NextBillion this January has started a series of thought-provoking articles on the theme of microfinance – which is very broadly a vision for the provision of financial services to low-income people through financial inclusion. It imagines a world where low-income households in all countries have access to affordable and high-quality financial services – savings, insurance, payments and remittances – to start small businesses, pursue advanced education, build wealth, stabilize lives and hedge against uncertain futures. It is closely related to microcredit – which are very small loans to low-income, unsalaried borrowers with almost no collateral.
According to a World Bank report, microfinance has built a solid track record as a critical tool in the fight against poverty and has reached 195 million borrowers in the last 20 years. Yet microfinance still reaches less than 20 percent of its potential market among the world’s three billion or more poor.
Timothy Ogden’s posts on NextBillion argues the case for continued social investment in microfinance, despite a recently published paper suggesting that impacts from various programs have been modest.
Curated via NextBillion, which was written by Timothy Ogden, a managing director of the Financial Access Initiative at NYU-Wagner.
The case for the status quo in microcredit – continued social investment and expansion with efforts to develop operational efficiencies and ensure client protection – is quite strong based on the findings of this research, especially if you value the extension of formal financial services to poor women. Admittedly, microcredit is not going to compete with the cost-effectiveness calculations for distributing bednets or deworming pills in areas with high prevalence of malaria and/or worms, but it doesn’t take much benefit to justify cost-effectiveness in comparison to most development interventions when your cost is less than $30 per person per year.
But there is also a strong case against the status quo: Surely we can do better than the current state of the art in microcredit. Understandably the impact research has captured people’s attention, but there has been a great deal of research over many years that focused less on impact and more on operational questions in the delivery of microcredit, such as: What drives repayment? What contract terms drive what sorts of behavior among borrowers? Why is take-up of microcredit so low? Why aren’t microenterprises growing? This rich body of research provides clear paths for innovation in microcredit that could boost impact. And again, it wouldn’t take much of a boost to dramatically improve cost-effectiveness estimates.
