Microfinance, financial services for the most disadvantaged, was hailed in the 1980s as a magic wand to end poverty. Perhaps the highlight was the awarding of the Nobel Peace Prize in 2006 to Mohammad Yunus, one of its authors and greatest supporter.
But the fame didn’t last long, and ten years later there was criticism because customers were over-indebted and too strict about defaults – microfinance programs, for example, were blamed for the suicides of 80 women in the Indian region of Andhra Pradesh in 2010.
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In all these years, microfinance has emerged as a major global economic sector, the first to demonstrate its ability to successfully serve the most disadvantaged populations, and is estimated to have generated more than $180 billion (165 billion euros ) of loans and benefits covers around 200 million people. However, the debate remains stubbornly unresolved and, in a constant cycle of support and criticism of the industry, questions how microfinance benefits its customers.
Testing whether microfinance has the desired effect is not an easy task. Esther Duflo, renowned Nobel Prize winner in economics, conducted randomized control group tests (RCT) in 2010 without drawing a clear conclusion. The RCT methodology alone cannot explain why the observed effect occurs because it does not document the dynamics that lead to the result. The only conclusion was that the same financial services can have different impacts depending on the context or provider.
It is very difficult to define a cause and effect effect in the microfinance market because there are many factors that influence the improvement of customers’ lives. Effects that are never short-term. As I tell my master’s students: Would we have the same success if they gave us all a microloan to improve our lives?
As I tell my students: Would we all have the same success if they gave us all a microloan to improve our lives?
What is clear is that being part of the formal financial system has advantages over the informal financial system, not only in terms of access and especially costs, but also in terms of customer protection and the regulation of financial practices.
Given this dilemma and the amount of resources available to finance microfinance, wouldn’t it be better to ask your customers clearly and relevantly if it has really changed their lives? The report that 60 Decibeles, a company designed by Acumen Fund, has just published has done exactly that, and its conclusions are compelling. 89% of customers say their quality of life has improved as a result of their microfinance experience. Based on interviews with more than 32,000 customers in 32 countries, the index has collected more than one million pieces of data. The survey covers more than 84 million microfinance borrowers, representing about 40% of the global total.
To experience this improvement in quality of life, time is of the essence. Customers who have been with their financial services provider for a longer period of time are more likely to “strongly agree” that their lives and the well-being of their household have improved. About 22% of long-time customers reported a significant improvement in their home improvement spending, as well as the quality and quantity of their meals, and increased spending on their children’s education. These results are also highlighted by the BBVA Microfinance Foundation in its social performance reports.
Customers who use the financial services provider’s additional services beyond the loan also report significant improvements in quality of life, business income, ability to manage their finances, savings and self-confidence. Two thirds of the microfinance companies surveyed currently offer their customers financial and non-financial services in addition to loans.
In summary, customers say microloans benefit them and lead to 70% greater financial resilience. Furthermore, a 75% refund is not a problem. Only 6% say that pay is a major burden. They are more likely to report that they have reduced household food consumption and say their concern about their finances has increased.
The gender influence is also significant. 83% of women report an improvement in their confidence thanks to their relationship with their financial provider, and 67% report better financial decision-making. The improvements reported by women are slightly greater than those reported by men.
Customers are aware of the role of microfinance in reducing the risk of relapse into poverty or in dealing with unforeseen events, in addition to playing an obvious role in empowering the poorest women. According to their own statements, they play an important role in improving the living conditions of many of their clients.
Wouldn’t it be better to stop theorizing about impacts and focus on developing and implementing good regulation and customer protection? Especially in developing products that can truly satisfy their individual needs and increase the impact on their lives.
As I told you in my article about the Huruma Fund, it is crucial to be able to offer microfinance products that are specifically tailored to the needs of specific groups, such as small-scale farmers feeding the world. We still have a lot to do in this regard. And this will only improve the impact on the most vulnerable customers.
Maria Lopez EscorialShe is a consultant specializing in social innovation and business solutions to combat poverty and has been a professor at the Instituto de Empresa since 2002. She was chosen among the top 100 female leaders in Spain in 2018 and received the Codespa 2022 Journalism for Development Award.