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Lofty or lowsy: microfinance under the microscope

Yasmine Cathell's picture

Microfinance has been both praised and criticized, but on what basis are these judgments being made? Taking a closer look at how microfinance institutions (MFI) are evaluated there seems to be a disconnect between the goals and measurable results. This has created a danger for MFIs to tout themselves as real do-gooders when in fact they are mere bottom feeders, preying on the poorest of the poor, charging exorbitant interest rates and making a killing.

The industry has pretty much been entrusted with the world’s poor because of the double bottom line of producing a profit while having a positive social impact. Determining the fiscal performance of an institution is rather straightforward, but measuring the social impact is a much more difficult thing to do. Too often MFI’s showcase the number of loans they have dispersed in a region as an example of how effective they are. While the number of loans dispersed or outstanding debt might be a good indicator of the financial viability of an institution, it in no way sheds light on the actual human impact or reduction of poverty.

There is a real opportunity for microfinance to have a significant positive impact on societies, but what we need is a system to hold these institutions accountable. If they claim to reduce poverty by teaching business classes then there needs to be a system in place to ensure that they are in fact teaching those business classes. 

The MIX Market, Microfinance Information Exchange, is playing an important role by providing financial performance data to the general public. They also provide social performance data, but this data is actually on the “social performance management initiatives” of an MFI and again is not indicative of the actual results with regard to poverty reduction. 

In an attempt to address this need for accountability in social performance MIX Market started the Social Performance Task Force (SPTF) to try and develop industry standards of social performance indicators in 2005. No doubt this is a step in the right direction, but is it enough? 

There needs to be some kind of third party that goes out into the field and independently audits the human impact. Has the standard of living of a loan recipient been improved? Have these individual learned life or business skills? Are they economically self-sufficient? In order to ensure the accuracy of these assessments auditors would need to hire locals who are more likely to be trusted, have no vested interest in the results, speak the native language and have no ties to the MFI in question.

Any foundation or big donor that has a real social conscience and is considering giving millions of dollars to an MFI should be able to hire one of these third parties to do a social performance audit. The results could be made public on MIX Market, for example, so that others wanting to invest in for-profit poverty alleviation can see who has the best results and not just the best goals.

Comments

Submitted by Tahira Saleem on
Microfinance is indeed a blessing for all those people who cannot get the financing from bank on hard terms. In Pakistan, banks like Khushali bank are providing relief to the poor especially the women. The case of Grameen Bank serves as a beacon of light. By emulating this example, other countries can also eradicate the poverty.

Submitted by Saief Mahmood on
I am a Finance graduate living in Bangladesh. MFIs are doing a praiseworthy job in getting finances to the poor. Traditional banks; most of the time avoid this huge portion of the population in the underdeveloped and developing countries where access to finance is still very limited to rural areas. MFIs are playing a vital role here. But the concern is whether the MFIs are as much successful in eradicating poverty as in providing finances. The number of people living below the poverty line seems not decreasing at a rate, we may have expected.

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