As investors increasingly seek out social impact investing opportunities, microfinance continues to present an attractive opportunity for achieving double bottom line goals.

However, some countries are way ahead of the pack in terms of their social impact investing efforts. Investing in microfinance has gained particular traction in certain European countries, specifically the Netherlands and Switzerland, while investors in the US and UK have been less responsive to microfinance investment opportunities.

One example of social investing in microfinance coming out of the Netherlands is the Dutch Triodos Bank, which as of December 2009 had 236 million euros under management in its four microfinance funds.

This summer, the Center for Financial Inclusion is teaming up with a group of virtual Credit Suisse volunteers to find out why countries such as the Netherlands and Switzerland are so far ahead.  Our team of volunteers will be researching how differences in the legal and tax frameworks of these four countries have led to different outcomes in terms of social investing.

The project is one of the first initiatives within the recently launched Virtual Volunteering Program for Microfinance. Through the program, volunteers from Credit Suisse will collaborate with the Center on a variety of projects within the field of microfinance.

Results and key findings from the cross country comparison will be presented at the Council of Microfinance Equity Funds (CMEF) meeting in Costa Rica on October 13-14.

Image credit: Tango Desktop Project

Have you read?

Mobilizing Microfinance Advocates from New York to Zurich, Pune to Singapore

Making History: Investors in Microfinance Agree on Principles of Conduct

A Difficult Balancing Act

Kilimani Chini looks, at first glance, like the backdrop for a “Save the Children” infomercial. With a name literally meaning “the road down” in Swahili, Kilimani Chini is composed of five crumbling brick structures, the remnants of a camp for coffee pickers built in the 1950s. A few women poke their heads out of dark doorways, casting cursory glances at the crowd of toddlers who play in the dust. There are no men in sight.

As a Princeton-in-Africa fellow with the Rift Valley Children’s Village (RVCV) an American-run NGO, I spent 18 months living just down the road from Kilimani Chini. I taught the village children at the local primary school, I lobbied for community support for new educational initiatives, and I encouraged  parents to invest in the future of their children. When, a few months into my stay, the organization launched a microfinance program, I tagged along with the microfinance director as he conducted market research, held initial meetings with community leaders, and eventually made the first round of loans. I sat in the back of our crowded Rec hall during financial literacy seminars and attended daylong programs on budgeting.  And I waited, with bated breath, for the transformational change that I was certain was just around the corner.

In a community where everyone is essentially squatting on land owned by the coffee plantations, and most families get by on under a dollar a day, opportunity is in short supply. The vast majority of children drop out of school after “standard seven” (the equivalent of a seventh grade education) and join their parents picking coffee – when it’s in season – and scrambling to find other ways to get by – when it isn’t.

Microfinance felt like a silver bullet. Hardworking people would finally have the resources to succeed on their own – effort and initiative, rather than handouts, would be the tool to break the chains of generational poverty.

I left when the microfinance program was still in its infancy. In those early days, everything was exciting – the loan repayment rate was close to 100%, and the small businesses being launched ranged from women making bead necklaces to farmers leasing land and trying out new crops, and all the way to teachers making bricks in their spare time. It felt like we were watching the community change, virtually overnight.

After I left, the honeymoon period of the microfinance program slowly came to an end. As loans got bigger, so did the percentage of clients defaulting. The short rains came late, farmers crops failed, and several of the most reliable clients began making homemade alcohol rather than weaving baskets.

There were still superstars, individuals for whom a loan catapulted them into a different economic reality. One of these extraordinary clients was a round, bossy woman named Mama Charles. Long before RVCV landed in her backyard, Mama Charles was running a tiny storefront outside of her house – selling her neighbors everything from single cigarettes, to hard candies, to plastic packets of bargain-rate gin. When American volunteers began arriving in droves, she started stocking Red Bull in addition to the dusty glass bottles of Fanta and Coke that lined her shelves.  Mama Charles used her first loan to expand her shop, and spent her early profits to buy a solar-powered flashlight, so her children could study at night.

Four years later, the Charles family has four small shops in the region, and Mama Charles is considering buying a plot of farmland just outside the nearby city of Karatu.  Mama Charles’s husband, who works alongside her in the shop and is a wholehearted supporter of his wife’s entrepreneurial efforts, brags to anyone who will listen that his oldest daughter, Anna, got the second-highest score in her school on the national exam. Mama Charles grew up picking coffee, and Anna is well on her way to achieving her dream of becoming a doctor.

Mama Charles is a microfinance program’s dream come true – a hardworking, entrepreneurial client, whose success is clearly translated into increased opportunities for herself and her children. It is tempting, hearing stories about women like Mama Charles, to assume that microfinance will lift whole communities out of poverty at a rapid pace. The thing about exceptional people, however, is that they are – by definition – the exception to the norm.

