Microfinance's sober reckoning

Madeleine Bunting

It's like a hangover after a big party. For over a decade microfinance has boomed as donors' have poured millions into the sector – now there is a sober reckoning. David Roodman picked up on it on Tuesday in his blog on the Centre for Global Development site, calling it the "new realism". He cited two recent reports, which argue for a rebalancing of the sector.

Now another study, commissioned by the UK Department for International Development (DfID), provides a chilly accounting of microfinance's impact contrary to the lavish claims of poverty reduction and female empowerment. Maren Duvendack and her team conclude: "No clear evidence exists that microfinance programmes have positive impacts." In the course of their exhaustive review, they looked at 11 academic databases, four microfinance aggregators and eight NGOs and aid websites. That included studying nearly 3,000 articles.

Duvendack found that many of these studies were poorly designed, including prominent ones that have been very influential – among them a study funded by USAid of microfinance programmes in India, Zimbabwe and Peru. But "rigorous quantitative evidence on the nature, magnitude and balance of microfinance impact is still scarce and inconclusive", Duvendack says.

Furthermore, the much-cited claims that microfinance can empower women have not been found to stand up.

These findings contradict the claims of champions of microfinance such as Muhammad Yunus, who, in a recent interview, insisted that it reduces poverty.

Duvendack's own research shows that microfinance is not much better for the poor than any other form of finance, such as moneylenders or banks. She argues for a more holistic approach to financial services for the poor, which would put more focus on savings, remittances and financial literacy rather than on the obsessive interest in microcredit of the last few years.

"Some people are just too poor to do anything productive with credit. If you can't secure basic survival, you can't grow a business. Food security and health are crucial and perhaps once these have been secured, people can graduate to microcredit. Microfinance often has to be combined with other interventions," comments Duvendack.

Duvendack's review for DfID is paralleled by another review commissioned by the department on microfinance in Africa, which is yet to be published but which, according to Duvendack, comes to broadly similar conclusions. But DfID has already committed significant funding to expanding microfinance programmes in Africa, and this wave of research has come too late to affect funding decisions.