> Posted by Alex Counts, Founder, Grameen Foundation
On Sunday, August 23, as I was enjoying some of the final days of summer visiting friends in New Hampshire, I noticed that I had been tagged in a tweet by Dean Karlan, the founder and president of Innovations for Poverty Action. He provided a link to an article about FINCA that included extensive quotes from its CEO, Rupert Scofield. He asked Rupert if he really believed microfinance could reduce terrorism, and asked me what I thought (“whatcha think?” was the precise formulation of his question). He tweeted again on Monday, asking whether I was “still going to stand by [my] claim that no microcredit leaders make grandiose and overselling impact claims?”
First of all, I have never said that no microcredit leaders have ever exaggerated impact claims. I believe that those exaggerated claims have been rare and atypical, especially in recent years. In other words, the tendency for practitioners and advocates to make exaggerated claims not backed up by data has itself been quite exaggerated.
But I don’t think Twitter is the best medium for exploring such topics. So I was grateful when the Center for Financial Inclusion agreed to publish this response to Dean’s public queries of me, in which I could address some related issues about microfinance advocacy and research. (This post builds upon some of the observations I made in reviewing Dean Karlan and Jacob Appel’s impressive but flawed book, More Than Good Intentions.)
Regarding the article Dean tweeted about, I am supportive of Rupert’s statements and encourage others to read it and come to their own conclusions. (Having been the public face of an international humanitarian organization for 18 years, I also realize that journalists sometimes focus on a very small part of what someone says in an interview, often on those things that are potentially the most controversial.) For the most part, Rupert comments on specific microfinance clients he and the journalist met and on his past experiences and how they shaped his view of microfinance. It’s impossible to challenge any of those observations and recollections. They are statements of personal experience and opinion.
At one point he makes the case that microfinance – which research has shown to have consistent though modest positive impacts on human well-being and in a few cases, such as in Bangladesh and through microsavings in multiple countries, more pronounced positive impacts – is part of a larger movement to address the human suffering and poverty that can, as a byproduct, decrease the attractiveness of ideologies that encourage terrorism.
If Rupert wants to make the leap to say that successfully addressing poverty also addresses terrorism, that is a statement of policy or ideology, rather than one of direct claims about microfinance or any other anti-poverty strategy. Rupert’s effort to provide nuance – saying specifically that microfinance is not “the only solution” – was wise. I assume he offered the journalist even more qualifiers and nuance that never made their way into the article. So I don’t find much to disagree with here, nor do I find anything that is grandiose or overselling, even though I have chosen not to make this microfinance/poverty/terrorism argument in public myself.
But let me take a moment to make a few related points. Like people in any other field, microfinance practitioners and advocates aggressively market their products. What else would we do? Researchers do that about research, automotive companies about cars, universities about the education they provide (and education in general), and so on.
There have been scores of studies of microfinance that have shown positive impact, and we have catalogued and cited them. When a leading study of microfinance, summarized in an article in a peer-reviewed academic journal in 1998, found significant positive impacts on poverty and empowerment in Bangladesh, people like me did not keep quiet about such credible, positive and encouraging findings, as they seemed to confirm earlier, less rigorous research. Why would we? [After much effort and the passage of 16 (!) years, two respected academics were able to publish a peer-reviewed critique of the Bangladesh study in 2014, muddying the issue further and causing most practitioners and advocates to exercise additional caution when citing the original findings from Bangladesh, and also prompting more head scratching about how they should digest and react to disagreements among academics.]
Later studies, on a handful of microfinance institutions among the thousands that exist today, pointed to more muted impact (at least from microcredit), causing nearly all practitioners and advocates to gradually recalibrate their marketing to be consistent with the evolving body of knowledge. While I am sure that one could find individual quotes from industry leaders including myself that stretched the bounds of what the research said at the time, in general I think we have little to be defensive about if you look beyond anecdotes – isolated statements, often taken out of context – and focus on the typical statements of industry leaders and how they have logically evolved as the research literature itself has evolved.
In fact, Grameen Foundation has tried to systematically capture the findings of the literature for our supporters and others by commissioning academics every five years to independently summarize, in layman’s terms, what successive waves of studies have concluded. Our last such effort was described by the thoughtful microfinance skeptic David Roodman in a blog post as “a model of public communication about social science research.” A third in this series, written like the second one by Professor Kathleen Odell of Dominican University, is due out early this fall.