Most clients didn’t meet with Mama Charles’ extreme success, nor did they direct virtually all of their profits to expanding opportunities for their children and their communities. Most clients were more like Jonathan, a teacher who makes a modest income on the side making bricks with the hand-held mold he purchased with his loan. The first thing Jonathan bought with his profits was a new, fancy cell phone (despite the fact that he lives in a house without electricity). He regularly treats his co-workers to a beer when profits are good. But he is also paying the primary-school fees for his six nieces and nephews who live in a neighboring community. Or like Neema, who bought a sewing machine and who hands over most of her modest profits to her husband – who promptly drinks them away. But Neema manages to hang onto enough to make sure that her daughter doesn’t have to miss class to pick coffee, and she is steadily building a tiny nest egg so she can one day start her own sewing school.

More than three years have passed since the first round of loans were distributed. And, on the surface at least, life in Kilimani Chini, and the villages around it, appears remarkably unchanged. But, as in so many cases, appearances can be deceiving. From the outside Neema’s house looks like it is crumbling, but inside the walls are covered in bright wrapping paper and the cement floors are so clean they shine. In her spotless home, there is a corner set aside for her daughter to study. A picture of Jonathan’s nephew, in a brand-new school uniform, sits proudly on Jonathan’s desk. And Mama Charles has just sent her third child to a top-tier secondary boarding school.

It is tempting to expect transformational change to occur instantaneously; however, in the case of Kilimani Chini, transformational change is occurring incrementally. Because of Jonathan’s loan, his six nieces and nephews are getting an education. Because of Neema’s loan, her daughter has a place to study, rather than pick coffee. And because of Mama Charles’ loan, an entire community is able to see what is possible when hard work and entrepreneurial spirit combine.

When RVCV launched the microfinance program, those of us on the outside were hoping for a silver bullet. What we got was less dramatic, but ultimately not less transformational, than we had hoped. As is so often the case, meaningful change doesn’t happen over night – it takes time and effort, and an allowance for human error, to begin to see sustainable changes occur.

Jessie Cronan is currently a second-year Masters in Public Policy Candidate at the Harvard Kennedy School. From 2007 – 2008, Jessie worked as a Princeton-in-Africa fellow with the Rift Valley Children’s Fund in rural Tanzania. Her work focused on improving educational outcomes in the region.

To the 30 or so people who came together to talk about microfinance impact during a session at the recent Microfinance USA 2010 conference, I posed the question: “What do you hope to achieve through your work in microfinance?” Not surprisingly, the first thing shouted out was “Lifting people out of poverty.” The list continued: women’s empowerment, stabilizing incomes, smoothing consumption, creating and saving jobs, building businesses, opening the financial system to everyone, promoting  a just and equitable society, and more. I was moved by aspirations reflected in this list. The people in the room bring their best hopes for making a difference in the world to their work in microfinance.

"Microfinance Miracle or Myth" session participants sketched out their definitions of microfinance impact.

In the lunchtime session, we noted the variety of ways that the group learns about the impact of their work, from talking with clients, to tracking their performance, to carrying out surveys.  As an international microfinance practitioner, I was struck by how much easier it is to get reliable information about client status in the U.S., where business records are more formal than in developing countries. We briefly discussed the randomized control trials that have been garnering great attention. The trials are the only method with a claim to demonstrate causality.

I likened the various ways of learning about the effects of microfinance  to painting a picture, with each method adding details to our emerging understanding.  I gave each table paper and markers and asked them to create their own picture of the impact of microfinance.  After a brief, painful silence, the room burst into a series of noisy conversations.   As I listened, I was struck by this:  the kind of information people want to use depends on their role. Investors asked for financial accountability and assurance of conformity to social standards.  Board members wanted direct consumer feedback. Managers wanted to monitor performance indicators like default rates and repeat loans.  The only people asking for proofs of causality were those who had to decide how to allocate subsidies.

Participants were reluctant to take up their markers and start drawing, though most tables eventually produced some kind of sketch.  A woman from Mexico reported that Compartamos had once given art supplies to the young children of clients and asked them to draw a picture about how Compartamos influenced their lives.  One youngster drew a box and a bed, saying, “I used to sleep in a cardboard box, but now I sleep in a bed.”  Anecdotal, to be sure, but what does it prove? That 6 year old children can sometimes express the essence of things better than a roomful of grown-up microfinance professionals.

