So, too, in Microfinance

The Jester is attending the “Microfinance Impact & Innovations Conference” in New York City this week. It was organized by economists and practitioners for economists and practitioners, with star representation from each set.

A recent round of research with randomized controlled trials, led by Dean Karlan, Abhijit Banerjee, and Esther Duflo, had cast doubt on the overall impact of microcredit’s ability to increase entrepreneurial capacity of borrowers as the rhetoric claims. On average, microcredit clients don’t appear to get richer over time. Those results were a springboard for the rest of the conference.

A lot was covered, but what stood out most was what seemed to be a sudden recognition among the academics (mostly economists) in the room — that human capacity of the clients is critical to making any microfinance program work. This is something that many practitioners have learned over the years through trial and error, but which the public microfinance rhetoric rarely mentions. For example, to this day, Muhammad Yunus continues to claim that borrowers don’t need training; they just need credit.

The papers presented mostly contradicted Yunus (the Jester hasn’t nominated a FftD recently, so Yunus is it!)…

Dean Karlan opened with several lines of work, where among the findings, one that stood out was the considerable heterogeneity in what microcredit clients did with their borrowings in the Philippines. There seemed to be an effect of male entrepreneurs increasing profits while women didn’t, but the results were hard to interpret, at least for the Jester. Karlan also noted that loans are used to manage risks, rather than necessarily to grow businesses.

Esther Duflo noted three different groups 15-18 months down the line of microfinance in Hyderabad, India. Those with existing businesses tend to expand their businesses. Those who want to start a business appear to take steps to do so. Those with low propensity to become entrepreneurs don’t start new businesses.

David McKenzie talked about $100 cash awards given to microentrepreneurs in Ghana. Male microentrepreneurs and more successful female microentrpreneurs used their grants to grow their businesses, while less successful female microentrepreneurs spent the cash with little visible impact.

Greg Fischer presented research on pushing microentrepreneurs to implement “rule of thumb” accounting practices. He found that more driven, more educated entrepreneurs were more likely to sign up for the program; that the program had large impact on revenues for everyone; and that among those who received a more complex accounting training, only those with high-school educations showed benefits.

Asim Ijaz Khwaja reported on efforts to see how psychological traits correlated with better entrepreneurial activity and found that some traits, such as drive and business acumen make a difference.

Taken together, these results all highlight the critical value of human capacity, both that which is already present with a microfinance client, and that which could be gained through training. If the overall value of microfinance comes out roughly even, there is nevertheless heterogeneity in the impacts, with some clients winning and some clients losing. (It’s not that different from the developed world, where some people misuse credit cards and others get real value out of them.) The real question is not “does microfinance work?” but how to get the losers to become winners.

This might seem obvious, but economists and policy makers are notoriously focused on what happens to the mean. They figure that to effect large-scale change, only movement of the large body at the center of a presumed normal distribution is meaningful, and they’re forever trying to construct incentives to manipulate the mean to do something good for themselves. I believe this attitude frequently blinds them to questions of why positive outliers are outliers, and leaves out solutions in which the goal is not just to change behavior, but to change underlying preferences.

What does this have to do with ICT4D? Well, in the Jester’s more grandiose moments, he likes to pretend that his kingdom is larger than ICT. In that larger domain, “technology” encompasses not only physical technology, but also systems, institutions, and policies. For any of them to work, the Jester claims, the magic sauce is always human intent and capacity. (As an aside, it’s also the ultimate thing that matters… Positive human intent and capacity is desirable in itself; technology by itself is just a hunk of junk.)

ICT amplifies human intent and capacity. Microfinance amplifies human intent and capacity. You can spread ICT, but not much happens without human intent and capacity. And, you can spread microfinance, but not much happens without human intent and capacity.

The Jester was heartened by this apparent turn in the microfinance conversation among economists to a focus on training, hand-holding, and other interventions that change intent and build capacity.

On the other hand, the Jester still finds that technocrats are technocrats. For the most part, the speakers spoke of these things as secondary issues. The term “microfinance plus” was frequently used, where “plus” was meant to include training, etc., in the same way that ICT4D-ers think of good design, cultural sensitivity, and political alignment as the “plus” part of “technology plus.”

But, neither technology or microfinance are the main event. It’s the “plus” – increasing human intent and capacity – that matters!

The Jester wonders when this recognition will come to agriculture, education (i.e., teachers and administration), governance…?

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One Response to “So, too, in Microfinance”

  1. arjuna rao chavala Says:

    Interesing post. Micro financing in Andhrapradesh, India has led to borrower suicides, as a result of indiscriminate lending by multiple companies interested in making a fast buck. A repeat of cause for recession at a smaller scale. See a news item about government attempt to control the same.

    http://www.thehindu.com/business/article830511.ece

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