The Benefits of Microfinance: Revisited

November 18, 2010    

In recent years, the results from a series of high-quality, randomized control trials (RCTs) hit the headlines and stirred up a debate within the industry about the impact of microfinance. Today, RCTs are being used for much broader purposes, providing insight into how different products benefit users in different ways and timeframes, and how they can help providers design better products.  As the body of research is growing, it is clear that the studies can provide useful tools for MFIs and other providers to test the demand for new products, and their potential for impact on the lives of the different groups of people that make up the world’s poor. So the assumption is no longer that providing financial services is going to show one monumental “impact.” Instead the question has become: How do different products help benefit low income households, and how can we improve the offerings through better product and delivery design to ensure we serve the real needs of poor people, so that the services are truly demand-driven?

Innovative research on impact and product development was the theme of the Microfinance Impact and Innovation Conference, held in New York 21-23 October 2010. The Conference, hosted by a consortium of research and investment institutions including CGAP, brought together practitioners and researchers to share some of the latest findings from the field on different financial services that serve the poor. In addition to the quality and range of findings reported, the event marked an important step in bringing together what researchers are discovering and providers’ responses on how it might change their thinking and approach. And it concluded with a day of “matchmaking” between practitioners and researchers for new opportunities to collaborate to improve knowledge for the industry.

When to use randomized control trials?
Randomized control trials offer a rigorous tool for clearly attributing cause and effect. But they are also expensive, time-consuming, and labor-intensive. Dean Karlan, of Innovations for Poverty Action (IPA) and a leading researcher in this field, says that the “provider’s challenge” is knowing whether their financial institution is at a stage where they can successfully conduct impact evaluation, or whether they should just be content with simple monitoring of their products’ sustainability and their clients’ satisfaction. Choosing between impact evaluation and monitoring is not simply a matter of cost, but may also depend on the stage in the MFI’s lifecycle, the number of clients and communities it operates in, and whether the provider places a high importance on a stated social mission. Of course, some providers are already enthusiastically using RCTs to help improve their products and operations. Carlos Danel, Executive Vice President of Compartamos, speaking at the New York conference, explained that Compartamos is embracing these new research methodologies, “not to validate what we do as an institution, but rather how to improve it.” This includes a new study conducted by IPA that measured how sensitive Compartamos’ clients are to interest rate changes, and if there is a business case for lowering interest rates by making up these lost revenues through increased client volume.

Using RCTs to improve product offerings and marketing
Microcredit showed that it was possible to deliver financial services to poor people sustainably and has long been the driving force behind the microfinance industry. And yet we’ve known for years that poor people have more diverse financial needs than just loans. Despite this latent demand for more and different financial services, many new products targeting the poor have suffered from low uptake, unintended impacts, or dissatisfied customers. By testing the effects of different product features using a treatment group and a control group, RCTs are helping pinpoint the effects of particular design and marketing features, so that providers can use the information to improve product design and delivery. In particular, promising new research on customer preferences and behavior is offering important insights into how to design and market more complex financial products to low-income or inexperienced populations. 

For example, two studies on marketing of agricultural insurance products demonstrate just how this research may reveal important successes and failures that can lead to better products. Christopher Udry, of Yale University, in presenting findings from a pilot crop insurance product in northern Ghana, described what he referred to as the “ambiguity aversion,” wherein farmers were not open to the idea of paying now for an uncertain further outcome. Similarly, James Vickery of the Federal Reserve Bank of New York reported findings that livestock insurance uptake in India had been stronger than uptake of rainfall index insurance. This is in part attributable to livestock insurance’s lower variability in payout rates—the cow is either dead or alive—than rainfall index insurance, where payouts are determined on a sliding scale of total rainfall, which makes livestock insurance an easier value proposition for customers to understand. It is surprising that rainfall index insurance in dry regions such as northern Ghana, or areas with erratic rainfall patterns such as India, would not be a popular choice for farmers. Studies such as these can reveal just why the product as currently structured is not successful, and what modifications could be made in future testing.

What products, or interventions, produce the best results?
Several studies on savings and business investment presented at the New York Conference examined how financial or capital inputs make a business grow or not grow. One such study in Ghana gave half its participants cash grants, and the other half in-kind business investments. This study reported higher positive returns from the in-kind business investment, while more of the grant money was directed to household needs. However, these findings were not universal across different segments of the population, as men benefited more from in-kind capital than women, and only women in the top half of profit levels before the study showed significant benefit from the in-kind transfers. Looking at this question of business investment from the savings side, two studies of commitment savings products in Kenya and Malawi reported higher savings resulted in great business investment, but not for the reasons of self-discipline we might imagine. Both researchers concluded that perhaps the greatest benefit of these savings accounts was that it kept the money out of the hand of relatives and friends. As one author noted, “it is easier to say no to a family member when money is in a bank account, and not under the mattress.”

So which is better for raising the profits of micro and small-businesses: Cash, credit, capital investments, or newfound savings discipline? Just like so much research, the answer appears to be, “it depends.” While this may not be the neat and clean answer researchers hoped for when they began testing new measurements of impact in microfinance several years ago, it might just be the most powerful affirmation yet of the importance of these new research methodologies for the private sector. These advanced methods of testing products and measuring consumer experience open up a range of possibilities for providers to partner with researchers to test new and better ways of reaching consumers, meeting demand, and providing positive impact in their lives through better targeted and designed products. In the end it will be from these innovations, and not a “thumbs up or thumbs down” declaration on microfinance that poor people will see increased benefits from what this industry offers them.

To view or download presentations from the Microfinance Impact and Innovation Conference, please visit the Conference website.