An institution with a very long name (Evidence for Policy and Practice Information and Co-ordinating Centre (EPPI-Centre) at the Social Science Research Unit at the Institute of Education, University of London) just published a review of the academic literature on the impacts of microfinance in Africa. The study was funded by the U.K. aid agency, the Department for International Development (DFID).
I peer-reviewed the study protocol barely six months ago and a draft in early November, just as the reality of the Andhra Pradesh crisis was sinking in. A lot has happened since. Looking over the report today, I realized how it could become a football in the ongoing arguments about the efficacy of microfinance. Proponents can point to the preponderance of + signs in the tables that summarize findings about effects on outcomes such as wealth and health (pages 29--37) as well as to the citations of "high quality studies." Doubters can invoke the negativity of the summary:
- We conclude that some people are made poorer, and not richer, by microfinance, particularly micro-credit clients. This seems to be because: they consume more instead of investing in their futures; their businesses fail to produce enough profit to pay high interest rates; their investment in other longer-term aspects of their futures is not sufficient to give a return on their investment; and because the context in which microfinance clients live is by definition fragile.
- There is some evidence that microfinance enables poor people to be better placed to deal with shocks, but this is not universal.
- The emphasis on reaching the ‘poorest of the poor’ may be flawed. There may be a need to focus more specifically on providing loans to entrepreneurs, rather than treating everyone as a potential entrepreneur.
- Micro-savings may be a better model than microcredit, both theoretically (because it does not require an increase in income to pay high interest rates and so implications of failure are not so high) and based on the currently available evidence. However, the evidence on micro-savings is small and further rigorous evaluation is needed.
- The rhetoric around microfinance is problematic and damaging. ‘Clients’ could also be called ‘borrowers’ or ‘savers’, and ‘micro-credit’ might just as well be called ‘micro-loans’ or even ‘micro-debt’. There is an obligation amongst donors and policy-makers not to falsely raise expectations with development aid in this way. The apparent failure of microfinance institutions and donors to engage with evidence of effectiveness perpetuates the problems by building expectations and obscuring the potential for harm. A growing microfinance industry may as easily be a cause for concern as one of hope.
Bear two points in mind in interpreting this report.
First, I would mentally italicize "some" in item 1 above. I think the authors mean to convey that microcredit, like all credit, appears to have a spectrum of impacts: it helps some, hurts others, and leaves many about the same. If I am right (as the lead author confirmed below), then the authors are emphasizing the negative in contradistinction with the prevailing, positive perception---or at least what was the prevailing perception when they started writing. They are not asserting that microcredit always or even on average does harm. I'm pretty sure none of the "high quality" studies suggests that.
Second, "high quality" is relative. The authors' assignment was to glean what they could from the literature on Africa, and in this I think they did an impressive job. But as I have argued (blog post, book chapter), the pickings of truly credible studies are thin. That goes double when you restrict to Africa.
For example, the Barnes et al. study of microcredit in Zimbabwe, one of the four "high quality" studies cited, is not randomized and not, in my view, credible. (See Beatriz Armendáriz de Aghion and Jonathan Morduch's Economics of Microfinance.) [Correction from Ruth Stewart below: I had the wrong Barnes et al. study. The "high quality" one took place in Uganda---but this does not change my argument.] Roughly speaking, it is "high quality" because it has a control group. I trust the authors' judgement that this puts the study a cut above. But since the treatment and control groups were not randomly constructed, it still doesn't cut it with me.
So if you're not exclusively interested in the impacts of microfinance in Africa, I would rely more on Kathleen Odell's excellent, recent review for the Grameen Foundation. Even if you are only interested in Africa, Odell's review of lessons from other continents is still relevant.
Overall, the texture and tenor of this fuller distillation of the findings feel about right to me:
The available evidence suggests that micro-credit has mixed impacts on the incomes of poor people. Microsavings alone appears to have no impact. Both microcredit and micro-savings have positive impacts on the levels of poor people’s savings, whilst they also both increase clients’ expenditure and their accumulation of assets.
The available evidence suggests that both micro-credit and micro-savings have a generally positive impact on the health of poor people, and on their food security and nutrition, although the effect on the latter is not observed across the board. In contrast, the evidence on the impact of micro-credit and micro-savings on education is varied, with limited evidence for positive effects and considerable evidence that micro-credit may be doing harm, negatively impacting on the education of clients’ children. Having said this, micro-credit does not appear to increase child labour.
There is some evidence that micro-credit is empowering women, but this is not consistent across the reviewed studies. Both micro-credit and micro-savings have a positive impact on clients’ housing. However, there is little evidence that micro-credit has any impact on job creation, and no studies measured social cohesion.