20.

Microfinance and economic development*

Robert Cull and Jonathan Morduch

1 INTRODUCTION

Microfinance was first trumpeted as a way to unleash the productive capacities of

poor people dependent on self-employment (e.g., Hulme and Mosley, 1996). The
idea was straightforward: microfinance would transform customers’ businesses by
providing capital; that would increase borrowers’ earnings and ultimately eliminate
poverty (Yunus, 2016). The focus aligned with influential economic theory that linked
productive inefficiencies to credit market failure and pinned the blame on the vulner-
ability of standard lending contracts to information asymmetries (e.g., Stiglitz and Weiss,
1981).
Microfinance has been fêted for introducing innovations in credit contracts, particu-
larly group lending and installment lending (Ghatak and Guinnane, 1999; Armendáriz
and Morduch, 2000). More broadly, microfinance demonstrates a new mode of develop-
ment intervention, one that displaces governments as central actors and turns to market
mechanisms to deliver services through a range of institutions that integrate social and
financial goals (Conning and Morduch, 2011).
Today, however, most observers see microfinance as a useful financial service but not
a transformative social and economic intervention (Mossman, 2015). Others, reacting
against high expectations, dismiss microfinance as a failed fad, a neoliberal contrivance
that entranced donors but failed to deliver services that truly helped poor communities
(Bateman and Chang, 2012). Even sympathetic observers worry that microfinance has
“lost its moral compass” by focusing more on the profitability of lenders than on the
poverty of customers (Hulme and Maitrot, 2014).
This chapter reconsiders the claims about microfinance, both about its social and eco-
nomic impacts on households and about microfinance institutions’ own profitability as
business enterprises that serve low-income households. We argue that claims about large
impacts and profits have been exaggerated, but so have claims about failures. There is
important heterogeneity in both impacts and profit, and microfinance holds real appeal
in some contexts, especially where communities remain fundamentally under-served.1
Expectations for impacts were set high by microfinance pioneers. They argued that
they were helping to overcome financing constraints for small-scale entrepreneurs

* We are grateful for permission to incorporate parts of “The Way Statistics Shaped Microfinance”,
presented by Jonathan Morduch at the 4th IMF Statistical Forum, 17 November 2016. Morduch thanks the
Institute for Advanced Study in Princeton, where he spent 2016–17 as the Roger W. Ferguson. Jr. and Annette
L. Nazareth member. The views are those of the authors only. They are not necessarily those of the World
Bank, or their affiliate institutions.
1
For related assessments, see Hermes and Lensink (2011), Banerjee (2013), and Field, Holland and Pande
(2016). See Beck (2015) for an assessment of microfinance within the broader contexts of financial inclusion
and regulation.

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 Microfinance and economic development 551

