Time to Move on from Microfinance or Re-engage? Part II

The conversation around the future role of microfinance has gained significant momentum in 2015.  Through this blog, we want to continue to participate in the conversation, especially in relation to our blog from last March 2014.

Challenges are nothing new to the microfinance industry; however the effort to maintain the confidence of funders and investors may become more difficult with the release of recent publications.  At a meeting hosted by the World Bank in early March, two articles addressed this challenge in response to the Poverty Action Lab’s report, “Where Credit Is Due.” A particularly critical spin was put on that discussion in a March 3^rd  Washington Post article by Chris Blattman, which concluded that microfinance can be compared to the microwave oven; it doesn't make people better off in ways that are easy to measure, but makes life a bit more convenient, and it certainly doesn't warrant a Nobel Prize.  A somewhat more constructive consideration of the World Bank discussion came in a March 16^th Devex article by Claire Luke. Luke reports reactions to the recent publications and research from a range of practitioners, including Grassroots’ Paul DiLeo, which generally suggest that since microfinance offers an unrivaled, self-sustaining platform for reaching hundreds of millions of poor families, there is a need for research that helps practitioners improve their products and services rather than studies seeking to generate eye-catching headlines that microcredit “doesn't work.” 

This reaction was anticipated in a thoughtful March 3^rd article by Alex Counts of the Grameen Foundation, which systematically extracted lessons gleaned from the last 30 years of the development of the microfinance industry to help guide the recent surge of interest in “impact investing.”  One of Counts’ points, which resonates in the context of the Poverty Action Lab’s report, is that “it is important to remember that few if any social innovations besides microfinance have proven capable of reaching large scale and generating consistent profits.” Large scale and reliable profitability should appeal to philanthropies and impact investors alike, and should ensure a place in impact portfolios.

Other such platforms will likely emerge in the future -- mobile technologies are garnering lots of enthusiasm at the moment -- but for now Grassroots believes that the practical challenge for those wanting to deliver effective anti-poverty products and services is to combine the microfinance experience, and the unique platform it has created at great cost and effort, with the latest research to improve the efficacy and scale of efforts to address the causes and consequences of poverty.  We can use the experiences of the past 30 years in order to evaluate the best way forward, rather than allowing a focus on what hasn't worked to lead us to a dead end. 

One way that Grassroots is actively supporting this approach is through its collaboration with Freedom from Hunger that utilizes MFIs as platforms with the aim of improving women’s access to health services.  Grassroots’ Impact First equity fund is another initiative which aims to support MFIs that are using the latest research to deliver meaningful results on both bottom lines. These engagements are among a newly flourishing cohort of efforts that build on the unique accomplishments and capabilities of microfinance rather than putting the majority of emphasis on the shortcomings with the dead-end conclusion that microfinance simply doesn't work. The original objective of alleviating poverty has not changed, but the methodology needs to expand beyond microcredit to integrate health services and access to energy among many others, and to increase the likelihood of success, this agenda needs both the support and constructive engagement of researchers and investors as well as practitioners.