Realising the potential of microfinance
Realising the potential of microfinance
Microfinance provides financial services to millions of the world's poor. Poor people, like the non-poor, may use financial services for many purposes and in different ways throughout their lives, but they are particularly vulnerable since their income is small and unstable. Thus it is difficult for them to anticipate when the need for small but critical lump sums of money may suddenly arise. Through savings, credit, insurance or remittances, poor people can secure larger lump sums of money than that which they would normally have access to. These lump sums help them to overcome the problem of unstable income, for example by allowing them to pay school fees, pay for events such as weddings and funerals, or cope with crises as a result of illness or natural disaster. Lump sums of money can also be invested in income generating activities which help to reduce poverty.
Throughout most of the world, poor people have little or no access to financial services that most of us take for granted. Financial institutions such as banks, insurance services and others have generally regarded 80% of the world's population as an unprofitable market and have focused their attention on serving the richest 20%. The growth of microfinance over the last 10 years has demonstrated that poor people can and do make use of financial services. There are approximately 3000 MFIs across the world serving more than 70 million people. Microfinance presents a win-win vision in that it builds financially self-sufficient organisations able to provide financial services on a permanent basis to increasing numbers of poor people. It is thereby possible to have a sustained impact on poverty levels and well being of clients without having to depend on donor subsidy.
Some sceptics argue that the provision of sustainable microfinance does not necessarily result in poverty alleviation. They raise questions about who microfinance reaches out to, the extent to which it reduces poverty, and about its negative impacts. The continued investment of large sums of public money through international donors in microfinance - estimated to be between US$5 and 10 billion over the past 10 years - means that there is an increasing need to demonstrate impact and justify the social value of microfinance. The benefits arising from the provision of microfinance services would include direct impacts on the income poverty of clients, as well as non-economic and wider benefits. Collectively these benefits are termed social performance.
What is social performance?
Most Microfinance Institutions have a social mission - they seek to improve access to financial services, reduce poverty, empower women, build community solidarity or promote economic development. Social performance refers to the MFI's success in meeting these goals.
From the work done by Imp-Act, a global action research programme funded by the Ford Foundation and designed to improve the impacts of microfinance on poverty, it is clear that the debate needs to move on from whether microfinance works or not. Numerous impact assessment studies provide evidence of positive impacts, while microfinance practitioners can provide several anecdotes of how women's lives have been transformed through simple access to credit or savings. Findings emerging from Imp-Act show why microfinance is not always successful and how MFIs can better serve their clients and improve the impacts of microfinance on poverty.
This issue of insights, focuses less on what microfinance achieves and more on how impacts happen and on what can be done to achieve and improve them. The problem lies not with microfinance itself but with the expectation that a generic model of microfinance will automatically have similar positive impacts everywhere. Two important questions need to be asked:
How can microfinance be tailored to the specific needs of poor and very poor people in ways that bring positive impacts?
How can the positive effects of microfinance be monitored and sustained?
MFIs need to develop systematic ways to assess and manage both their social and financial performance and to ensure that information they gather is fed back into their operations as a means to improve their overall performance. Microfinance can then realise its full potential.
In this issue of insights, Hashemi explains how microfinance can help poor people realise their potential in many ways. It can raise income, increase assets, reduce vulnerability, socially empower its participants (mostly women), and contribute to broader social and economic development. These may in turn allow poor people to improve their access to education, health services, better nutrition and so on, thus contributing to the majority of the eight MDGs, particularly as part of a broader development strategy.
Mosley and Kabeer outline the significant wider impacts that may arise in addition to those directly observed on clients and their families. They suggest that the benefits of microfinance may be underestimated or the relative performance of different approaches incorrectly assessed, unless assessment looks beyond the direct impacts on individual clients.
However, the direct and wider impacts are not automatic and depend on the implementation of strategies designed to achieve these ends. Microfinance covers a range of products and services, delivered by organisations with very different missions, models and approaches, in many different contexts. As Kline argues, for microfinance to achieve its potential, a distinction is needed between intentional and incidental outreach and impact. A deliberate and context-specific strategy is needed.
What is clear from Imp-Act's research and emphasised in the articles in this issue, is the importance of MFIs themselves developing systems to understand their clients' needs better and to monitor the effectiveness of their organisational strategies in serving poor people and achieving their social mission. MFIs' own internal social performance assessment systems provide an opportunity to move away from the costly external impact assessments often expected by donors. On-going monitoring and assessment systems provide managers with information about the outcomes of their services and allow for informed decisions towards meeting the needs of clients, the mission of the MFI, and for generally improving the social conditions in which people live.