I think it is arguable that the variation of microfinance practiced in Bangladesh and perhaps a few other countries does have significant positive impact on poverty while microfinance in many other parts of the world, as currently practiced, brings more limited human development benefits. While the practitioners of RCTs are very rigorous about random assignment at the level of the program participants, their choice of MFIs to study among the thousands in operation today has been anything but scientific. Rather than attempting to choose a truly representative sample of MFIs for study, their selection has been uncoordinated and opportunistic, and has to date completely avoided the country where microfinance is most intensively practiced.
For this and other reasons, there is real debate even within academia about what can be learned from RCTs, especially what can be applied to other places and similar programs. For now, I believe humility and curiosity are called for, as well as constructive efforts that help us get beyond “proving” whether microfinance works and refocus on a more constructive topic: leveraging research to further improve this social innovation that is clearly here to stay.
As I mentioned in my comments at a recent World Bank conference on the impact of microcredit, I continue to be puzzled by the tendency of some researchers (including the authors of the American Economic Journal summary article) to suggest that the microfinance industry somehow made a collective “promise” to “transform” the lives of the average client in under two years, and then failed to deliver on it – and then put this forward as the most compelling narrative about our sector. (See, for example, the misleading title of this press release.)
Leaving aside the fact that “transformation” is never rigorously defined, this argument requires one to believe that the most aggressive marketing claims made over the last 30 years were actually typical, and that they were collectively agreed upon by this fragmented, decentralized industry some point in the past and regularly reaffirmed thereafter (rather than being periodically modified based on new research). In both cases, I find the evidence lacking.
One way of interpreting this dynamic, expressed to me by another industry leader as I prepared this response, is that certain research organizations are “aggressively marketing their work by ‘overclaiming’ [or in other words] exaggerating the claims [made by] microfinance [advocates] initially” in order to heighten interest in their research.
So, in summary, I find Rupert’s statements quoted by the journalist to be descriptive, at times quite nuanced, and accurate, as far as they go. In one case he expresses his personal belief about the link between poverty reduction and terrorism, one that I don’t believe can be conclusively supported or refuted by the existing evidence, but that intuitively makes sense to many people, including me.
Shaped by Rupert’s vast experience in Central America, where the interviews also took place, I suspect he may have been using the terms “violence” and “terrorism” almost interchangeably in the context of a free-wheeling conversation. Perhaps everyone can agree that reducing poverty and terrorism/violence are two positive goals where the causal relationship between them is tenuous and uncertain, but hardly implausible.
The bottom line for me is that Rupert’s comments are not part of a discussion of impact evidence. They are intended to communicate why FINCA – and Rupert – find their work meaningful, and that has a lot to do with the legacy of conflict in Central America. Most readers of the article would understand this, and interpret the claims in exactly the way they were intended.
Image credit: Accion
Have you read?
Reflections on the Latest Studies on Microcredit
Considerations for the Pursuit of Financial Inclusion – Beyond Account Access
Alex Counts on Karlan and Appel’s “More Than Good Intentions”
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8 comments
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August 27, 2015 at 10:36 am
Karl Polzer
There is more jargon is this policy area than any I have ever encountered. Please write in simple well defined terms.
August 30, 2015 at 1:19 pm
Alex Counts
Can you give some examples of what you think is jargon in this post? I try as much as possible to write in plain English and avoid jargon, but I may have some blindspots.
August 30, 2015 at 11:36 pm
Hugh Sinclair (@MFHeretic)
In summary, Counts seems to acknowledge that there might have been a little bit of hype at some point about microfinance (but not by him). And that he personally wouldn’t go as far as to claim that microfinance can prevent terrorism. It is a relief to see him edge towards the realm of sanity.
More interesting is Scofield’s ludicrous claim, which very few seem to be echoing. I actually thought it was a joke at first, but it does appear that he actually believes this. Or does he? A quick look at the Finca 990 Form and financials suggests the company is not doing too well. It depends on donations to cover costs, and recent developments in Azerbaijan, one of Finca’s main cash-cows, must be a worry. They are opening an office in London to fund-raise, have a few PR companies, and urgently need to raise money just to cover the bloated overhead. A default at an MFI could trigger a parent guarantee, and we have seen in countless cases how the MIVs tend to act as a herd. One pulls out and the rest follow. That could quickly spiral out of control. Look at how quickly MiBanco/ACP collapsed.
