The Holy Grail of Microfinance Research?

> Posted by Tyler Owens, Management Intern, CFI 

The Holy Grail of research for the global microfinance sector is incontrovertible proof that the provision of small loans generates real and lasting impact for borrowers. While Holy Grails are never found, new research from the World Bank offers more than two decades worth of evidence examining the impact of microfinance on households in Bangladesh. The question of whether it provides this incontestable proof of effectiveness warrants more than a yes or no answer.

There are different ways to define what works. Proof of positive impact encompasses a host of definitions, from general ones such as rising levels of GDP per capita or other measures of progress out of poverty, to narrower ones such as growing investment in education or certain health outcomes. Regardless, to those who practice microfinance or study the sector, there is consensus that impact means real and lasting benefits to people, society, and economy. For example, a growing number of people who have transcended the national poverty line and stayed above it for some years implies real and lasting impact.

The recent World Bank study, Dynamic Effects of Microcredit in Bangladesh by Shahidur Khandker and Hussain Samad, attempts to generate such broad evidence to assess impact. It covered more than 3,000 households in 87 villages across Bangladesh, and lasted more than 20 years. Ultimately, the study showed that “group-based credit programs have significant positive effects in raising household welfare including per capita consumption, household non-land assets and net worth.” The study also showed significant positive effects from individual lending on household income and expenditure. Additionally, both boys’ and girls’ schooling levels as well as labor supply—which indicates the amount of hours workers are willing to work—increased concurrently with lending.

While a positive contribution to the intellectual arsenal of microfinance proponents, the study falls short of providing global, unified evidence that microfinance works. David Roodman points out several compelling reasons why. First, the study confuses statistical significance with real world significance. The study’s findings do achieve statistical significance: “A 10% increase in men’s borrowing raises household spending by 0.04%….Borrowing by women pushes up household spending by one and a half times as much,” it reports. The study also shows that a 10 percent increase in women’s borrowing raises female labor supply by 0.46 percent, boys’ school enrollment by 0.07 percent, and girls’ school enrollment by 0.08 percent. But are these outcomes significant enough to matter in real life? For example, how would a 0.04 percent increase in spending translate to changes in quality of life? Or, does a 0.08 percent rise in girls’ school enrollment motivate donors, socially responsible investors, NGOs, or public policy officials to further support the industry? Roodman thinks not.

Handling of correlation is another area where the study is lacking. Everyone by now knows that correlation does not prove causation, but it bears repeating because the study implies causation. “Microcredit programs have continued to benefit the poor by raising household welfare,” it says. However, as we all know, household dynamics affect each other. To address this causality dilemma, many social scientists believe the randomized control trial (RCT) to be the best tool available for proving causality. But, the World Bank’s study was not an RCT. Thus, one can legitimately wonder whether a better harvest, lower monthly expenses, a more entrepreneurial spirit, or dozens of other factors could have been responsible for the positive outcomes listed above.

So, as the microfinance industry continues to grow, responding to rising demand and huge unbanked markets, there will undoubtedly be many more reports showing positive impact. But the final word—evidence that any responsibly-provided microloan will impact any or at least most poor borrowers in a real and lasting way—continues to be elusive.

Image credit: Kris Robinson

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