Update on Microfinance Research
- We have been continuing our process to find great microfinance charities. In this post we discuss our process to date and the evolution of our criteria.
As part of the process of distributing $250,000 to economic empowerment charities in Sub-Saharan Africa, we asked a number of large U.S.-based microfinance organizations to apply for our grant. We found that, while some of these organizations own or provide direct financial support to microfinance institutions (MFIs), a large part of what these organizations do involves technical assistance to MFIs, an activity for which there appears to be little evidence of impact. Furthermore, we did not identify a U.S.-based organization working in Sub-Saharan Africa that had a strong process of determining whether the MFIs it works with are able to answer our questions for microfinance charities (more at http://blog.givewell.net/2009/11/20/two-charities-one-microfinance-institution/).
We wondered if approaching the MFIs themselves, rather than the U.S.-based networks, would yield stronger answers to our questions (more at http://groups.yahoo.com/group/givewell/message/130). We contacted a number of Sub-Saharan African MFIs, and identified the Small Enterprise Foundation as the strongest MFI we have seen to date--it stands out from other MFIs we've looked at for its monitoring of clients' poverty levels and reasons why clients drop out of the program, and for its commitment to self-evaluation.
What we're doing to find more strong MFIs
Since disbursing our Economic Empowerment grant, we have continued to research MFIs, expanding our geographic focus from Sub-Saharan Africa to all developing countries. We have done the following to identify promising MFIs:
- We downloaded all "Social Performance Standards" reports from Mix Market. We believe this is a good starting point for finding MFIs that (a) are committed to such "social impact" (as opposed to purely financial) goals as serving the poorest and providing high quality service, and (b) have data, and are willing to share it publicly, about their progress toward these social goals. As of early April 2010, there were about 170 MFIs with reports listed at http://www.themix.org/standards/sp-reports.A few other MFIs were added to this list based on referrals from Imp-Act, a group working to promote "social performance management" by MFIs.
- Of the MFIs on this list, 114 had accepted donations in the recent past or had indicated that they were seeking donations currently, according to their Mix Market profile. We did not look further at MFIs that did not appear to accept or be seeking donations.
- Based on their responses to certain questions in the Social Performance Standards report and information available on their Mix Market profiles, we were able to focus in on those MFIs that appeared most likely to be able to answer our questions for microfinance charities. Specifically, we looked for evidence that an MFI tracks data on clients' standard of living and either surveys dropouts for reasons why they left the program (if loans are the primary financial service the MFI offers) or offers voluntary savings (in which case we have a different set of questions).These screens left us with 59 MFIs to investigate further.
We have compiled additional information on these 59 MFIs, based only on publicly available documents, and identified 3 promising ones (each had moderate to high quality data publicly available on clients' standards of living as well as either evidence of regular monitoring of dropout/repayment rates or have a focus on voluntary savings), which we have recently contacted.We hope to speak with these 3 MFIs about our remaining questions and draw on this experience to decide on next steps with the remaining MFIs that have passed our initial screens.
Rethinking our criteria
In thinking about how to separate the great MFIs from the average ones, we have revised our criteria a number of times. The following outlines our thought process and our remaining questions:
- We originally looked for rigorous evidence that clients' incomes had been raised by their participation in microfinance programs. After investigations of a number of organizations and the independent literature on the subject, it became clear that impact studies performed by microfinance charities did not establish that microfinance caused higher incomes. Furthermore, the few rigorous studies of the impact of microfinance that exist did not show that microfinance increased incomes (more at http://blog.givewell.net/2009/09/07/microfinance-evidence-of-impact/).
- We shifted our focus to microfinance as a service that allows the poor to have more control over their cash flows. Viewing microfinance as a service, rather than a program to raise incomes, led us to ask a different set of questions. We have been working to refine this set of questions as we read more, speak with MFIs and leaders in the field, and think harder about which questions lead to the clearest picture of an MFI's impact.
- Is the charity creating self-sustaining institutions? If an organization is providing a service people are willing to pay for, this seems like a good indication that the service is valuable. In practice, however, we have not found that this is a very useful question. For one, if an MFI is able to cover its own costs, this raises questions about the MFI's ability to use additional donations productively. The concept of "a history of creating self-sustaining institutions" may be helpful at the network level, but is less helpful at the MFI level. Secondly, as Holden noted in a recent blog post, there seem to be certain areas where the mere fact of selling something for a non-trivial price would seem to indicate a certain success in filling a need, even if not all costs are covered. As such, looking at interest rates, compared with standard rates in a country, may be a more useful metric.
- Does the charity have high repayment rates? We've discussed at length on our blog why interpreting an MFI's repayment rate is often complex. We have been thinking about ways that we can use standard measures of delinquency, many of which are reported on Mix Market, to estimate a lower bound on an MFI's repayment rate. We have not defined what we consider a "high" and a "low" repayment rate, but informally, we consider repayment rates below 90% to be worrisome, and we suspect that an MFI with strong systems and practices would have a repayment rate above 95%.
- Who are the customers? The question of how poor the customers are is particularly important if loans are heavily subsidized (to the point of having extremely favorable interest rates and/or forgiveness of repeated default). Based on our investigations of interest rates and repayment rates, we suspect that this kind of heavy subsidy is rare and that MFIs nearly/always are highly concerned with profit and loss. At this point, we are somewhat hesitant to disqualify an MFI on the basis that its customers "aren't poor enough" (since it seems very unlikely that clients are wealthy by our standards), but we still believe there is great variation in how poor clients are and that it is important for both MFIs and donors to have a clear sense of where they stand.
- How many people drop out of the program and why do they drop out? Like repayment, calculating a dropout rate can be complex and MFIs may use different methods and definitions (for more, see this paper). Information on an MFI's dropout rate and evidence that it is monitoring the reasons why clients leave the program is key to our judgment of whether an MFI is creating more benefit than harm with its loans. An MFI won't earn 2 or 3stars if it is not able to show that it tracks dropout rates (and is able to describe how this is calculated) and the reasons behind it.
- Are clients protected against harassment from loan officers and group members? Do clients become over-indebted? Also key to our judgment of whether an MFI is causing harm is evidence that an MFI has strong systems for monitoring client protection and indebtedness. We would like to see past reports of how this was monitored, what such monitoring activities found, and how they were dealt with. An initiative by the Center for Financial Inclusion, the Smart Campaign, defines 6 dimensions of appropriate treatment of clients. We plan to ask MFIs what systems they have (and what these systems have found) to ensure that they have effective practices on 4 of these dimensions: avoidance of over-indebtedness, appropriate collections practices, ethical staff behavior, and mechanisms for redress or grievances.
We expect that we will continue to refine our criteria as we review more MFIs and welcome any feedback on the points above.