and radically expanding their opportunities to earn. At minimum, they claimed,

microfinance would provide capital at cheaper interest rates than moneylenders and
diminish dependence on trader-lenders adept at extracting surpluses (US House of
Representatives, 1986). But more optimistically, microfinance promised to raise
income and, with newfound resources, improve education and health and empower
women. In this vision, finance was seen as a tool for personal transformation, and it
captured the imaginations of those seeking new modes of social and economic change
(Yunus, 2008).
Researchers, though, have so far failed to find sustained evidence that access to micro-
finance has, writ large, done much to reduce poverty, improve living conditions, and fuel
microbusinesses. Nearly all rigorous quantitative studies, beginning well before the use of
randomized controlled trials, fail to fully support microfinance as a tool that can power-
fully and single-handedly reduce poverty (see accounts in Armendáriz and Morduch,
2010; Banerjee, Karlan and Zinman, 2015). Still, the vision is supported in pieces, and
the most recent impact studies make a case for guarded optimism (e.g., Banerjee, Breza,
Duflo and Kinman, 2015; Breza and Kinnan, 2017).
As debates on microfinance proceed, many are turning to broader notions like
“financial inclusion” that bring microfinance together with efforts to provide saving,
insurance, and payment services in under-served communities. This broadening should
also inspire an expanded vision for microfinance itself. In this view, microfinance
is not exclusively about fueling small businesses. Instead, microfinance makes life
easier by enhancing financial liquidity, making it more likely that households can get
hold of money when they need it. Here, microfinance is often worth paying for, and
perhaps worth subsidizing, even though it rarely transforms. In this expanded vision,
microfinance helps households with the challenges of managing the ups and downs
of lives in poverty and near-poverty, even when poverty persists (Collins et al., 2009).
From customers’ viewpoints, microfinance is already seen as providing basic household
finance – even though in public documents lenders may describe microfinance as a tool
strictly for entrepreneurial finance.
Recognizing that microfinance is akin to consumer finance makes it clearer that donors
and investors must also recognize that access to microfinance is not always benign (e.g.,
Karim, 2011). In the 1980s and 1990s, the loan repayment rate coupled with evidence
of steady demand had been used as a rough indicator of impact. After all, why would
customers borrow repeatedly – and how could they repay their loans steadily and with
interest – if the borrowed funds were not yielding high returns to investment? But as
microfinance markets saturate, and borrowing is partly driven by liquidity needs, it is
easier to see how debt problems arise amid sustained demand (Schicks, 2013). The past
decades give examples of over-lending by providers and over-borrowing by customers
– with microfinance crises emerging in economies including Cambodia, Bangladesh,
Bolivia, and Bosnia – jeopardizing borrowers’ livelihoods and adding substantial costs to
already burdened lives (Guérin et al., 2015).
The chapter has five further sections. Section 2 describes the global landscape of
microfinance, highlighting fundamental differences, on average, between institutions
operating in South Asia versus Latin America, and those operating as non-governmental
organizations (NGOs) versus commercialized banks. Section 3 discusses the economic
impacts of microfinance, showing room for both optimism and pessimism. Section 4

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 552 Handbook of finance and development

turns to subsidies and microfinance from a cost–benefit perspective.2 The literature sug-
gests that microfinance impacts are modest and mixed, but, more optimistically, we also
find relatively low costs to providing microfinance (Cull, Demirgüç-Kunt and Morduch,
2017). Microfinance should thus be seen as a basic intervention that, despite modest aver-
age benefits, can still deliver favorable benefit–cost ratios, especially when well-targeted.
Section 5 describes a broader vision for microfinance and Section 6 concludes the chapter.

2 THE GLOBAL LANDSCAPE OF MICROFINANCE

The starting date of the global microfinance movement is debated. Some look to ante-
cedents in nineteenth-century credit cooperatives (e.g., Banerjee, Besley and Guinnane,
1994). Others point to seeds in informal financial mechanisms like rotating savings and
credit institutions (e.g., Rutherford and Arora, 2009). But the modern microfinance move-
ment dates to Muhammad Yunus’s early microcredit experiments in 1976, over 40 years
ago.3 Those experiments led to the establishment of Grameen Bank in Bangladesh under
an official ordinance in 1983, which in turn inspired the first global Microcredit Summit
Campaign, launched in February 1997 at a summit in Washington, DC, attended by over
2900 delegates from 137 countries. At that point, just 13 million microfinance customers
were counted globally. The summit featured the start of a nine-year campaign to reach
“100 million of the world’s poorest families” by 2005. In line with Yunus’s emphases,
the focus was on women especially, and explicitly on “credit for self-employment and
other financial and business services”. The 1997 summit has been followed by 17 annual
summits.4
Microfinance grew fast. Figure 20.1 is adapted from the Microcredit Summit Campaign’s
State of the Campaign Report 2015 (the most recent at the time of writing). It shows the
impressive success of microcredit in reaching global scale. In 1997, of the 13 million cus-
tomers counted worldwide, 8 million were among the poorest when entering (either living
on income below international poverty lines or living on income that placed them in the
bottom half of their country’s poor population).5 By 2013, the total had hit 211 million,
with 114 million among the “poorest”.6

