Does Microfinance Make a Difference?

Measuring the Social Impact of Microfinance
By Hyewon Jung, Associate Programme Manager, UNCDF


Microfinance is hailed by many as an important tool for poverty alleviation. The potential for reaching and assisting low-income households in meeting their basic financial needs, for protecting against risks, and for developing social and economic empowerment on a sustainable basis have precipitated donor funding into microfinance in the late 90’s causing the sector to rapidly expand. Most institutions providing financial services to the poor operate under a corporate mission which includes poverty reduction, and donors have allocated increasing amounts of funding to microfinance on this basis. Microfinance programmes have burgeoned in many developing countries as part of their efforts to reduce poverty. The portion of poor clients served by microfinance institutions has been rapidly growing at a rate of 25 to 30 percent annually over the past five years. It is estimated that tens of millions of low-income people now have access to financial services.
Despite its rapid expansion, the effectiveness of microfinance in achieving its potential has always been put into question. The scarce reliable data on the impact of direct access to financial services on income, expenditure or wealth of poor households hinder attempts at deriving a clear conclusion on the matter.

One reason is that the effect of accessing financial services can have multiple and cross-cutting effects on poverty; these effects are hard to isolate and determine direct causal relationships. The impact of anti-poverty measures is often not immediately apparent, sometimes necessitating an intergenerational study of the impact on households. In addition, because of the variety in the institutional arrangements of the tens of thousands MFIs worldwide, obtaining reliable comparable data across countries is difficult.

Thus, evaluating the anti-poverty effect of microfinance overall becomes an arduous task, and this has subsequently hampered the development and promotion of cross-regional, impact studies on microfinance.
Nonetheless, the scarcity of data or the difficulty of undertaking comparative studies on the impact of microfinance in alleviating poverty should not be an excuse to neglect the impact evaluation of specific microfinance programmes. Assessing the social impact of microfinance is vital in determining whether established microfinance programmes achieve the desired outcome. Thus, for the different stakeholders in the microfinance industry, impact assessment has become a necessity. Donors want to be assured that their resources are being used for the intended objective, and emphasize the importance of impact assessment to evaluate the social return on their investment. For microfinance institutions social impact assessments enable them to draw out strategic management information to better orient themselves for improved financial performance and sustainability. Concrete and available information about the impact of microfinance and specific services provided by MFIs on household income and risk management enables clients to make informed decisions about the different range of services they need.
Different approaches to assessing the impact of microfinance have been developed, according to the many objectives the evaluation tries to serve. Among the different methods are those developed under the AIMS and Imp-Act programmes. Supported by USAID, a number of research activities were carried out under the AIMS (Assessing the Impacts of Microenterprise Services) Project between 1995-2001, the result of which provided a conceptual framework for assessing the impact of microenterprise services. The tools and indicators developed under AIMS were used to undertake a cross-national study on the impact of microfinance in India, Peru, and Zimbabwe, at the household, enterprise and individual levels.

Although the impact of microfinance varied in all countries in terms of its nature and magnitude, findings strongly suggest that overall, access to financial services is associated with improvements of social and economic welfare of low-income households.
The Ford Foundation has been sponsoring the Imp-Act (Improving the Impact of Microfinance on Poverty: Action Research) Programme, “a three-year action-research programme that aims to improve the quality of microfinance services and their impact on poverty through the development of impact assessment systems.” The Institute of Development Studies is the lead implementer of this programme. In conjunction with 30 MFIs in 20 countries and academics from three UK universities, policy-makers, international NGOs and donors, the programme seeks to “develop credible and useful impact assessment systems based on the priorities of microfinance organizations and their stakeholders, to broaden the scope of impact assessment to include wider poverty impacts, and to influence thinking and practice relating to the role of microfinance in poverty reduction” (see www.ids.ac.uk/impact/). Different approaches and methodologies for impact assessment are being developed and promoted under Imp-Act with the collaboration of the various partners.
Although impact assessment studies allow for a clear analysis of the costs and benefits of microfinance, for most MFIs, the cost and difficulty in designing and conducting adequate and reliable statistical analysis are an impediment to the institutionalization of impact assessments. According to Professor Jonathan Morduch of New York University, “Many studies focusing on impact assessments are problematic due to a faulty design in the basic approach and methodology. The main challenge in measuring the impact of a microfinance product or programme offered by a specific institution is obtaining reliable data. Most often times, clients are recipients of more than one product, which are provided by more than one microfinance institution. For MFIs, it becomes hard to obtain measures on the exact impact of their services and products on their clients’ lives.”
Failure to generate information based on reliable data analysis in a timely manner contributes to the hesitancy of some MFIs concerning the adoption of impact assessments.

Even when impact assessments are carried out through external funding and do not pose a burden, many MFIs are reticent to the idea of undertaking the assessments because of the fear of getting results that do not conform to the satisfaction of donors. Rather than face the possibility of being held accountable for bad performance, which can be easily detected by a formal impact assessment, some MFIs prefer relying on informal reporting, which can be conveniently stowed away and “buried”. According to Debjani Bagchi of Enterprising Solutions Global Consulting, “MFIs should realize that impact assessments, when implemented correctly, can serve as a valuable indicator for the direction management needs to take to improve their performance. Improving financial performance means increased returns. A necessary precondition for institutionalizing impact assessment studies is a strong commitment on the part of MFIs. In the case when the financial cost of impact assessments serves as a deterrent, MFIs should work with the donor community, government policymakers, and NGOs to reduce the burden.”
Impact assessment provides valuable feedback on the effect of different microfinance programmes and services that are provided by MFIs. Policymakers, microfinance institutions and the donor community can gain a better sense of the direction they need to take and how they should collaborate to reach a greater number of people through the design of better products and services, and the promotion and establishment of an environment conducive to the growth of the microfinance sector.