Memorandum submitted by James Copestake
and Susan Johnson, Department of Economics and International Development,
University of Bath
1. OUR CREDENTIALS
This submission addresses the role of donors
and the private sector in reducing poverty through investment
in microfinance. The experience of the authors in this field includes:
(a) commissioned impact assessment research of DFID investments
in microfinance in India, Kenya, Uganda, Malawi and Zambia; (b)
academic leadership of Imp-Act: a five year international
program of research into the social performance of microfinance
sponsored by the Ford Foundation and involving microfinance providers
in more than twenty countries; (c) membership of various other
groups involved in these issues, including DFID's Enterprise Development
Innovation Fund and the CGAP[81]
advisory panel on impact assessment. A selection of relevant publications
of the authors is provided in the appendix (Ev 236), along with
summaries of relevant findings.
2. SCOPE OF
SUBMISSION: MICROFINANCE
FOR POVERTY
REDUCTION
Microfinance is defined as credit, savings,
insurance and money transfer services for relatively poor people.
This definition goes beyond traditional banking services to include
self-provision—eg self-help group savings, and electronic
transfer of mobile phone credits as a payment mechanism. The central
goal of donor intervention in the field is taken to be sustainable
poverty reduction achieved through actions to improve financial
services to relatively poor people hitherto excluded from the
financial system and/or incorporated into it only on adverse terms.
While social benefits depend on the quantity of financial
services supplied to poor people they also depend critically on
their quality. This includes both direct impact (value-added)
on the lives and livelihoods of customers, and indirect impact—on
family relationships, employment, social capital and gender norms,
for example. At the core of this submission is: (a) a concern
that quality of impact is being neglected in the rush to improve
quantity of commercial supply; (b) a belief that DFID can
help to address this problem by promoting quality measurement
and enhancement.
3. POTENTIAL
FOR A
MORE COMMERCIAL
APPROACH
The last decade has seen a remarkable growth
in the number and sophistication of non-profit private sector
institutions specialised in delivering financial services to poor
people—microfinance institutions (MFIs). However, a relatively
small proportion of these have achieved full financial self-sustainability.
We welcome the efforts of DFID (through multilateral agencies
and CGAP as well as directly) to increase the role of private
for-profit financial institutions in microfinance, alongside non-profit
and cooperative institutions, in order to enhance the resources
and expertise available to reduce financial exclusion. An important
benefit of a more commercial approach is a strong emphasis on
responding flexibly to the needs of users. Likewise we welcome
moves towards a sector-wide approach in which the overall ability
of the financial sector to reduce poverty (by reaching poor people
and serving them well) joins macroeconomic stability and economic
growth as an explicit policy goal.
4. DANGERS OF
COMMERCIALISATION (1): UPSCALING
However, we are concerned about mission drift
arising from the use of donor funds to promote commercialisation.
With respect to upscaling of MFIs, nearly 10 years of research
has taught us that growth and financial performance indicators
are no substitute for evidence of poverty impact or social
performance.
— It produces a bias towards geographical
areas that are more easily accessible and where economic activity
is greater. The core microfinance methodologies have been relatively
successful in these contexts but less so in more rural contexts
(see reference 11) in particular there has been relatively little
experimentation with agricultural lending and related insurance
mechanisms.
— Emphasis on achieving financial sustainability
often results in high rates of client turnover because poorer
people are less able to cope with demands to increase their use
of services or to bear more of the costs of doing so. While those
able to stay experience modest increases in income, there is also
a bias towards better off groups, and hence an overall risk of
increasing differentiation (see references 7,8,9).
— Targeting women has often been seen
as a means of correcting their past exclusion from financial services,
but their ability to absorb increasing volumes of credit and develop
enterprises is constrained by many other gender norms that affect
their market activities. A focus on financial services alone that
is not related to building other capacities and addressing these
constraints cannot be a panacea for women's economic empowerment.
Financial services need to be carefully tailored to meet their
gendered needs, and need to be supplied to meet the gendered needs
of men also (see reference 9,11,12). Emphasis on women's empowerment
has overshadowed development of the tools for effective gender
analysis of the financial market.
— Investment in more cost-effective
monitoring of who is being reached by MFIs and to what effect
(hence capacity to manage social performance) has been
inadequate relative to the emphasis on measuring and managing
financial performance (see references 1-6)
5. DANGERS OF
COMMERCIALISATION (2): DOWNSCALING
AND A
SECTOR-WIDE
APPROACH
We also have concerns about initiatives to downscale
for-profit financial institutions. Initiatives of for-profit partners
should be appraised and reviewed against social as well as financial
goals in the same way as upscaling initiatives. However the ability
of donors to require and implement reporting of this kind is often
limited because their financial leverage and influence is small.
Improving access and quality of financial services is generally
better served through spontaneous moves down market spurred by
increased competition (see reference 2). The risk is that British
aid is subsidising banks (large and small) in a vague hope that
financial exclusion will be reduced and employment created as
a result.
6. THE NEED
FOR SOCIAL
AND FINANCIAL
PERFORMANCE MANAGEMENT
Given these fears, we argue that investment
in financial institutions should only be made alongside strong
and sustainable mechanisms for assessing whether there are commensurate
social returns. Without these there is no evidence on which to
judge whether DFID's aim to have an impact on poverty is in fact
being achieved. Incentives for wishful and even opportunistic
thinking about the extent to which microfinance can reduce poverty,
build social capital, empower women and yield a profit simultaneously
is large. The only counter to this tendency is to invest in an
evidence-based approach and a culture of learning through evaluation.
