Microfinance has a reputation among the public for making poor people self-sufficient and a means to help women in developing countries to improve their economic and social situation. In 2010, however, there was a pronounced microfinance crisis in the Indian state of Andhra Pradesh. The social pressure in some credit groups had become so great that it was proven that some borrowers committed suicide. Microcredit crises of varying proportions have also emerged in recent years in Nicaragua, Bolivia, Bosnia, Pakistan and Morocco.
Parallel to these upheavals, more and more scientific studies were published, which as a whole did not confirm a systematic poverty-reducing effect of microcredit.
What Do Studies Say?
Thus, the most recent review of the state of research concludes that a systematic reduction of poverty through microcredits has not yet been proven. Other authors like David Roodman support this statement.
However, this result of survey studies is not considered to be a final judgment. Rather, it is also based on the complexity of the research subject and the often inadequate scientific tools used in the studies available to date.
Both Duvendack and Roodman point out that despite the plethora of studies on this topic, only a few studies have a strong predictive power. Thus, the research group around Duvendack, after reviewing 2,643 studies, articles, books and doctoral theses, only had 58 meaningful texts.
Odell points out in her 2010 survey that the scientific assertion that microfinance generally reduces poverty is not possible today because microfinance and the social circumstances in which it is offered vary widely. In addition, different methods of examination check very different statements, making it difficult to compare their results. All authors also regret that the “gold standard” of evaluation, the randomized control study, is difficult to apply in microfinance analysis, especially when longer periods of time are observed, and has been used in very few studies so far.
The variety of results will be outlined in four examples:
Odell’s survey shows that a total of six studies from such diverse contexts as Kenya, India and the Philippines have come to the conclusion that microcredit and micro-savings opportunities can promote the emergence and economic success of micro-enterprises, but that no poverty-reducing effect can be demonstrated.
A microcredit study in South Africa concludes that micro-borrowers had an 11% higher chance of getting a job than those who were in principle eligible for a loan, but after that
Randomly excluded from it. Discussions with borrowers showed that the loan allowed some of them to buy the equipment needed for the job, such as a uniform or a vehicle.
While the above results are based on quantitative research, qualitative studies on the question of empowering women through microcredits come to the following conclusions:
Credit groups that are self-help groups and that aim at empowering women in addition to providing credit can work very effectively and effectively support each other well beyond lending, thereby improving their position together.
However, a study conducted in Bangladesh in the early 1990s found that 63% of women surveyed had very limited or no control over the use of their credit.
Negative effects on the status of women are reported primarily where credit groups exercise strong peer pressure. For example, Roodman reports strong aggressive behavior by group members towards defaulting payers.
These results are sobering given the image of microfinance. The images of smiling Indian women in colorful saris reporting that they’ve bought a goat, expanded their market stall, or bought crafting materials with microcredits are just one side of microfinance. On the other hand, there are many women who have had to resell their goat because their husband needed medical treatment or who use the money to feed their family or to buy a school uniform.
Microfinance As Access to Financial Services
Given these mixed and sometimes frighteningly negative results after more than 30 years of microcredit, there is growing evidence that the strength of microfinance is not poverty reduction or empowerment, but that poor people have access to reliable lending and saving opportunities and that stable institutions have been built up in recent decades that bring this service as far as possible into the reach of poor and very poor people in developing countries. This new understanding of microfinance as a service offering can be seen in the exchange of the concept of “poverty reduction” in the objectives of microfinance through that of “financial inclusion” as it is known, for example. on the microfi-platform of the World Bank CGAP. This term is filled with an expansion of the offer of MFIs. In addition to loans, savings are increasingly offered and larger institutions are looking for solutions for insurance offers for the poor.
The “Portfolio of the Poor” study provided a major impetus to this new perspective, as researchers spent over a year accompanying poor families in Bangladesh, India, and South Africa to create budget books on their monetary transactions This was met by a wide range of institutions, including a moneyguard (a neighbor who kept small sums of money for a short time), a life insurance fund, a rotating savings and loan SCA), in which women pay in a certain amount of money, and then pay out the jointly accumulated sum in turn to one of the members. Loans from microfinance organizations were just as much a part of this instrument as loans from lenders.
There were three main needs of households:
- Keep money safe for a short time.
- To cushion the insecure and uneven income of the household, that is to say, with a profit of 4 euros on one day, of 1 euro the next and none at the next but still enough to bring food to the family table.
- to have access to larger sums, e.g. for illnesses, weddings or major purchases or just to build up a self-employment. These larger sums can be available through group savings, group loans and insurance.
Until a few years ago, microfinance focused on just one of these needs and only one tool: providing credit for building an independent existence.
In understanding microfinance as an instrument of financial inclusion, other requirements for financial service providers are emerging. They are now measured by how well they provide their target group with the widest range of financial services tailored to their needs. However, in the face of the need to work economically, borders become clear. The secure storage of small sums in a regulated institution is often unprofitable, and the demand for insurance policies for eventualities that never occur is poor among poor people.
In addition, the inflow of capital from Western Europe and North America promotes a transfer of money in the form of (profitable) small loans rather than the construction of (expensive) savings. Approaches to the implementation of transparent lending and the establishment of criteria for measuring the social successes of MFIs, which also take into account the range of supply, are intended to remedy this situation.