I have criticised Accion on the basis of high salaries, which the owners of this blog might not have appreciated, but respect for them for allowing me to comment here. But let’s be transparent: Scofield gets paid more than Schlein. According to the 990 (link below, publicly available information), Scofield earned $611,420 + a bonus on $99,076 in 2013.
Similarly, many have criticised Compartamos for charging interest rates up to 195%, myself included, but Finca Zambia were charging up to 347% until recently (and Zambia is not suffering from hyper-inflation). Finca claims to be ultra transparent – but try finding out the interest rates on their website.
Finca is worth watching closely, it’s always been a poster-child in the sector, but the first signs of trouble are brewing. Of course Scofield will make ludicrous claims about microfinance – that is his job. As people are growing tired of the idea of indebting poor people as a way of alleviating poverty, and funding is drying up, he has to re-double efforts to persuade the last remaining fanatics to donate to him, and keep the ship running. If not, that rather generous salary might be questioned!
http://990s.foundationcenter.org/990_pdf_archive/133/133240109/133240109_201312_990.pdf?_ga=1.178577188.125254405.1440788916
August 31, 2015 at 9:15 am
Bob
Question to you Hugh. I know that you don’t believe that microfinance reduces poverty, but do you believe that there is there a link between poverty and violence and/or terrorism? Why or why not?
August 31, 2015 at 1:19 pm
Hugh Sinclair (@MFHeretic)
You over-simplify my opinion. I believe that the vast majority of microfinance, or more specifically microcredit, does not alleviate poverty, and indeed can worsen it. This does not mean that ALL microcredit is useless. Roodman said it succinctly – poverty alleviation is zero “on average”. There’s beneficial, harmful and neutral microfinance basically. How can we expand the beneficial and eliminate (if possible) the harmful? Regulation and transparency are two obvious ways, which is why I support active intervention of regulators in the microfinance sector. Obviously such intervention can also be harmful – it needs to be intelligently done, with the interests of the clients at the forefront. Self-regulation is useless. The Smart Campaign is ineffective and does not even mention the possibility of harmful child labour, to cite just one example.
So, do I believe that there is a link between poverty and violence/terrorism? You need to define the terms more precisely. Gun crime is rife in America and few would describe it as a poor nation. I am skeptical as to whether lending to gun-owners will reduce gun crime. 9/11 took place on US soil, and yet was carried out largely by citizens of Saudi Arabia. Homicide rates are terrifyingly high in El Salvador, Honduras and Guatemala, which are also relatively poor countries, but awash with microfinance. Presumably Scofield would argue that the situation would be even worse in these countries had there been no microfinance? There’s no way to respond to such a comment. And who will define terrorism? Quite a few people in developing and developed countries have some serious concerns about US foreign policy! If a US drone aircraft blows up an innocent family in Pakistan, “collateral damage” is the common term. And yet, were the tables turned, this would be “terrorism”. Do you have a definition that encompasses both such cases?
And to further complicate matters, when atrocities are committed, we ought not forget that it is often the “developed” and apparently civilized nations that produced the weapons in the first place.
I recently returned from DPRK, where there is no crime, serious poverty, and no microfinance, with an atypical regime! The causal chain is horrendously more complex than Scofield suggests. And besides, I am no expert of crime and terrorism. Is Scofield?
The more pertinent inquiry is whether we believe in the indirect connection between microcredit reducing poverty and in the process reducing crime. Given the paucity of evidence on the first leg of this circuitous causal chain I would suspect (note the word: suspect) that any causal link between indebting people and their likelihood to become involved in violence and terrorism is going to be negligible, but that this is simply another opportunity for the microfinance fanatics to claim another success for their increasingly challenged methods.
To what extent are we “crying wolf” here? The sector has made so many claims in the past that turned out to be false that people become jaded by the disappointing results. That is a risk, but the solution seems obvious: “stop making false claims”. But you presumably understand why main sigh and wonder “what next, microfinance will enable space flight and clean the oceans?”. More research seems to be the solution, rather than jumping to these potentially ludicrous conclusions. There might be some logistical obstacles running an RCT here: interview 1,000 terrorists and find out their borrowing habits? The control group might be hard to pin down. Take 1,000 existing clients and divide them neatly into terrorists and non-terrorists? Could get messy!
