This is the culmination of my 15-month exploration of what we are learning about microfinance and world hunger—not just what Freedom from Hunger is learning from its own research into what works and what doesn’t, but also the research of others looking at similar strategies and populations around the world.
The Evidence Project is a series of posts organized by Theme—see the list of Themes to the right. Theme One contains the introductory posts and a few miscellaneous later ones. Themes Two through Nine are like the chapters of a book, each post a sub-chapter. You can find a list of the posts for each Theme by clicking on the Theme title; the posts are listed in chronological order of writing. (Each post is also given a unique number in the order of writing of all posts regardless of Theme; there are 84 posts and this is # 84.) For the larger Themes (Two through Six), there is a wrap-up post by my volunteer analyst colleague, Lynne Davidson Jarrell, to offer another person’s perspective on what the evidence tells us. That is followed by my post on what the evidence regarding that Theme means for Freedom from Hunger.
This project is designed as a service to Freedom from Hunger, but it also serves the community of learning and practice that shares our interests and commitment to evidence-driven development interventions for and with people living in poverty, especially those so poor they are chronically hungry. It is a compendium of evidence I have been able to find regarding the validity of the varied assumptions and hypotheses that constitute the Freedom from Hunger Benefits Diagram (a.k.a. theory of change). The Themes are structured around the main questions about “intermediate outcomes” and “ultimate impacts” of programs that offer combinations of microfinance and nonfinancial services (especially health, business and financial education, and linkages to health services) to groups of women.
Some in our line of work are satisfied by a logical argument from personal and organizational experience, but I have tried hard not to be so easily satisfied. We can be deceived by wishful thinking and the perspective of personal experience. We need more objective evidence to support our logical argument. On the other hand, I have not insisted that credible evidence can only be found in academically unassailable impact studies. In fact, if we so limit ourselves, we won’t have much to go on. Fortunately, evidence comes in many forms:
Experience-based practitioner intuition
Qualitative stories and observations
Careful descriptive studies
Highly quantitative correlation studies
Randomized trials that can demonstrate causation.
In isolation, these forms of evidence range from low to high credibility in pretty much the order I’ve just listed them. In combination, they can offer a deep understanding not just of specific cases thoroughly studied (internal validity) but also of how much we can generalize with confidence from the best studies to unstudied situations (external validity).
We can never prove our hypothesis is correct; there is always the possibility that the next study may conclusively refute it. Nonetheless, with compelling evidence from varied sources (triangulation), we can make good judgments about the likelihood we are correct. We can increase or decrease our confidence in the hypothesis. We need a lot of confidence to design and implement programs that affect people’s lives. The Evidence Project is for those whose confidence depends on having compelling evidence.
What does The Evidence Project tell us?
You can read the posts (better yet the reports I draw from) and form your own conclusions. Here I only can tell you what it tells me. And the “you” I speak to is the organization that commissioned this project, Freedom from Hunger. The rest of you, however, are welcome to eavesdrop. Here goes!
Microfinance is a good thing
1. Even the poorest households need to borrow occasionally to smooth consumption and manage financial shocks. Microfinance credit offers an additional borrowing option with distinctive advantages and disadvantages. It is not necessarily a better option than borrowing from family, friends or moneylenders, but if it is more helpful than other options in certain circumstances, then introducing microfinance loans expands the menu of financial service tools at the disposal of poor households. Having more options is a good thing; therefore, so is reliable access to microfinance loans. Such access is even better when the loans have terms that approximate the flexibility and convenience of informal borrowing options.
2. It is invariably a good thing when poor households have access to safe, convenient, reliable options for disciplined saving. Formal financial institutions have a much harder time offering attractive savings options to poor households than do savings group programs that don’t depend on formal institutions to provide their core services. When savings groups can negotiate additional services by formal financial institutions that complement their own core services, they can have the best of both worlds.
Microfinance in groups can be even better
3. In traditional societies with relatively high social capital (in the form of interpersonal relationships of trust), joining a group to save and borrow is often normal, especially for women. External “facilitating agents,” whether they come from microfinance institutions (MFIs) offering loans or from nonfinancial non-government organizations (NGOs) offering only training, can very effectively introduce new organizing principles to improve the coherence and reliability of such groups. By creating new relationships of trust among members and with external actors, these facilitating agents can augment social capital and personal empowerment for group members.
4. Imposing formal “joint liability” for repayment of loans to group members is often problematic in stress situations and can result in abuse by both group members and facilitating agencies. Evidence reviewed in post #59 indicates that joint liability is not necessary for groups to be an effective aid to both the lending institution (as an efficient point of service and regulator of member behavior) and to the group members (for social support and mutual learning). There are solid examples of group microfinance without formal joint liability (e.g., ASA in Bangladesh), and even more examples in which joint liability is not effectively enforced yet loan repayment is still high (many village banking programs).
Access to microfinance improves household consumption-smoothing and shock-coping
5. This seems to be the most, perhaps the only, reliable impact of improved access to microfinance services in general, be it credit only, savings only, credit and savings together, to groups or to individuals.
6. The better the quality of the microfinance services, as described above in the first four points, the more likely and powerful the beneficial impact on consumption-smoothing and shock-coping will be.