At next week’s Microfinance USA conference, I have the honor of leading a session on one of the hottest topics in microfinance these days: impact. Interest in impact has surged recently because of the big press coverage garnered by the researchers associated with MIT’s Poverty Action Lab and their new randomized controlled trials. At the session we’ll talk about how these new studies work (in layman’s terms – I’m no econometrician) and what their results are showing about microfinance.

To start off, I’d like us to consider all the ways we can learn about the impact of microfinance. Like these:

• The seeing-is-believing method – otherwise known as talking to clients or anecdotal evidence.
• The market method – if customers pay for the services, they must value them.
• The institutional method – sustainable institutions that serve the poor are prima facie contributions to more inclusive societies.
• The anthropological approach – talking intensively to clients in a structured way that allows inferences to be drawn. Recently the Financial Diaries approach has done this.
• The simple quantitative-survey approach – used for years despite suffering from many design flaws.
• And finally, the experimental-design approach, a statistically rigorous model patterned after medical drug trials, which is capturing today’s headlines.

I think we learn from all of these methods.  It’s like we are painting a picture using different kinds of paint and brushes. Gradually, our picture takes on shape, color and texture, and ultimately all these elements come together to convey meaning.

At our session, I want to move beyond the often divisive arguments about which research method is better than others and look instead at the emerging painting, which is complex. The title of the session is Microfinance: Miracle or Myth.  Of course you can guess that my answer is, something else.

The microfinance community has not shied away from talking about an extremely complex and sometimes sensitive issue: the impact of microfinance. We at the Center for Financial Inclusion are happy to see the tough issues being tackled from all sides and hope to help facilitate further discussion.  Below are links to two recent posts by Rich Rosenberg and Chris Dunford.

Different Levels of “Knowing” the Impact of Microfinance
Posted by Chris Dunford, Megan Gash and Bobbi Gray Kotara, Freedom from Hunger, April 30, 2010
http://www.freedomfromhunger.org/blog/?p=34

A Fine Blog on the Impact Debate
Posted by Richard Rosenberg, CGAP, Wednesday, May 5, 2010
http://microfinance.cgap.org/2010/05/05/a-fine-blog-on-the-impact-debate/

In case you missed Elisabeth Rhyne’s post as we entered the holiday season, we give it to you again… 

The Market as a Measure for Microfinance
> Posted by Elisabeth Rhyne
December 23, 2009 

Many thanks to David Roodman for bringing people’s attention to an argument that I have been making for years: that measuring microfinance’s impact is far more complex than finding a one-to-one correspondence between a given loan and a client’s subsequent economic status.

I’d like to take the discussion a step further and consider why this message has been so hard to get across to donors and investors, researchers, and the general public. First, let’s look briefly at the main points.(If you disagree with any of them, I hope you’ll read the longer excerpt on David’s blog, or the chapter available here of The New World of Microenterprise Finance, on which it’s based.) Here they are:  

• The causal links between receipt of financial services by individual borrowers and their subsequent economic growth are affected by many factors, finance being but one part of a complex process of decision making by enterprises and households. Clients use finance for a variety of purposes: protection against bad times, facilitation of efficient business operations (liquidity), and financing of investments. And they face a wide range of external forces, like competition, markets, health, weather, security, etc. The effect of finance is not likely to be as clear-cut as the effect of these other factors. Evaluations tend to strip out the richness of these dimensions.
• The service-client relationship is best measured by a market test of demand, or the willingness of clients to pay. If people pay full cost for a service on an ongoing basis, then evaluators can be sure that the service is valued at least as highly as its price.
• Microfinance has been all about building institutions, and more important, about building financial systems that serve low-income people. At the level of the institution, the strong test is commercial viability.
• These two market tests, which are interdependent, make finance programs “self-evaluating.” They provide information that is highly reliable (voting with feet rather than answering an interviewer’s question) and what’s more, cost nothing to collect.
• Financial services should be valued more for their general enabling effects across whole economic sectors as much as for the direct change induced by individual loans. This view argues that the far reaching and long lasting goal of microfinance is to build the capacity of the financial system to serve all people who need financial services.

