It is getting hot in here

If there is a cool topic to be working on right now, this is it: microfinance.

Forget Dambisa Moyo (even if she is quite supportive of microfinance) and the Easterly-Sachs online dramas, the development world is waiting for an answer on what microfinance can and cannot do. The answer is unfortunately blurred but on the way of being clarified.
I think there are three groups of constituencies that are either helping or damaging the microfinance world.

The rigorous observers: Some must-read blogs (this and another one at PSD blog) this week portrayed a recent paper by some of the members of this group. There is good news for microfinance: the existing business owners of a Hyderabad slum appear to use microcredit to expand their businesses, durables spending (i.e. investment) and business profits increased. Unfortunately, there is a down side and some bad news. On the down side, the introduction of microcredit had little impact on non-financial aspects of development (health, education and women empowerment). The impact was not statistically significant, in their lingo. The bad news of the whole research: the results of the rigorous observers only apply to that particular slum (external validity, in their lingo again) and to that group of (mostly not super poor) clients. I leave the details on the sampling problems of the baseline survey and how to measure women empowerment to the experts.

The passionate believers: This group is a little bit at odds with the rigorous observers. They are mostly practitioners (can somebody tell me what that exactly means?) and do not like the work of the observers all the time. Many simply think that spending on randomized control trials does not tell us anything valid/applicable to all contexts and that money could be better spent on on-spot impact assessments or quick fix evaluations. You have passionate believers that care about the poor and passionate believers that care more about the business.

The one-sided detractors: This has been a real and dangerous surprise in the last week. A recent documentary published on French television found all the right images of poor Indian and Bangladeshi microfinance clients to show the French audience that microfinance is throwing clients into a credit trap and not helping them jump out of poverty. Even the music of that documentary is purposely sad. The one-sided detractors add no value to the microfinance world. They just bring horror stories that can be (easily) curtailed by another documentary showing bright happy faces of women borrowing.

I’d like to end with some gentle, very gentle reminders: there are too many expectations of this industry, microfinance is more than credit (and CGAP reminds this continuously!), the rigorous observers should talk to the believers much more and, finally, more transparency on what kind of product (lending/saving/productive/consumption) is given to which kind of client (micro business owner, very poor) is needed to help us observers grasp where this industry is heading towards. Let’s help the microfinance institutions on the ground to improve on that last point and to expand responsible financial access.

So, in which group are you? You can also be a little bit of everything. However, evidence-based findings are difficult to beat and better sources to inform policy than other romantic views of the poor.