Several articles in this issue point out that social performance information can be used to improve social performance. Kline focuses on the institutional level, advocating that by taking steps to improve their clarity of focus, strengthening and aligning organisational culture with social mission, and developing information systems to monitor and manage social performance, MFIs would better understand and improve their effect on poverty levels and other aspects of clients' lives. Noponen reminds us that the clients are the central concern, and looks at how organisations can develop strategies to be responsive to their client needs and ensure effective participation. The Internal Learning System is one example of a method that involves clients in assessing their own needs, and assists MFIs in understanding and responding to client needs more effectively.
The issue of whether MFIs can be financially self-sufficient without jeopardising their social mission is taken up by Morduch. He asserts that it is possible for MFIs to achieve both financial self-sufficiency and social performance but he emphasises the implications of the very real choices that MFIs need to make, discussing the factors that affect the various costs incurred for providing microfinance services. Copestake argues that social performance assessment can be cost-effectively integrated into the existing methods and procedures of MFIs. He presents evidence that such systems can be justified in business terms, resulting in improved financial as well as social performance. According to him, by investing in social performance management MFIs can use resources more wisely and retain customers. These systems enable managers to balance social performance and profitability.
To sum up, internal social performance assessment and management systems provide an opportunity for microfinance to improve its effectiveness in realising its social goals. For an MFI, this involves clarifying social objectives and strategies; developing systems to interact with and learn from clients; and above all, taking action in response to information generated from the systems. Social performance management systems not only create greater understanding about the performance of microfinance, they also enable all those involved in the provision of such services, to reach a balance between social and financial goals, enabling clearer and more realistic goals and better informed decisions that lead to positive social impacts.
Anton Simanowitz
Programme Manager, Imp-Act Programme,
A.Simanowitz@ids.ac.uk
Alyson Brody
Programme and Communications Co-ordinator, Imp-Act Programme,
A.Brody@ids.ac.uk
Improving the Impact of Microfinance on Poverty: Action Research Programme (www.imp-act.org)
Institute of Development Studies
University of Sussex
Brighton BN1 9RE
UK
Realising the potential of microfinance - To learn more about this author, visit id 21's Website.
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Microfinance is a key strategy in reaching the Millennium Development Goals (MDGs) and in building global financial systems that meet needs of most poor people. Although microfinance has demonstrated the potential to reduce poverty, its impacts have varied. Perhaps as a result of these inconsistencies, few donors have prioritised microfinance in their strategies to achieve the MDGs. Microfinance can have positive effects everywhere, if services respond to the particular mission and social context of a microfinance institution (MFI), as well as to the needs of its clients. This issue of insights asks: "How can we be more realistic in our expectations of microfinance? How can we help MFIs to achieve sustained impacts such as alleviating poverty or reaching out to more poor people? How can microfinance realise its potential?"
Microfinance provides financial services to millions of the world's poor. Poor people, like the non-poor, may use financial services for many purposes and in different ways throughout their lives, but they are particularly vulnerable since their income is small and unstable. Thus it is difficult for them to anticipate when the need for small but critical lump sums of money may suddenly arise. Through savings, credit, insurance or remittances, poor people can secure larger lump sums of money than that which they would normally have access to. These lump sums help them to overcome the problem of unstable income, for example by allowing them to pay school fees, pay for events such as weddings and funerals, or cope with crises as a result of illness or natural disaster. Lump sums of money can also be invested in income generating activities which help to reduce poverty.
Throughout most of the world, poor people have little or no access to financial services that most of us take for granted. Financial institutions such as banks, insurance services and others have generally regarded 80% of the world's population as an unprofitable market and have focused their attention on serving the richest 20%. The growth of microfinance over the last 10 years has demonstrated that poor people can and do make use of financial services. There are approximately 3000 MFIs across the world serving more than 70 million people. Microfinance presents a win-win vision in that it builds financially self-sufficient organisations able to provide financial services on a permanent basis to increasing numbers of poor people. It is thereby possible to have a sustained impact on poverty levels and well being of clients without having to depend on donor subsidy.
Some sceptics argue that the provision of sustainable microfinance does not necessarily result in poverty alleviation. They raise questions about who microfinance reaches out to, the extent to which it reduces poverty, and about its negative impacts. The continued investment of large sums of public money through international donors in microfinance - estimated to be between US$5 and 10 billion over the past 10 years - means that there is an increasing need to demonstrate impact and justify the social value of microfinance. The benefits arising from the provision of microfinance services would include direct impacts on the income poverty of clients, as well as non-economic and wider benefits. Collectively these benefits are termed social performance.
What is social performance?
Most Microfinance Institutions have a social mission - they seek to improve access to financial services, reduce poverty, empower women, build community solidarity or promote economic development. Social performance refers to the MFI's success in meeting these goals.
