Microfinance: a balanced approach

Argument: Microfinance isn't always a good thing, but it's not bad either. It can have have both positive and negative effects, varying greatly by context.

Microfinance is good:  MFI's have done well in establishing that microfinance is a boon to the poor.  It is fairly easy to see and is basically the popularly accepted position:

• Most MFI's report positive effects and extol the virtues of microfinance.  See the Grameen Bank, Bandhan, or Kiva websites to get an idea of the noble intentions behind the service as well as some positive figures.  For instance, Grameen points out that over 9.4 million people have been helped through their MFI partners and that more than 1.1 million micro-loans have been generated.

• Research such as "Measuring the impact of microfinance in Hyderabad, India"generally shows positive effects of microlending, particularly starting or investing in a business.

• Muhammad Yunus, founder of Grameen Bank anda major innovator in microfinance won the 2006 Nobel Peace Prize.

Microfinance is bad:  No one is really arguing that microfinance is bad, but several have questioned it's effectiveness:

• In their paper "The miracle of micro…nance? Evidence from a randomized evaluation" Banerjee, Duflo, Glennerster, and Kinnan conclude "While microcredit succeeds in affecting household expenditure and creating and expanding businesses, it appears to have no discernible effect on education, health, or womens' empowerment."

• In another randomized evaluation, Karlan and Zinman has a few surprising finds: marginally creditworthy microentrepreneurs who randomly receive credit actually shrunk their businesses, access to credit increased profits for male but not for female microentrepreneurs, and increased access to credit didn't improve subjective well-being

• Chuck Waterfield's research points out the difficulties in understanding microfinance prices due to misleading information and how lenders can end up paying far more than is initially apparent.

• Media reports including this Boston Globe article draw on research to paint a negative picture of microfinance, saying things such as "by most measures, microcredit does not offer a way out of poverty"

Balanced approach: Generally speaking, providing financial services to people is a good thing.  However, it may not be effective as some theorize and may even have negative consequences in some circumstances.  Even though research may call into question the effectiveness of microfinance, the same researchers point out the difficulty of generalizing the results and the need for more long term evaluation.  The 2010 Grameen Foundation report "Measuring the Impact of Microfinance: Taking Another Look" provides a balanced look at the current studies concerning the impact of microfinance and encourages further research by posing important unanswered questions:

• Do the business investments evidenced in the existing research lead to additional development outcomes over a longer time?  Will incomes rise and poverty rates fall as borrowers continue to operate their businesses?  Will new studies be able to replicate earlier positive results about social outcomes?

• To what extent do loans and savings programs alleviate the day-to-day uncertainty of life below the poverty line?

• Will additional studies in alternative settings find similar positive results of microsavings programs?

• Can insightfully designed lending programs lead to positive outcomes for the very poorest borrowers?

• What about the macroeconomic effects of microfinance program? Is there convincing evidence of effects on poverty rates, rates of inequality, and economic growth in a variety of settings?