Reflections on the Latest Studies on Microcredit

Note: This post was originally published by Grameen Foundation and presented at Financial Services for the Poor: Lessons and Implications of the Latest Research on Credit event hosted by CGAP, IPA, J-PAL, and The World Bank on February 27, 2015

By Alex Counts, President & CEO of Grameen Foundation, Co-Chair of the Microfinance CEO Working Group

I would like to start by congratulating the researchers involved in these six new studies, as they add to the body of knowledge about microcredit and microfinance that has been accumulating for several decades, and has made us a stronger industry as a result. I would also like to congratulate the organizers of this event, and thank them for inviting me to share my views, as a representative of Grameen Foundation and the Microfinance CEO Working Group, which I co-chair with Mary Ellen Iskendarian of Women’s World Banking.

I actually find these studies encouraging. The frame I use to digest them is this: what do they tell us about what microcredit is accomplishing, and about what it can accomplish. Somehow, the main frame people seem to be using to interpret these results is what microcredit does not do. I don’t think that frame is appropriate, nor helpful.

I think that we can all agree that while microcredit has been “transformative” for individual clients, it is not today “transformative” for the average client, especially in the time frames that are being studied. I presume we can all also agree that microcredit has not cured cancer, nor the common cold. But why use unrealistic standards to frame the discussion?

Let me make an analogy. How shall we assess the administration of President Obama? Of course there are many facts about how he has performed. If we were to use, as the standard to judge him against, the most enthusiastic visions of his most ardent supporters in 2008 — which doubtless included some version of him being able to transform the country and its typical citizen — then we must judge his administration an abysmal failure.

If, however, we use the more realistic standard of whether the country, and its typical citizen, are better off — if only modestly — compared to 2008, I think you can make a strong argument that he has succeeded. In both cases, the facts are the same — but the frame determines the top line message. I believe that the debate around microcredit has taken on the feature of the first, more unrealistic standard or frame.

So, what are we to make of the new research, and what is the path forward? Let me use another analogy.

Think back 50 or 75 years to a much earlier stage of the development of modern medicine. Back then, I am sure there were finding about its impact on human well-being that showed only “modest” benefits, compared to earlier approaches, like faith healing. There were mixed and disappointing findings. I think we are all glad that the people receiving such evidence rolled up their sleeves and decided they wanted to take something that was promising yet maddeningly imperfect and — through endless tinkering, testing, and evaluation — developed modern medicine to what it is today. And modern medicine is something that arguably is “transformative,” or at least well beyond what it was in an earlier era.

I think the call to action for those involved in microcredit today should be much the same. Let’s work hard to build on what we have done, built and learned, and make it much more powerful, and make its impacts less modest.

So, if we focus on what microcredit has accomplished, what can we say? First of all, we need to keep in the back of our mind David Roodman’s insight that in the modern world, access to reliable financial services is essential to the poor. In fact, he argues it is more important to them, than to the non-poor. So microcredit should be thought of as similar to health care, in that it is something essential for the well-being of the poor and as a result, something that should be continuously improved upon.

So, with such high stakes, what has been accomplished so far?

Microcredit has developed a sustainable business model. The users pay for 100% of the operating costs in a typical MFI. In fact, they often pay enough to generate surplus that can be invested in research and development (which can and should be supplemented by smart subsidy in some cases, in order to spur faster innovation).

Partly as a result of the sustainability achievement, microcredit has gone to scale — which is its second major accomplishment. Tens of millions of people are being reached today from the hundreds of variations on the idea of microcredit that exist today.

Finally, as was reinforced by these studies, microcredit is bringing modest benefits to the typical client. In fact, one can argue, as I do, that tens of millions of modestly positive impacts is anything but “modest.”

This sustainable model, built out on a large scale, represents an existing distribution network paid for by its users that is ready, today, to bring new and better credit products to tens of millions of people once they are developed, and also to distribute other financial products such as savings and insurance, as well as targeted social services.

Taken together, this strikes me as very good news — and also a call to action for researchers, practitioners and policy-makers to roll up their sleeves and work collaboratively to develop successive waves of better credit products for the poor who, as we know, clearly need reliable financial services.

Let me conclude with two thoughts.

First, some people have argued that we should shift our focus from microcredit to microsavings. Certainly Grameen Foundation, drawing on the earliest work of Grameen Bank, has been a strong advocate for microsavings. But as my colleague Camilla Nestor has argued, if we are going to make a big push to collect deposits from the poor, to have a sustainable overall business model we need someplace to invest those pools of capital. Do we want to simply say that we will lend that money to the non-poor, a model that presents operational as well as ethical challenges? Or can we use this insight to further spur us to master the credit side of the equation, more than we have done to date? I would argue for the latter.

Second, the summary paper says something very interesting towards the end. It notes that the claims of microcredit’s strongest supporters are correct for certain segments of borrowers. I find this very exciting, and motivating. If we can understand why microcredit produces immodest and even transformative positive impacts for certain segments of the poor, then perhaps we can tweak and better target our products better so these larger impacts can be sustained with other populations segments. That seems absolutely do-able, with sustained effort and focus.

So, we have a lot of work to do. Let’s move on from the stale debates of the past, focus on what microcredit has done and can do, and let’s get back to work.