A recent article by the Economist hails a study in Bangladesh by Shahidur Khandker as "the biggest study so far finds that microcredit helps the poor after all." Within the sector, the article has been widely circulated as proof that, indeed, microfinance does work. Rupert Scofield, CEO of FINCA, found vindication that this study finally resolved the problems of earlier randomized control trial (RCT) studies, which had found that microloans had zero impact on clients:
The recent short-term studies were undertaken in highly saturated markets and focused on clients who diverted some or even all of their loans into consumption. Microcredit works best when the client uses it to fund a business.
But there's the danger of jumping to early conclusions. Before considering the Khandker study, it's worth addressing the way Scofield seeks to explain away the RCTs by referring to "highly saturated markets" and "clients who divert loans to consumption."
First, Scofield errs by suggesting that the RCTs (assuming here he means the Banerjee/Duflo 2009 study in Hyderabad and others) were undertaken in highly saturated markets, thus implying that Bangladesh is somehow less saturated. On the contrary, Bangladesh is the most saturated market of all. Even the Khandker study repeatedly discusses widespread multiple borrowing among the surveyed households. While we all have the image of the microfinance bubble in Andhra Pradesh in 2010, it's worth remembering that at the time of Duflo's study, during 2006-08, it was significantly less saturated, probably less than Bangladesh anytime in the past decade. And Duflo's study is by no means the only one. I am sure that Scofield would not suggest that Karlan's RCT study in Manila in 2006-08 (which found much the same thing as Duflo) was conducted in a market more saturated than Bangladesh.
As for the diversion of loans to consumption, is there anything in Khandker's study to suggest that the households he surveyed did NOT divert their funds to consumption? Why would we assume that these clients are any different from those in India or Philippines? I find no basis for this.
Scofield does have a point about the relatively short timeframe of the RCTs, though I don't find them quite so short, given that they spanned one full loan cycle or more.
So what about the Khandker study itself? Here, I must once again go to the authority, David Roodman:
The article appears to commit what Dierdre McCloskey and Stephen Ziliak dub the “standard error of regressions,” which is to confuse statistical significance with real-world significance. Statistical significance, as meant here, is the certainty that the impact of microcredit is not zero. Real-world significance is whether the effect is big enough to matter. “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.” Let’s see…because of compounding, seven 10% increases would about suffice to about double borrowing. So doubling female borrowing will lift household spending by 7 * 0.04% * 1.5 = 0.42%. To me, that seems small—about a sixth of the impact found in the first study of these families.
Indeed, 0.42%. That's what's being hailed here as proof of success. Let's put this in perspective. Let's say you are a middle-class family earning €50,000/year. Would you want to double your debt in return for an extra €210?
No, probably not.
Neither would Scofield. In the two client examples he gives, we don't see a benefit of 0.42%. Both are standout clients. One has actually gone on to build a million-dollar business. They are the equivalent of those two kids you knew in high school, one of whom went on to become a successful lawyer and another a billionaire hedge fund manager. And as with the high school curricula, I doubt that FINCA's lending programs are oriented to those two success stories. No, they quite rightly aim to serve the average person, which is what microfinance should be all about. The need for quality financial services – savings, credit, insurance – is enormous. And so far, we've barely made a dent.
I reject microfinance as the story of rags to riches. As financial providers, we're in no position to be selling tickets out of poverty. Rather, we should focus on providing everyday people who are excluded from the financial system with the products they need, and doing so responsibly. When some clients do extraordinarily well, we should celebrate them, not us. When others make mistakes or suffer bad luck, we should try to mitigate their situations as best we can. But above all, we should focus on those in the middle, and try to make their lives just a tad easier and help them lay the foundation for the next generation.
That should be the measure of success.
author: Daniel Rozas
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