Why do these arguments encounter so much resistance? I can think of several reasons: 

• Short-term measures of economic impact are as seductive as short-term profits. Our society places supreme value on the sound bite and the short-term solution.
• As David pointed out, NGOs are under constant pressure to make that one-to-one heart-connection for their donors. “A $100 loan enabled Juanita to buy a potter’s wheel and so transform her life.” At ACCION, we have logged thousands of such microenterprise success stories. But just as often, the loan may tide Juanita over six weeks when she has no income, enable her child to stay in school when another relative working in the shop gets sick and she needs a pair of hands, or keep the house heated through the winter until business picks up. Complex stories are difficult to tell in donor brochures, and “institution-building” does not excite the emotions of most people.
• The argument that “the market is the measure” leads some people to conclude that microfinance practitioners are afraid of impact studies or don’t want to put in the hard work. While sophisticated, in-depth studies that account for the nuances outlined above can be valuable, they are far too costly for most MFIs, themselves, to conduct. On the other side of the coin, discounting the value of the demand test bespeaks a patronizing assumption that poor people using a responsibly-delivered product don’t know what’s best for themselves.
• There is concern that a market test implies a free-for-all in which clients return because they are in debt traps. Only a market that is operating responsibly can provide a true test of the value of microfinance. That is why a strong commitment to client service and client protection, ensuring that microfinance continues to produce value for clients, is crucial to the sustainability of the industry. That, in turn, is why we are strongly backing The Smart Campaign, a global, industry-wide effort to institutionalize client protection principles.

A sustainable microfinance industry that continues to attract and serve customers and demonstrate profitability and growth is passing the tests that matter most. Strong, widely diffused measures of client protection, combined with market discipline, will keep microfinance on a path of sustainable growth and so provide the justification that backs up these market tests.

Many thanks to David Roodman for bringing people’s attention to an argument that I have been making for years: that measuring microfinance’s impact is far more complex than finding a one-to-one correspondence between a given loan and a client’s subsequent economic status.

I’d like to take the discussion a step further and consider why this message has been so hard to get across to donors and investors, researchers, and the general public. First, let’s look briefly at the main points.(If you disagree with any of them, I hope you’ll read the longer excerpt on David’s blog, or the chapter available here of The New World of Microenterprise Finance, on which it’s based.) Here they are:

• The causal links between receipt of financial services by individual borrowers and their subsequent economic growth are affected by many factors, finance being but one part of a complex process of decision making by enterprises and households. Clients use finance for a variety of purposes: protection against bad times, facilitation of efficient business operations (liquidity), and financing of investments. And they face a wide range of external forces, like competition, markets, health, weather, security, etc. The effect of finance is not likely to be as clear-cut as the effect of these other factors. Evaluations tend to strip out the richness of these dimensions.
• The service-client relationship is best measured by a market test of demand, or the willingness of clients to pay. If people pay full cost for a service on an ongoing basis, then evaluators can be sure that the service is valued at least as highly as its price.
• Microfinance has been all about building institutions, and more important, about building financial systems that serve low-income people. At the level of the institution, the strong test is commercial viability.
• These two market tests, which are interdependent, make finance programs “self-evaluating.” They provide information that is highly reliable (voting with feet rather than answering an interviewer’s question) and what’s more, cost nothing to collect.
• Financial services should be valued more for their general enabling effects across whole economic sectors as much as for the direct change induced by individual loans. This view argues that the far reaching and long lasting goal of microfinance is to build the capacity of the financial system to serve all people who need financial services.

Why do these arguments encounter so much resistance? I can think of several reasons:

• Short-term measures of economic impact are as seductive as short-term profits. Our society places supreme value on the sound bite and the short-term solution.
• As David pointed out, NGOs are under constant pressure to make that one-to-one heart-connection for their donors. “A $100 loan enabled Juanita to buy a potter’s wheel and so transform her life.” At ACCION, we have logged thousands of such microenterprise success stories. But just as often, the loan may tide Juanita over six weeks when she has no income, enable her child to stay in school when another relative working in the shop gets sick and she needs a pair of hands, or keep the house heated through the winter until business picks up. Complex stories are difficult to tell in donor brochures, and “institution-building” does not excite the emotions of most people.
• The argument that “the market is the measure” leads some people to conclude that microfinance practitioners are afraid of impact studies or don’t want to put in the hard work. While sophisticated, in-depth studies that account for the nuances outlined above can be valuable, they are far too costly for most MFIs, themselves, to conduct. On the other side of the coin, discounting the value of the demand test bespeaks a patronizing assumption that poor people using a responsibly-delivered product don’t know what’s best for themselves.
• There is concern that a market test implies a free-for-all in which clients return because they are in debt traps. Only a market that is operating responsibly can provide a true test of the value of microfinance. That is why a strong commitment to client service and client protection, ensuring that microfinance continues to produce value for clients, is crucial to the sustainability of the industry. That, in turn, is why we are strongly backing The Smart Campaign, a global, industry-wide effort to institutionalize client protection principles.

A sustainable microfinance industry that continues to attract and serve customers and demonstrate profitability and growth is passing the tests that matter most. Strong, widely diffused measures of client protection, combined with market discipline, will keep microfinance on a path of sustainable growth and so provide the justification that backs up these market tests.