The Art of Pointless and Misleading Microcredit Impact Evaluations

This guest post is provided by Milford Bateman who is a Visiting Professor of Economics at Juraj Dobrila University of Pula in Croatia and a development consultant. He recently accepted a two-month position as Distinguished Visiting Professor of Development Studies at St Mary’s University in Nova Scotia, Canada, to be taken up in late 2013.

Four of the most high-profile research teams have in recent months released papers summarising the results of multi-year projects that aimed to assess the impact of microcredit. All of these projects claim to have found some small residual value in the increasingly de-bunked concept of microcredit which, the authors quickly go on to say, suggests to them that it is too early to agree with the growing number of nay-sayers and abandon the microcredit model in favour of other local development models.  The four papers I refer to are:

• (most recently) ‘Win Some Lose Some? Evidence from a Randomized Microcredit Program Placement Experiment by Compartamos Banco’ by Manuela Angelucci, Dean Karlan, and Jonathan Zinman (hereafter AKZ
• ‘Microfinance at the Margin: Experimental Evidence from Bosnia and Herzegovina’ by Britta Augsburg, Ralph De Haas, Heike Harmgart and Costas Meghir (hereafter AHHM)
• ‘The Miracle of Microfinance? Evidence from a Randomized Evaluation’ by Esther Duflo, Abhijit Banerjee, Rachel Glennerster and Cynthia G. Kinnan (hereafter DBGK)
• ‘Are microcredit participants in Bangladesh trapped in poverty and debt?’ by Shahidur R. Khandker and Hussain A. Samad (hereafter KS).

Dazzling econometrics and pioneering impact methodologies aside, the most important thing these four papers all have in common is actually something else: they all go to great lengths to avoid exploring the most awkward downside issues that lie at the heart of microcredit and, to do so, they choose to deploy some faulty logic along the way.

How to Make Microfinance out as a Success, even when It Isn’t

CGAP is the World Bank’s (not-quite-so-)arm’s-length sub-organisation whose role is to promote microfinance. CGAP (“see-gap“) once stood for “Consultative Group to Assist the Poorest“, now it officially stands for “Consultative Group to Assist the Poor”. Actually, if nomen were to be omen, it should probably stand for “Consultative Group to assist (those who lend to) the Poor (and not-so poor)”.

So many functions … but can it cut? Image: Slartibartfass (CC BY-SA 3.0)

I don’t expect CGAP to function as an independent evaluator of microfinance. What I do expect is that CGAP publications have minimum standards of research quality and logic.

The most recent CGAP report, entitled “Latest Findings from Randomized Evaluations of Microfinance” (Bauchet et. al.), however, is appalling on both counts. Nearly everything about this report is problematic. It is racked by wishful thinking – to paraphrase: “we may not have evidence that microfinance does what it was supposed to, but we still believe it works” – and it has a disturbing feel about it, which derives from: (1) what the authors have left out, and (2) the heavy tension between concern for the poor and patronising them.

False Histories: Microfinance and its non-Lineage of German Cooperative Banking

Recently, I’ve been writing a section about the history of microfinance for my dissertation. Having read around a bit, I feel the need to correct a myth that seems all too common among microfinance enthusiasts: that microfinance follows in the footsteps of German cooperative banking. I will admit this is becoming something of a pet peeve. But in fact, microfinance and the cooperative movement have very little in common. Here’s an explanation.

At least not all microfinance histories follow the simplistic story which casts microfinance as an invention of Muhammad Yunus in 1976, essentially saying microfinance has no history. But there is also an account of microfinance which I would call the over-historicised account, which sees microfinance as part of a very long history of credit. Mainly, the idea is that pilanthropists have been using credit to “do good” for aeons because the poor have always needed credit, so microfinance is just the modern iteration of this idea. Muhammad Yunus has even been compared to Friedrich Wilhelm Raiffeisen (by Bernd Balkenhol at the ILO).

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Can you tell the difference? Muhammad Yunus; F. W. Raiffeisen

But I don’t think the poor have always needed credit (definitely not before the monetised economy), and I don’t believe microfinance really follows in the footsteps of, say, the Irish loan societies or the German cooperative movement. The particular for-profit financialised “social business” commercial enterprise which is modern microfinance bears very little resemblance to anything before it; it is distinctly a product of the financialised capitalism of our time.