2
The chapter focuses on the performance of microfinance institutions and the impacts of microfinance
on poverty and development. For an overview of microfinance theory, see Armendáriz and Morduch (2010).
For discussion of particular mechanisms and contracts, see Karlan and Morduch (2009) and Ghatak and
Guinnane (1999).
3
We use the words “microcredit” and “microfinance” interchangeably here, although Grameen Bank was
originally focused mainly on credit and also used the term “microcredit” as a mark of distinction to signify a pro-
poor orientation. Other early providers of microcredit include Bank Rakyat Indonesia and Accion International,
but it was Grameen Bank that created a focal point and developed the most widely replicated model.
4
See details on the Microcredit Summit website: http://www.microcreditsummit.org/about-the-cam-
paign2.html. Accessed March 21, 2018.
5
The numbers are self-reported and, while there are attempts at outside verification, few if any of the
statistics on the “poorest” are collected through careful household surveys on income and consumption. See
Bauchet and Morduch (2010) for a discussion of the survey and its limits.
6
The social orientation of the Microcredit Summit means that their leadership’s choice of “headline”
numbers deliberately focused on people, rather than the size of loan portfolios or the growth of lenders’
assets. By counting poor customers and building poverty targets explicitly into goals, the social dimension is
reinforced, an idea that lines up with Muhammad Yunus’s aim to be a “banker to the poor” and not merely a
banker.

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 Microfinance and economic development 553

250 100%

214 90%
211
Customers that are among the
200 80%
poorest (%) 205
73% 195
170
70%
62% 61% 62% 155
150 60%
133
Million

113 54% 50%

49%
100 92 40%
81
68 30%
55 Total number of
50 20%
31 borrowers (millions)
21 24
13 10%

0 0%
97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

13
19

19

19

20

20

20

20

20

20

20

20

20

20

20

20

20

20
Source: Adapted from Figure 1, Microcredit Summit Campaign, State of the Campaign Report 2015.

Figure 20.1 Microfinance borrowers, 1997–2013 (millions)

These are impressive numbers as absolutes, but in relative terms the fraction comprising
the poorest has fallen from 62 percent in 1997 to 54 percent in the 2013 data. Diversity
within the “big tent” of the movement shows in the divergence of trajectories of total bor-
rowers and the “poorest” borrowers from 2010 onward. The Microcredit Summit started
to see both a relative and absolute decline in the orientation toward poor customers.
Table 20.1 shows that the Microcredit Summit numbers are driven by large lenders
in Asia and the Pacific, and most of those are in India and Bangladesh. Of total world
outreach at the end of 2013, 79 percent of customers lived in Asia and the Pacific, including
86 percent of all women served and 89 percent of all counted as being the poorest. Given
the overlap in the two groups, it is unsurprising that 91 percent of “poorest women” are also
from Asia and the Pacific. In contrast, 16 percent of all borrowers are from Sub-Saharan
Africa or Latin America and the Caribbean, and just 8 percent of the poorest women.7

7
The published data in the State of the Campaign Report 2015 include an incorrect entry for the number
of women served in Asia and the Pacific (166 908 164 was reported as the number of total clients, and the same
figure was mistakenly reported as the number of women; Table 7 of the report). In Table 20.1 and Table 20.2
here, we substitute a number based on data from the State of the Campaign Report 2014. The 2014 report lists
161 022 985 total clients in Asia and the Pacific and 130 880 298 female clients in the region (81 percent of the
2014 total). Here, we assumed a stable gender ratio and replaced the Summit’s number of female clients with 131
195 613, which is also 81 percent of the Asia and Pacific total in 2013. Data from the 2014 report are available
at https://stateofthecampaign.org/2014/03/21/2014-report-regional-data/; accessed March 21, 2018.

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Table 20.1 Regional client numbers as percentage of global totals: customers by region,
gender, and poverty level – data as of December 31, 2013

Total (%) Women (%) Poorest (%) Poorest Women (%)

Sub-Saharan Africa 7.6 5.4 7.6 6.
Asia and Pacific 79.1 85.8 887 90.6
Latin America and Caribbean 8.2 6.8 2.4 2.1
Middle East and N. Africa 2.5 1.8 1.1 1.0
“Developing World” 97.4 99.8 99.9 99.9

Source: Adapted from Table 7, Microcredit Summit Campaign, State of the Campaign Report 2015.

