evaluations need to be done… of course, if the microfinance is rather heavily subsidized, then “Jane” always argued this was really really bad, because it basically was shutting down local development of financial industry- the microfinance as dumping argument.

  8. This post seems timely–advocates, critics, and neutral observers of microfinance increasingly are calling for more and better evidence on impacts. That it’s becoming more common for people to pause and ask questions suggests that microfinance is growing into itself, and it’s a step forward in and of itself. The risk at this juncture is that people will look at evidence only through the lens of their expectations and focus too much on “impact” traditionally defined (i.e. business growth or increased consumption), missing opportunities to redefine their understanding of the role of financial access.

    Quiet Griot (above) mentions Portfolios of the Poor. The biggest lesson I took away from the book is that for poor households, the reduced vulnerability to shocks afforded by reliable financial services makes a huge difference. It’s not the same as increased consumption, but it’s far from a disappointment.