The real revolution in microfinance

October 22, 2010

People often talk (and write) about how commercialization is changing the nature of microfinance. Yet increasingly it looks like an even more fundamental shift is afoot. Microfinanciers are finally figuring out what their customers want.

The well-worn story of microfinance goes something like this. Lend a poor person in a poor country a little bit of money, and that person can invest in a business—by buying a sewing machine, say, or another cow. Over the long run, that person pulls himself out of poverty with the income generated by his endeavor.

One reason this story involves a loan is because in most countries it’s a whole lot easier to lend money than it is to take deposits. (The latter requires a banking license, which the former doesn’t.) But there’s another reason loan-making is at the center of traditional microfinance: the people who started this work more than 30 years ago assumed that since mainstream banks didn’t lend to poor people, there was a massive, untapped demand for borrowing.

The thing is, no one ever really asked poor people if business loans were the most important financial product they were missing. That’s now starting to change, thanks in part to a recent wave of academic research. As it turns out, poor people lead complicated financial lives and they need money for all sorts of things.

Thursday I was at this conference, where Dean Karlan of Yale talked about research he’s been doing with Jonathan Zinman of Dartmouth. In interviews with microfinance recipients in the Philippines, the pair discovered that some 46% of borrowers used a decent chunk of their business loan to pay down other debt and about 28% spent part of the money on a big household purchase—even though fewer than 4% of people in either category ever admitted this to their bank. (Disclosure: I was at this conference because I am now doing work for the Financial Access Initiative, which co-sponsored the event.)

This sort of finding—which quantifies what many practitioners have long suspected was the case—is having an impact on how microfinanciers go about their business. “We’re an industry built on assumptions, and we’ve gotten to a point where we have to test those,” said Carlos Danel, a co-founder of the Mexican microfinance behemoth Banco Compartamos. ”Research is showing us that we actually don’t know a lot about the customers we serve.” That’s why Compartamos is conducting a 4-year study with Karlan and other researchers to find out how customers use microfinance products, and how those products do—or don’t—change their lives.

As Danel put it, microfinance is an industry that was born out of supply—one that came from people thinking about what organizations were capable of doing. Now, he said, the challenge is to figure out what poor people around the world actually need.

9 comments

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We need to export the US model to these places.

Everybody gets a credit card, even if they have no income.

Everybody gets a mortgage, even if they don’t have a house or property.

The micro-financers can then securitize these through US banks who will then pass the securities on to the Fed.

Posted by ErnieD | Report as abusive

”Research is showing us that we actually don’t know a lot about the customers we serve.” That’s why Compartamos is conducting a 4-year study …

Researcher says we need more research, certainly no reason not to take that at face value…

“In interviews with microfinance recipients in the Philippines, the pair discovered that some 46% of borrowers used a decent chunk of their business loan to pay down other debt and about 28% spent part of the money on a big household purchase—even though fewer than 4% of people in either category ever admitted this to their bank. ”

This sort of finding… is exactly what everyone in the field already knows, what is the story here?

Posted by inboulder | Report as abusive

I often wonder with whom the prototypical “poor person in a poor country” is doing business after they get their microloan. Other poor people, I always assume.

Posted by SableSage | Report as abusive

There used to be microfinance in comic books. The American Seed Company of Lancaster, PA advertised in comic books and kids could order seed packets which they would sell to their neighbors and then they would remit some of the money back to the American Seed Company. It went out of business when children stopped sending in the payments after selling the seeds.

Cooperstown Baseball Hall of Fame money is from selling sewing machines on the installment plan. Clark Estates. It wasn’t “micro” in the 19th century.

Posted by bidrec | Report as abusive

I don’t think Microfinance works as a business to make profits from, but it can enable and empower the poor, particular women who are poor with families to feed. One charitable microfinance project I saw a documentary about was in India or Africa and lent money to women with children so they had some income independent of their husbands (who frequently drank, smoked or gambled their pay away before it got into the family coffers).

By lending really small amounts, women could then invest in something that gave them an independent income that enabled them to lift their kids out of poverty. The women were found to be more reliable than the men when it came to repaying the loans, and for making better use of the money.

Posted by FifthDecade | Report as abusive

@inboulder: The story is that practitioners (not just researchers) are increasingly interested in being able to more deeply understand what services and features clients need– and then doing something about it.

Posted by BarbaraKiviat | Report as abusive

I’m currently reviewing Why Microfinance Doesn’t Work for my Communication and Development Theory class. While some of Bateman’s criticisms will be hard to resolve, the desire by some lenders to actively think about what they are doing means there might be hope yet for the industry that Bateman didn’t see.

Posted by brian1121 | Report as abusive

In the Philippines, many have cross-membership with various microfinance institutions. That maybe supports the findings that 46% of loans was used to pay off debts.

Posted by Gil25Leo | Report as abusive

I would go one step further. Not only are we just beginning to understand the complex financial lives of the poor and only now adapting to their needs, what we are seeing is that microfinance has a different impact than was once assumed. The narrative you discuss has people believe that microfinance is a “pull yourself up by your bootstraps” story. The reality is that the impact is much more nuanced. Microfinance loans smooth consumption, so that the person who earns 14 dollars on Monday and nothing the rest of the week can actually live on $2 a day. It is called smoothing consumption, and I have written about it:

http://developeconomies.com/?p=1518
http://developeconomies.com/?p=1206
http://developeconomies.com/?p=1191

Posted by jwduke109 | Report as abusive

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