7. The poorer the household, the more variable its consumption and the more vulnerable it is to a variety of shocks. Given this more difficult starting point, poorer households are likely to experience greater relative improvements than better-off households in their consumption-smoothing and shock-coping when given new access to microfinance services.
8. Given its focus on improving household food security, a major manifestation of consumption-smoothing and shock-coping, Freedom from Hunger could achieve its central mission-driven objective “just” by massively expanding access to good-quality microfinance services, particularly for groups of women living in households so poor they are chronically hungry. But pay special attention to point 7 above and point 9 below.
Microfinance must intentionally do more to have important impact on household poverty
9. Reducing the household poverty rate must start with outreach to poor households living below a relevant poverty line. Microfinance providers of all types are not particularly successful at such poverty outreach even when they explicitly seek to reach the poor. They do better when they target areas of high household poverty rates and design services specifically for the poorer households in these areas. Where social barriers block access by the poorer households, it seems that selective inclusion of the poorer households is required of Freedom from Hunger and its microfinance provider partners, including both MFIs and savings group facilitating agencies.
10. Despite the poverty alleviating effects of improved consumption-smoothing and shock-coping, poverty reduction means increased annual income. The additional income comes from either self-employment in enterprises or from wage labor or salaried jobs (including household members working far away and sending money home) or from transfers by government agencies or private benefactors. However, as discussed at length in Theme Three, most use of microfinance services, especially by poorer households, is not directed to profitable enterprise growth or improvement of employability (except indirectly through education of children or bus fare to a city or another country). Therefore, microfinance on average tends to have little upward impact on household annual income.
11. Poverty reduction is most likely in programs that target microfinance services to poor households that are engaged (or likely to engage) in enterprises oriented to profit and growth. The design features of microfinance services for these selected households must meet the particular needs and opportunities of their enterprises. Often the design must include integration with nonfinancial services, such as immediately useful, basic business management education (provided through adult-appropriate education techniques) and linkages to suppliers and markets.
Microfinance must intentionally do more to have important impacts on women’s empowerment
12. The actions of saving and/or borrowing, and thereby having money on hand to accomplish that which couldn’t be accomplished otherwise, build self-confidence and trust in a MFI or a savings group. Just by virtue of providing useful and reliable services, an outside agency can empower or build social capital among clients even in the absence of intentional effort to empower. However, it is equally possible for an agency to unintentionally turn clients into disempowered debtors and dependents.
13. To go beyond leaving the building of confidence and trust among clients to chance or worse, the frontline staff of MFIs or savings-group facilitating agencies must be intentionally trained to build relationships of trust and support that augment social capital and personal empowerment.
14. When clients are served in groups for the sake of efficiency, additional opportunities to empower or disempower are opened up by group dynamics. To steer the group dynamics in positive directions, the frontline staff must be recruited, trained, supervised and incentivized for that purpose. This is most effectively done by agencies that task their frontline staff to be good-quality nonformal adult educators; i.e., facilitators of dialogue-based learning. This is an area of historic and deep expertise and experience within Freedom from Hunger.
Microfinance must intentionally do more to have important impacts on family health and nutrition
15. Illness and injury are the most common causes of financial setback, or shock, to households. The poorer the household, the more vulnerable it is to illness and injury. These are severe threats not only to the client or member households but also to the financial and social objectives of the agency that serves these households.
16. MFIs and savings groups offer opportunities for addressing health and nutrition problems. At minimum, the meetings of credit groups and savings groups can be efficient and effective points of service for health/nutrition education and services. This can be done either through the direct action of these microfinance providers or through linkages between these providers and local health education and service agencies, but most effectively through a combination of the two.
17. There is a highly plausible business case for MFIs to offer health education and services to their clients. However, as long as the extra services do not compromise commercial viability, the social motivation of leadership is the important determinant of institutional commitment to offer these services. Where the profit motive has eclipsed the social, even a highly plausible business case seems to fall on deaf ears.
Quality field agents are the key ingredient for enhanced impacts of microfinance services
18. Repeating much of point 3 above, external “facilitating agents,” whether they come from MFIs offering loans or from NGOs facilitating savings group formation, can very effectively create new relationships of trust with and among the group members. The better the agents perform this facilitating function, the more they seem to amplify pre-existing social capital and personal empowerment of group members and the beneficial dynamics of the groups themselves. Agent performance quality can be assured by recruiting, training, supervising and incentivizing agents to be effective facilitators for this purpose.
19. In addition to the basic benefits of household consumption-smoothing and shock-coping, social capital building and personal empowerment seem to be the next most common benefits of access to microfinance services. Together, these primary and secondary benefits seem to enable and amplify other impacts ranging from business success and poverty reduction to household food security to improved knowledge and practice for child nutrition and health.
20. The relationship of trust between group members and with an external facilitating agent appears to be the essential foundation on which successful group microfinance is built for people living in poverty. Whatever services are built on this relationship must also enhance the relationship in order to be successful. And whatever management and technology solutions are introduced to improve efficiency, they must be designed to complement rather than replace or undermine the interpersonal relationship of trust.
These 20 points are the most salient for me after spending the past 15 months sifting through the evidence. Even if you read all the posts of The Evidence Project, you may end up with somewhat different conclusions. The purpose of this project is to allow you to draw your own conclusions from solid evidence and reasoning. I have had my say, so I will stop and let you take it from here.