From the work done by Imp-Act, a global action research programme funded by the Ford Foundation and designed to improve the impacts of microfinance on poverty, it is clear that the debate needs to move on from whether microfinance works or not. Numerous impact assessment studies provide evidence of positive impacts, while microfinance practitioners can provide several anecdotes of how women's lives have been transformed through simple access to credit or savings. Findings emerging from Imp-Act show why microfinance is not always successful and how MFIs can better serve their clients and improve the impacts of microfinance on poverty.
This issue of insights, focuses less on what microfinance achieves and more on how impacts happen and on what can be done to achieve and improve them. The problem lies not with microfinance itself but with the expectation that a generic model of microfinance will automatically have similar positive impacts everywhere. Two important questions need to be asked:
How can microfinance be tailored to the specific needs of poor and very poor people in ways that bring positive impacts?
How can the positive effects of microfinance be monitored and sustained?
MFIs need to develop systematic ways to assess and manage both their social and financial performance and to ensure that information they gather is fed back into their operations as a means to improve their overall performance. Microfinance can then realise its full potential.
In this issue of insights, Hashemi explains how microfinance can help poor people realise their potential in many ways. It can raise income, increase assets, reduce vulnerability, socially empower its participants (mostly women), and contribute to broader social and economic development. These may in turn allow poor people to improve their access to education, health services, better nutrition and so on, thus contributing to the majority of the eight MDGs, particularly as part of a broader development strategy.
Mosley and Kabeer outline the significant wider impacts that may arise in addition to those directly observed on clients and their families. They suggest that the benefits of microfinance may be underestimated or the relative performance of different approaches incorrectly assessed, unless assessment looks beyond the direct impacts on individual clients.
However, the direct and wider impacts are not automatic and depend on the implementation of strategies designed to achieve these ends. Microfinance covers a range of products and services, delivered by organisations with very different missions, models and approaches, in many different contexts. As Kline argues, for microfinance to achieve its potential, a distinction is needed between intentional and incidental outreach and impact. A deliberate and context-specific strategy is needed.
What is clear from Imp-Act's research and emphasised in the articles in this issue, is the importance of MFIs themselves developing systems to understand their clients' needs better and to monitor the effectiveness of their organisational strategies in serving poor people and achieving their social mission. MFIs' own internal social performance assessment systems provide an opportunity to move away from the costly external impact assessments often expected by donors. On-going monitoring and assessment systems provide managers with information about the outcomes of their services and allow for informed decisions towards meeting the needs of clients, the mission of the MFI, and for generally improving the social conditions in which people live.
Several articles in this issue point out that social performance information can be used to improve social performance. Kline focuses on the institutional level, advocating that by taking steps to improve their clarity of focus, strengthening and aligning organisational culture with social mission, and developing information systems to monitor and manage social performance, MFIs would better understand and improve their effect on poverty levels and other aspects of clients' lives. Noponen reminds us that the clients are the central concern, and looks at how organisations can develop strategies to be responsive to their client needs and ensure effective participation. The Internal Learning System is one example of a method that involves clients in assessing their own needs, and assists MFIs in understanding and responding to client needs more effectively.
The issue of whether MFIs can be financially self-sufficient without jeopardising their social mission is taken up by Morduch. He asserts that it is possible for MFIs to achieve both financial self-sufficiency and social performance but he emphasises the implications of the very real choices that MFIs need to make, discussing the factors that affect the various costs incurred for providing microfinance services. Copestake argues that social performance assessment can be cost-effectively integrated into the existing methods and procedures of MFIs. He presents evidence that such systems can be justified in business terms, resulting in improved financial as well as social performance. According to him, by investing in social performance management MFIs can use resources more wisely and retain customers. These systems enable managers to balance social performance and profitability.
To sum up, internal social performance assessment and management systems provide an opportunity for microfinance to improve its effectiveness in realising its social goals. For an MFI, this involves clarifying social objectives and strategies; developing systems to interact with and learn from clients; and above all, taking action in response to information generated from the systems. Social performance management systems not only create greater understanding about the performance of microfinance, they also enable all those involved in the provision of such services, to reach a balance between social and financial goals, enabling clearer and more realistic goals and better informed decisions that lead to positive social impacts.
Anton Simanowitz
Programme Manager, Imp-Act Programme,
A.Simanowitz@ids.ac.uk
Alyson Brody
Programme and Communications Co-ordinator, Imp-Act Programme,
A.Brody@ids.ac.uk
Improving the Impact of Microfinance on Poverty: Action Research Programme (www.imp-act.org)
Institute of Development Studies
University of Sussex
Brighton BN1 9RE
UK
Realising the potential of microfinance - To learn more about this author, visit id 21's Website.
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