Table 20.2 Microfinance heterogeneity: customers by region, gender, and poverty level –
data as of December 31, 2013

Total Clients (Million) Percentage Within Each Region

Women Poorest Poorest Women
Sub-Saharan Africa 15.9 53.8 54.7 36.8
Asia and Pacific 166.9 81.0 60.8 51.2
Latin America and Caribbean 17.4 61.6 15.8 11.5
Middle East and N. Africa 5.3 52.8 23.7 17.2
“Developing World” 205.5 92.0 55.5 45.9

Source: Adapted from Table 7, Microcredit Summit Campaign, State of the Campaign Report 2015

Asia’s numbers are aided by a large population served by self-help groups (SHGs)
in India subsidized by the National Bank for Agriculture and Rural Development
(NABARD).8 In 2013, SHGs funded by NABARD accounted for 54.4 million customers
in the Microcredit Summit data, 43.5 million of whom were among the poorest (Table
8, Microcredit Summit, 2015).9 We calculate that in percentage terms the NABARD group
accounts for 33 percent of all customers in Asia and the Pacific in 2013. In global terms,
NABARD alone accounts for 26 percent of the total. According to MIX Market (2017,
p. 32), lenders in Bangladesh in total account for another 24 million active borrowers.
Table 20.2 shows that different regions serve very different customers. In Asia and
the Pacific, we estimate that 81 percent of the 167 million customers are women. The
Microcredit Summit reports that 61 percent were among the poorest when they started,
and 51 percent were among the poorest women.
In contrast, in Sub-Saharan Africa, just 54 percent of the 16 million customers reported
to the Summit are women, and 37 percent are among the poorest women. Even more

8
For a recent survey on microfinance in India (arguing that there’s “still much to do”) see Sinha et al.
(2017). For an inquiry into SHGs in South India (and further references), see Guérin, Kumar and Agier (2010).
See also the National Bank for Agricultural and Rural Development (NABARD) at www.nabard.org.
9
Since some SHGs are accounted for independently in the Microcredit Summit data, the NABARD
numbers net out the overlapping institutions. The SHG fraction of the whole is thus slightly higher (by about 3
percent) when the other SHGs are also included (Microcredit Summit, 2015).

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 Microfinance and economic development 555

starkly, in Latin America and the Caribbean, while 62 percent of the 17 million customers
are women, just 16 percent are among the poorest, and 12 percent are among the poorest
women. There, commercial forms of microfinance have taken stronger root, part of a
broader cleavage around the aims and orientation of microfinance.

2.1 Correlates of Outreach

Microfinance has achieved remarkable scale, though penetration rates are widely dispersed
across countries. While microfinance borrowers represent less than 2 percent of the popula-
tion in roughly half of the developing countries for which data are available, they comprise
10–15 percent of the populations of Bangladesh, Mongolia, and Peru (see Cull, Demirgüç-
Kunt and Morduch, 2014, Figure 1). To understand variation, we look to the broader finan-
cial ecosystem of a country. Key factors include the business environment, particularly as it
relates to regulation and supervision of microfinance institutions (MFIs) themselves, broader
supervisory approaches within the financial sector, and competition from other providers
of financial services all affect the development of microfinance (see, for example, McIntosh
and Wydick, 2005; Ahlin, Lin and Maio, 2011; Hermes, Lesink and Meesters, 2011).
For example, Cull et al. (2015) use MIX Market data (see below) to show that the
supporting institutional framework in terms of accounting transparency, client protec-
tion, the quality of credit bureaus, and the feasibility of financial transactions through
agents are all positively associated with microfinance penetration rates. Effective client
protection (as rated by expert observers) is most strongly associated with the scale of
microfinance in a country.
Regulation and supervision also affect the trajectory of microfinance development,
though impact varies across institutional types. For example, empirical evidence from
cross-country data suggests that commercially oriented MFIs bear the costs of active
prudential supervision by making larger loans and lending less to women, both signs of
curtailed outreach (Cull, Demirgüç-Kunt and Morduch, 2011). In contrast, outreach
indicators for MFIs that rely more heavily on non-commercial sources of funding such
as donations (typically chartered as non-governmental organizations) are not affected by
prudential supervision. However, the costs of compliance are reflected in their signifi-
cantly lower profitability when actively supervised.
Similar patterns are reflected for measures of the quality of microfinance regulation
and supervision as rated by expert observers. Specifically, better developed regulatory and
supervisory regimes are associated with less outreach to poorer clients (as reflected in larger
average loan sizes) but stronger financial performance for commercially oriented MFIs
(Cull et al., 2015). The outreach and financial performance of less commercially oriented
institutions (NGOs) are not associated with broad measures of the quality of regulation
and supervision. However, NGOs tend to make smaller loans and lend more to women in
countries that score highly in terms of the ease of establishing and operating non-regulated
MFIs. (See also Hartarska and Nadolnyak 2007 and Mersland and Strøm, 2009.)
Finally, competition from other financial service providers also affects the profitability
and outreach of MFIs, but again the effects vary across institutional types. Bank penetra-
tion as measured by the number of branches per capita (or per square km) is associated with
MFIs making smaller loans and lending more to women (Cull et al., 2015). The relation-
ships are strongest for formal MFIs that rely on commercial sources of funding and make