Bordercrossing books: “Why Doesn’t Microfinance Work? The destructive rise of local neoliberalism”

Book review:

Milford Bateman, 2010: Why Doesn’t Microfinance Work? The destructive rise of local neoliberalism. London: Zed Books.

Since the inception of this blog, one issue which has been critically explored again and again is the dominant position of microfinance in the field of international development. For instance, a series of blog posts in early 2009 was aimed at unmasking the popular myths spun by microcredit’s advocates, from presumed gender empowerment to the purported win-win situation in which profits would go hand-in-hand with social impacts. More recently, we followed how, in the wake of two high-profile randomised studies which failed to show increases in poor people’s income, even some mainstream media have begun taking a more critical view of microfinance.

Indeed, 2009 and 2010 may have brought some disillusionment to many who believed that small loans would create “a world without poverty”. But still the microfinance industry and its epistemic community remain fiercely defensive of the reputation as a solution to poverty; still the international donor community unquestioningly pours money into a concept with much promise but little proof; and still Muhammad Yunus’ award shelf continues to fill up with precious metal as the hype around microfinance continues to enthrall the socially-concerned masses.

A few full-fledged books critiquing present microfinance practices may have been published to date, but these have addressed themselves mainly to microfinance insiders and development experts. Milford Bateman’s brand-new book (released this summer) however is the first critical book capable of crossing the border between academia and the lay world; it reaches out to convince a wider audience of questioning those accepted wisdoms which underlie the first big development hype of the 21st century.

Microcredit Myth #3: Microcredit empowers women.

Small loans for women, often organised in groups, to build their own businesses – that’s a standard model of microfinance, and many microfinance organisations are focused on women. In fact, it used to be the case that 95 percent of Grameen Bank’s borrowers were female.

Through the establishment of self-owned businesses which provide an independent income stream, it is theorised (or often simply claimed) that women will be empowered thanks to microcredit. A compelling argument it is, but the evidence, sadly, is thin.

Many men send their women to obtain loans which they themselves would not be eligible for, as Weber (2002) found. Thereupon they allocate the loan within the family as they see fit, possibly buying a rickshaw which they themselves pull, or on-lend to a relative with an existing business. However, if repayment becomes a problem, it is the woman who is held responsible by the microfinace organisation, and is then subject to legal and social sanctions.

Microcredit Myth #2: Microcredit is (and should be) profitable.

Since the beginning, proponents of microcredit have argued that they have found a self-sustaining, profitable route to reducing poverty: borrowers repay loans with enough interest to cover the costs plus an increase in the bank’s capital base, plus a payout for its owners. Sceptics of this story point to the fact that most microcredit programmes are still subsidised by donors. They argue that this is because many borrowers cannot afford to repay so dearly, and that the cost of capital should be lower in order to help more and poorer people.

Welcome to the ‘sustainability versus outreach’ debate. At the core, it is about the question whether incentives or impact matter more. Time to examine the arguments.

Microcredit Myth #1: Microcredit is good for all poor people.

Credit is a useful lever for helping businesses grow. Many poor people in the developing world are self-employed farmers or petty traders, so technically they can be conceived of as businesspeople. But most farmers are actually subsistence farmers, working not for the market but for their own family’s meals, and many traders are simply traders for lack of a better alternative of stable, paid employment. They resiliently eke a meagre living out of their harsh surroundings, and truly deserve admiration by comfortable Westerners. But does that necessarily warrant them being treated as Schumpeterian entrepreneurs, willing and able to “creatively destroy” their traditional economic environments, if only they were lent the necessary finance?

We should keep in mind that people are incredibly diverse, and this must be taken into account and respected when formulating development policies. One-size-fits-all approaches have repeatedly failed in development history, and serve as a warning.

Questioning some Microcredit Myths

In the popular literature surrounding microcredit (or microfinance), a number of claims is repeatedly made which deserve a closer look. The mass media are full of heartwarming stories, anecdotes and PR-like representations of MFIs’ work, showing the apparent power of microcredit to improve the lives of the poorer inhabitants of this planet. In fact, many academic productions make similar claims without providing sufficient evidence to back them up.

In this way, the impression is being created that the development industry has found a panacea for poverty; a dangerous insinuation which can only lead to disappointment. Over my next few blog entries I will address and critically illuminate some myths – insufficiently supported claims or untested assumptions – which currently stand in the way of a balanced assessment of the true powers and drawbacks of microcredit as a development tool.

(phil)