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Does Microfinance Break the Cycle of Poverty?

By Rob Moll

The story of microfinance has always been compelling in its simplicity: A poor entrepreneur receives a loan. The loan enables her to purchase equipment or goods. She is then able to sell or increase sales of homemade clothes or fresh fruit. The new or increased sales bring in more income which she uses to pay back the loan, feed her children, and put them through school. The experience is repeated and the business grows and family fortunes improve. The cycle of poverty is broken.

This story is true, and Opportunity International sees it played out over and over again among our nearly 2 million clients.

But the lives of the poor in developing countries are much more complex. A sick family member can take time and money away from an otherwise profitable enterprise. Political fortunes for the country’s leaders change, disrupting the business environment. Inflation drives up the cost of goods beyond the reach of the poor, even when they have microfinance loans. And while savings accounts and insurance provide some protection, for many of the poor their financial lives are precarious.

For academics who study microfinance — and hope to show direct correlation between a loan and increased income — this has led to some incredible frustration. The frustration was evident on a panel at last Friday’s Chicago Microfinance Conference called “Impact Monitoring and Reporting: Heading Towards an Industry Standard.”

Moderated by Alicia Menendez, an associate professor at the University of Chicago’s Harris School of Public Policy, the panel tried to discuss the impact of microfinance in light of three recent studies (summarized by David Roodman, a fellow researcher) that show just how complex and difficult it is to show that loan X equals an increase in Y amount of income.

In general, experts find that microfinance is good and it works. But in the messy realm of life in poverty and human choice, it is hard to tie direct lines of cause and effect. Ruth Mbeba, a panelist from Mennonite Economic Development Associates, agreed. “Poverty is complex.” It is hard to attribute a specific output to a specific intervention. And yet, she said, she has seen the tremendous impact that access to finance can make.

Charles Belanger of FINCA Internationalencouraged the audience not to leave out the clients’ perspectives. “What services would they like to have? What will help them?” Clients know what is best for them. So when clients are loyal to a microfinance provider, repeatedly accessing their services, Charles said, “This gives us an idea of our impact.”
People interested in the question of impact, said Lori Scott of Calvert Investments, need to be comfortable with a degree of uncertainty. “How do you measure the impact of a loan in Haiti versus Kenya?” The differences in economic opportunities and basic needs are too great. And measuring the impact in one area doesn’t mean that the same process will discover an impact in another area.

Lisa Thomas from ShoreCap Exchangeencouraged the audience to have different expectations of microfinance. The point, she said, was simply to expand access to financial services, which allows people to alleviate the effects of poverty, better feed their children, and send their kids to school. While this may mean that the poor entrepreneur never works her way out of poverty, as many in developed countries would define it, such access to financial services does break the cycle of poverty. With well-nourished and educated children, they will not suffer from poverty. “We want to create access to capital,” she said. “We know that’s good. Providing financial services to people without them is a mission unto itself.”

Academics and practitioners are equally frustrated in their attempts to know just how, why, and to what extent microfinance alleviates poverty. Nothing that was said on Friday’s panel changed that. Academics hope to understand what results in poverty alleviation so that they can influence governments and foundations that are spending money to help poor people. Microfinance organizations hope to know better why their services work, to be able to design new products that will better meet the needs of clients and improve the likelihood that people will work their way out of poverty.

Learning more about the needs of poor families and how they can use financial services is essential. But as is true in so many areas of international development, it is tough work.

 

Check back in tomorrow to read the next in our series of blog posts from the 2010 Chicago Microfinance Conference.

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