Such evidence must of course be reliable. But it should also be
timely, cost-effective and contribute where possible to cumulative
and institutionally sustainable processes of learning (see references
1,3,4,10). This entails identifying and working only with financial
institutions (and organisations that support them through consultancy
and networking) that demonstrate willingness and capacity to collect
and use social and financial performance data as a core aspect
of what they do. There are a number of initiatives underway to
promote these approaches.
USAID is evaluating indicators to more easily
and effectively assess poverty outreach (see www.povertytools.org)
and to strengthen private sector development evaluation methods
(www.microlinks.org). Imp-Act is working with a range of MFIs
to spread good practice in social performance management (www.Imp-Act.org).
DFID has funded Finscope in South Africa to produce data on financial
service use and monitor the social objective of increasing financial
service outreach in South Africa (www.finscope.co.za). But we
believe DFID can go much further in ensuring that social performance
assessment is a core feature of its work with the financial sector.
Relevant studies carried out by the authors.[82]
| 1 | Imp-Act (2005). Cost-effective social performance management. Meeting the social and financial goals of microfinance. Policy note 1. www.imp-act.org. (8 pages)
| Reports on how MFIs in three countries (Honduras, Bosnia-Herzegovinia & South Africa) found routine assessment of client satisfaction and impact improved their financial performance. Also reports on how formal impact assessment of MFIs in Bolivia was made more cost-effective by delegating the task to a microfinance network. Draws lessons for other MFIs.
|
| 2 | Imp-Act (2005) Working with formal financial institutions: expanding access and achieving social performance. Policy Note 2. www.imp-act.org. (6 pages)
| Sets out the promise and pitfalls of donor support for large regulated financial institutions.
|
| 3 | Imp-Act (2005). Social Performance management in microfinance: guidelines. Brighton: IDS Publications with the Microfinance Centre, Warsaw. (48 pages)
| Step-by-step for MFIs into setting up a social performance management system. Also includes a CD and practice notes, including (No.8) on how donors can conduct reviews into the social performance of MFIs in a way that strengthens internal systems.
|
| 4 | Copestake, J. G., M. Greeley, S. Johnson, N. Kabeer, A. Simanowitz (2005a). Money with a mission. Microfinance and poverty reduction. ITDG Publications. (253 pages)
| Synthesis of the experience of thirty with social performance management of more than 30 MFIs in 20 countries, including detailed findings on poverty outreach, impact assessment, wider social impact, impact on local financial markets and internal management issues.
|
| 5 | Copestake, J. G., P. Dawson, J-P. Fanning, A. McKay & K. Wright-Revolledo (2005b). Monitoring diversity of poverty outreach and impact of microfinance: a comparison of methods using data from Peru. Development Policy Review, 23(5), 703-24.
| Compares empirical findings from two studies into poverty outreach, and two studies of impact on poverty of a consortium of Peruvian MFIs using village banking methodology. Argues that cost-effective social performance management is possible (a) using proxy indicators to monitor poverty (b) a qualitative individual interview protocol (QUIP) to monitor impact.
|
| 6 | Copestake, J.G. (2006) Mainstreaming microfinance: social performance management or mission drift? Paper submitted to World Development (28 pages) http://staff.bath.ac.uk/hssjgc/
| A summary of the main argument in Reference 4. Sets out a general framework for assessing the double bottom line of microfinance, drawing upon summary findings from Imp-Act. It also discusses scope for extending it to commercial banks and a sector wide approach, with reference to Mexico and South Africa.
|
| 7 | Copestake, J. G. (2002). Poverty, inequality and the polarising impact of microcredit: evidence from Zambia's Copperbelt, Journal of International Development 14.
| Reports on impact of CETZAM, a DFID sponsored MFI. Finds evidence of short-term improvements in average household income, but no significant effect on employment creation. Also provides qualitative evidence to suggest participation increases inequality among clients.
|
| 8 | Copestake, J.G., Bhalotra, S., & Johnson, S., (2001) Assessing the impact of microcredit: A Zambian case study Journal of Development Studies 37(4).
| Reports on impact of PULSE, a DFID supported MFI working in Lusaka. Finds modest positive impact on average household income. Argues in favour of internalising outreach monitoring and impact assessment within MFIs, rather than relying on expensive external donor-funded impact studies.
|
| 9 | Johnson, S. (2005). Gender relations, empowerment and microcredit: moving forward from a lost decade. European Journal of Development Research, 17(2), 224-248.
| Reports on an impact assessment of FINCA-Malawi, a DFID supported programme. Finds very high drop out rates and modest impact on income. These are explained by the gender relations operating in the Malawi context. Women's priority is for small incomes rather than business development, and gender constrains their business options.
|
| 10 | Copestake, J.G. (2004). Social performance assessment of microfinance: cost-effective or costly indulgence? Small Enterprise Development, 15(3).
| A more detailed report on research summarised in Imp-Act Policy Note No.1 (reference 1 above).
|
| 11 | Johnson, S., Malkamaki, M., & Wanjau, K., (2006) Tackling the `frontiers' of microfinance in Kenya: the role for decentralized services. Forthcoming in Small Enterprise Development. Available at: www.microsave.org/dfs
| Reviews different types of financial institutions operating in the Kenyan rural context and argues that those with more decentralized approaches are more capable of extending deeper into more rural and poorer areas. Argues that donor policy has not prioritised such initiatives.
|
| 12 | Johnson, S., (2004) Gender norms in financial markets: evidence from Kenya World Development 32(8)
| Shows how gender relations at intra-household level and reflected in social norms have an impact on patterns of demand and supply of financial services within the financial market.
|
| January 2006 | |
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81
CGAP is the Consultative Group to Assist the Poorest, a multi-donor
initiative focussed on microfinance and the key policy leader
and knowledge bank in the field. Back
82
Copies have been placed in the Library. Back
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