Evolving Microfinance–Why We Might Appear to Talk Past Each Other

Some time ago, I was on a microfinance panel organized by USAID together with two respected industry leaders: Shari Berenbach, Director of USAID’s Microenterprise Development Office, and Sam Daley-Harris, the out-going Director of the Microcredit Summit Campaign. Somebody from the audience told me afterwards: “It was fascinating to hear three such different views” – and I suspect she was just polite enough not to say “totally disconnected.”

A recent déjà-vu moment reminded me of that conversation and the conclusion that I had come around to: we weren’t that disconnected and probably had the same starting point, but we stressed three different directions of evolution from the original microcredit idea. These three directions are not mutually exclusive. In fact, from a development perspective they are all required. We just each stressed one dimension that seemed more plausible or comfortable – perhaps for a combination of reasons such as institutional mandates, philosophical beliefs, and pragmatic biases.

Let me try to explain, and I start with the simple assumption that we all got inspired by the iconic microcredit story a while ago: capital-constraint micro-entrepreneur gets credit, earns steep marginal return on capital, can pay back pretty high interest rate associated with microcredit, still keeps some, can re-invest, and grows out of poverty. Now, over time of course, the field realized that this story, while true at its narrow core, is too simplistic and other factors are important to achieve sustained, large-scale poverty reduction and growth of local economy.

So, Shari highlighted the need for micro-enterprises to grow beyond subsistence to create jobs, and for interventions that help micro-enterprises reach markets, thereby increasing their chances of success.

Sam quoted Muhammad Yunus, saying that microcredit was ironically never about money but about human capital and stressed the need for healthcare, education, water and sanitation.

I mentioned that poor households in the informal economy are typically multi-generational and multi-occupational, and we know empirically that they need a broad range of financial services to accumulate business assets, cope with shocks, and protect themselves from risks.

All three additions to the ostensible silver bullet of “microcredit-for-microentrepreneurs-will-end-poverty” are valid. Poor people need access to basic services, access to finance, and access to markets.*

From a donor perspective, all three strategies need to be able to plausibly answer the following three questions — otherwise it’s hard to justify spending scarce public resources:

1. Does a particular form of access positively impact poor people’s welfare?
2. Can donor interventions demonstrably improve the provision of that particular form of access and also show “proof of concept” to private and public sectors?
3. Can these interventions be meaningfully scaled-up and become self-sustaining?

I’m not equally conversant across the three access strategies, but let me venture an assessment.

Access to finance can improve household welfare if the underlying need is met by an appropriate and responsibly delivered financial service, but the case is not closed shut. We have learned a lot as a field and we have a pretty good idea of successful, catalytic donor interventions. By design, the provision of financial services at scale is self-sustainable. It’s arguably the approach that is least paternalistic and most based on market principles, but it relies on somebody else to take care of access to other basic services and markets.

Access to markets is an extension of the market-based approach, but recognizes more directly specific market failures. The evidence seems to suggest that enterprise development interventions help. Recent advances in supply-chain interventions are particularly promising, but generally the successful scalability and sustainability of these interventions is less clear.

Access to services has arguably the most direct welfare impact on poor households. Better healthcare leading to better health outcomes directly helps poor people rather than relying on the eventual welfare impact through the access to finance and to markets improving income prospects. Basic services have an intrinsic public good quality. These services require non-market based solidarity mechanisms and public resources, which make scalability and sustainability dependent on the broader context of local political economy.

In the best of worlds, we combine the three strategies and they beautifully complement each other: Market-based approaches that lead to income generation and job-creation, and solidarity- or public sector-based approaches to basic services. More experienced colleagues tell me that’s what has been tried with integrated, rural development strategies in the past. On a personal level, I’m quite keen to understand what went wrong with those and what can be learned from the experience going forward.
 

*The head of the MIF, Nancy Lee, has used these three terms to describe their strategy as I realized later.