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– Built on Foundations of Sand

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Two groups of researchers have studied thousands of evaluation reports to look for evidence that microfinance eradicates poverty. Their results are discouraging.

View trailer - "the micro debt"

A group of researchers lead by Maren Duvendack, was assigned by DFID to make a Systematic Review of a great number of evaluation reports and impact assessments on microfinance projects. Their job was to find the documented evidence that the projects work as planned, and contributes to eradication of poverty.

– I think that the enthusiasm for microfinance might have been build on foundations of sand and we might have been better advised to look for alternatives, says Duvendack, when interviewed by NRK Brennpunkt.

The challenges in the microfinance sector is well acknoledged by now, and also widely discussed. A series of studies have been published the past years. But these two stand out as special, because of their broad scope of untypical methodology. Duvendack’s group and a group headed by Ruth Stewart both chose «Systematic Reviews» as their methods. In Stewarts case, her group scanned through an initial pile of 6000 reports from microfinance projects in Sub-Saharan Africa.

– What you end up with is a system which is about making profit, but is also making a profit of the poorest people in the world, and those two things don’t sit comfortably together, Stewart says.

Read the report from Duvendacks team here.

Read the report from Stewarts team here.
Changes ahead

Maren Duvendack

Maren Duvendack

Foto: Lotte la Cour

Now is the time for changes in policies. Among those who are changing focus, are Norwegian aid authorities.

For governments, such a new focus can be more on assessing quality of excisting projects, more evaluations. There are discussions over tools as Credit Checks and Debt Registers, tools that other and more mature finance markets have dealt with for decades, but which the microdebat markeds have lacked. There is also a discussion over a potential maximum interest rate.

The Duvendack report is now part of the advice British authorities base their future policies on. Maren Duvendack is a researcher at the ODI (Overseas Development Institute).

– What did you find in your work?

– We found out that most of these studies were based on weak methodologies and inadequate data, says Duvendack.

– Based on our review, we could not reach any firm conclusions, as to whether microfinance work or does not work because the evidence was limited and rather weak.

Lack of Evidence

The researchers were surprised by the lack of evidence that microfinance removes poverty:

– I thought it was amazing that the evidence is actually rather weak and not very convincing, giving that there had been so many microfinance impact evaluations over the last two decades, and still after two decades we don’t know how microfinance works, and for whom it actually works, she says.

After more than two decades, where Norad and others have given massive support for microfinance projects, mainly microcredit loans, these researchers say it is wrong to say microfinance if the only possible solution to the poverty problems.

By the end of 2010, another Systematic Review was published. This time from Sub-Saharan Africa, written by researchers from the University of London and from Johannesburg, South Africa.

Again, the conclusion was that most of the previously made impact assessments was worthless. Only 15 of the 6000 reports the team scanned trough was considered of such a quality that one could learn from them.

Good for some

Ruth Steward

Ruth Stewart

Foto: Lotte la Cour

Despite the lack of quality on most reports, the researchers did find some good news:

– We found that microfinance does do good for some people, particular in areas for example like investing in housing, which clients seems to benefit from. Not neccesary being able to build your own house but they do benefit, Stewart says.

Negative effects on education

But there were negative effects also. In some cas, the children paid the price when the families’ micro loans where difficult to handle.

– For some people microfinance was actually reducing their levels of education of their children, so it was doing harm.

Ruth Stewart tells us about boys in Malawai who had to repeat years in school and girls who where completely delayed in school enrollment. The fact that their parents, in these cases, took out loans where damaging the childrens’ education.

– So the idea that we treat the poor differently, and somehow expect that a very small loan at a high interest rate is going to produce those kind of things, it doesn’t make sense, Stewart says.