The Promise of Microfinance – Craig McIntosh, Ph.D.


Video: Beyond good intentions
Beyond good intentions

Highlights of The Promise of Microfinance and the Difficulty of Proving It, Craig McIntosh

Microfinance 102, April 19, 2011

(Summary courtesy of Jean Fort, Founding Director of Women Empowerment International)

Does microfinance work?  The answer is not clear.  The better papers have found:

  • Decrease in volatility of income (smoothing)
  • Larger income increases for women than men
  • Frustratingly few MF clients really climb the ‘ladder of credit’ to start larger businesses.
  • Lots of reselling, not much manufacturing.
  • Groups can help to foster social capital when all goes well, can be focus points for tension otherwise.


The best study ever done on the impact of microfinance is the 2010 “The Miracle of Microfinance” by Banjeree et al.  What should we take away from this study?

  • Has microfinance failed?

No, it just hasn’t achieved a transformative effect on people’s lives.  But then, this is high-interest debt that has to be paid back.  Why did we think it would?

  • Has MF been oversold?

Many MFIs make grand claims to donors to raise money.  Would people support MF if they thought it led to a small increase in the rate of business ownership?  Should they?


Impacts summarized:

  • MF ‘works’ for lenders.  Default is very low.
  • MF does not have a transformative effect on the average entrepreneur who receives a loan.  Average benefits, if any, are small.
  • MF decreases the variance of consumption; suggests it is better thought of as an insurance product than some kind of venture capital.
  • MF increases the variance of outcomes across individuals; the poor are similar because they make few choices; credit is power.
  • Lack of longer-term, more qualitative studies of impacts.


Perhaps the average effect is not the interesting question?


The Ethical Arguments:

  • Should we be thinking about trying to create stable, competitive marketplaces, or should be be focusing on providing services to the poorest of the poor?
  • Who is MF really there to help; the entrepreneurial poor (who are likely to be more entrepreneurial than poor), or the needy?
  • Is credit a mechanism suited to the poor at all, or do they have needs that are more basic than finance?


New Developments:

Importance of microsavings and microinsurance


Concluding Remarks:  Financial service demand is interlinked:

  • In the rich world, we typically borrow and save at the same time, but the poor often do not have financial institutions that let them do this.
  • When individuals can be provided with financial tools that let them save to meet their needs, this will be preferable to debt by the interest rate margin.
  • Current global microfinance movement has been too focused on debt and has not paid enough attention to savings.
  • Do MF borrowers really just use debt as a discipline device?  If so, provide them with commitment savings instead.
  • Do MF borrowers really just use debt to insure themselves against shocks?  If so, provide them with insurance instead.
  • Overall, need to be more serious in thinking about how to design products, institutions, and a regulatory environment that succeed in providing a suite of sustainable financial services to the poor.