Microcredit alone may not transform many people’s lives. But it can be a part of the equation that does.
Poverty is a multi-dimensional issue that requires a multi-dimensional approach. Why then do impact studies on microcredit search for transformative effects of what is essentially a limited intervention?
Last week the American Economic Journal: Applied Economics published the results of six randomised control trials showing the limited impact of microcredit on the lives of the poor. In their introduction to the volume, Abhijeet Banerjee, Dean Karlan, and Jonathan Zinman note that “lack of evidence of transformative effects on the average borrower”.
Far from being damning (see “The Final Word on Microcredit?” from the Center for Global Development), these results are expected. At BRAC we see microfinance as but one important part of a broader set of services needed by the poor that should also include access to education, healthcare, clean water and sanitation, and the justice system.
Indeed, as recently noted in The Guardian and in Harvard Business Review, for those experiencing the harshest forms of poverty, BRAC makes sure that clients receive a combination of services through targeted interventions that include healthcare, education for children, social integration, skills training, asset transfer, and either grants or loans. This holistic, tailored approach for the ultra-poor has certainly been shown to have transformative effects on poverty.
Not all NGOs can provide all these services. But we believe that those involved in microfinance alone do make valuable impacts on people’s lives.
We see it when we speak to clients, when they tell us with pride and confidence about their businesses, and when they talk about what they did before they had access to microfinance.
This is partially reflected in the RCTs. The authors highlight that microcredit works well for some and not for others, with modest positive overall effects. A limitation of the studies, however, is that they only focus on microcredit.
Responsible NGOs understand that clients respond to microcredit differently, seek to understand these differences, and try to design their products accordingly. This often means expanding beyond the remit of traditional microcredit, as many have done, to providing savings products, insurance facilities, financial education, and testing new delivery channels such as mobile money.
As an example, BRAC learnt that one in three late loan instalments were caused by a sudden health shock for a client or a client’s family member. To address this we developed health loans that ease the financial pressures on clients who unexpectedly have to pay for medical care.
Such efforts are being complemented with research BRAC is doing itself. In 2013 we launched a Financial Diaries project, which will try to track every transaction that is made by respondents, in order to draw an accurate picture of the complex financial lives of the poor. We hope this will enable us to design products that go further in meeting the heterogeneous needs of our client base.
NGOs cannot anticipate everything that can go wrong for a client. But they can equip them with the skills, tools and awareness with which to deal with difficulties when they arise. Financial literacy may prove critical in these scenarios, and a growing number of organisations, including BRAC, are offering financial education alongside its other products.
It is not just NGOs and MFIs that must take heed of microcredit’s limits. Regulators often determine the impact that practitioners can make. In their introduction, Banerjee, Karlan and Zinman note that savings products have shown promise, yet regulators still limit many organisations in their ability to take deposits. We believe our impact in countries outside of Bangladesh would be greater if this wasn’t the case.
Too often microcredit is synonymous with microfinance. In assessing this sector it is time that research moved away from heavy focus on credit, and gave a critical view to other financial services starting to gain traction in the financial inclusion space.
This is likely not “the final word on microcredit.” Let us certainly hope it is not the last word on microfinance.