August 31, 2015 at 11:40 am
James Militzer
This is a thought-provoking post, but beyond what Mr. Scofield did or didn’t claim in this isolated interview, I think it’s pretty clear that microfinance has tended to overstate its impact – and continues to do so.
Look at the overall branding of the sector, as epitomized by some of its leading lights. Rather than hearing measured assessments of its (apparently) modest positive social impact, you’re much more likely to hear inspiring stories of transformational change – as Kiva puts it, “Loans that Change Lives.” And rather than hearing that perhaps 5-10% of microloan recipients are likely to experience this kind of impact, you’re likely to hear that this transformation is available to anyone – as Muhammad Yunus puts it, “Entrepreneurial ability and potential is in everybody.”
It has become increasingly clear, if it wasn’t before, that not all microcredit clients can become – or even want to become – successful entrepreneurs. But at least to my eye, our shifting understanding of microfinance’s real uses and impact hasn’t yet reshaped the way the sector sees (and sells) itself.
(If you’re interested, we discussed this issue in a recent post on NextBillion: http://nextbillion.net/blogpost.aspx?blogid=6540.)
September 1, 2015 at 2:49 am
P N Vasudevan
hi all, the world has changed and has moved on. what was important long back is not even thought about in today’s world. micro finacne, when it was born a long time ago, was born on the back of charity funding and donations. and the only way people coudl continue to aspire to receive charity funding and donations was by keeping on highlighting and painting bright pictures of very poor people whose lives have been transformed completely by the $100 loan! and why not? after all, there was no other money coming to this sector in those decades back settings!
today, the world has changed upside down. the percentage of charity money in MFI around the world is probably less than 1%. the rest is commercial equity capital or commercial loans from banks. and these people are not exactly looking for fabulous societal transformations before funding entities. they are looking at the entities’ capabilities, ability to manage a very field intense program like MFI, ability to network amgonst other MFIs and share data base to keep overall indebtedness of borrowers under reasonable check, be prudent in their lending practices, compliant to the laws and regulations etc. and that, probablyh is the reaosn why u dont see almost 95% of MFI practitioners even talking about eradicating poverty and dramatic things like that.
in Equitas we realised right at the time of our birth in 2007 that the world has changed! hence right from the begining, our focus and effort has been, how do we ensure we run the most fair and transparent MFI operation in the world, offering small loans to people who need it on terms which are very fair and completely transparent, and then support them to the extent we can in terms of basic levels of financial inclusion or skill training and leave the rest of their lives in thier own hands … to make the best use of our inputs as well as their own efforts to stabilise in their lives.
and so, when we started in 2007, we fixed our lending rate at 25.5% all inclusive, reducing balance interest rate to borrowers and were the first MFI in the world, to publish this all inclusive reducing balance interest rate in our loan passbook provided to the clients. and after 4 years, when RBI put a cap on lending rate, it was 26%!!! and we have rolled out medical and skill training initiatives which have now benefited over 3 million and 400,000 people respectively.
our philosophy has been very simple: we are here to provide access to loans (we are only allowed to lend, in India), to people whoa re not able to access same from any other formal lenders, at the lowest rate that we can manage, and declaring the actual lending rate transparentlyh to the borrower and to our capacity, support them on any other supplementary development initiatives on health and skills. and if these interventions help them come out of poverty, fabulous!!! on the other hand, if it just helps them balance their life a wee better and helps them breath just a bit better, atleast that much! on the other hand, if our loans actually hurt them then we would change our lending matrix to try and understand such situations, parametrise them and move them out of our lending matrix to our abilities.
and finally rest in peace that we have done a very fair and honest transaction with our borrowers with no guilt or remorse in our minds!!!
regards/vasu
September 7, 2015 at 10:24 am
Alex Counts
The reliance on anecdote rather than data, and on impressionistic rather than rigorous analysis (i.e., defining what constitutes a valid vs. overstated claim), by those who assert that microfinance is still overselling itself, is striking. The issue itself is something of a distraction but to the extent we discuss it, I hope those making assertions will back them up with evidence and rigor in the future.