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 556 Handbook of finance and development

traditional bilateral loans rather than the group liability loans often favored by NGO MFIs.
This suggests that commercially oriented MFIs are more likely to compete with outreach-
oriented banks, which pushes them to serve poorer clients and women. And indeed, bank
branch penetration is not strongly linked to the outreach profiles of NGO MFIs.

2.2 Financial Performance

While the Microcredit Summit Campaign aims to keep an eye on the global human
reach of microfinance with a particular focus on poor women, international donors have
worked to shift attention to the commercial prospects for microfinance. According to
“best practices”, the commercial prospects for microfinance depend on raising interest
rates on loans to levels that often are considerably higher than the rates charged to (richer)
customers of traditional banks (Helms, 2006; see Rosenberg, 2009 for a nuanced view).
The case has been made along several related lines: that the higher interest rates are
still much lower than rates charged by moneylenders; that illiquid households seek access
rather than cheap credit; and that the financial returns to cash-starved entrepreneurs are
so high that interest rates are a minor concern. Even though the arguments torture both
logic and evidence (see Morduch, 2000), the arguments have convinced policymakers
and practitioners, creating a broad defense of commercialization in social terms: high
interest rates are necessary for a microfinance institution’s profitability, it is argued, and,
in principle, that then attracts investment to allow portfolio growth and far greater reach.
It also frees donors of the need to perpetually support the sector.10
In theory, moral hazard and adverse selection in financial markets impose limits on the
ability to raise interest rates, since raising fees worsens incentives to repay. Although, all
else the same, higher interest rates increase revenues generated by loans, the higher prices
can undermine repayment discipline to such a degree that expected profit falls. In some
cases, it is impossible to find a profit-making interest rate at all.11 The promise was that
new credit contracts (particularly group lending and installment lending) could attenuate
the incentive problems, permitting microfinance to succeed and expand on a commercial
basis while serving the poor (Ghatak and Guinnane, 1999). The theory works well, but
the bottom line is ultimately empirical.
The empirical difficulty with the vision is not with the claim that some poor households
are willing to pay high interest rates. The difficulty is instead with the assertion that there
is no trade-off between pursuing commercial and social goals. With respect to interest
rates, evidence from Bangladesh (structural break) and Mexico (randomized experiment)
shows similar results: customers are sensitive to interest rates such that in the short run a
10 percent increase in prices brings roughly a 10 percent drop in credit demand (Dehejia,
Montgomery and Morduch, 2009; Karlan and Zinman, 2016). After three years, Karlan
and Zinman find an elasticity of –2.9! True, some customers are willing to pay high prices

10
See Helms (2006) for an overview of the donor vision from the Consultative Group to Assist the Poor
(CGAP), the microfinance donor consortium. See Hudon and Traca (2011) for important questions around
subsidy and efficiency.
11
See Stiglitz and Weiss (1981) for a classic paper along these lines. See Armendáriz and Morduch (2010)
for a review of theory as it relates to microfinance. See Field et al. (2013) for an example of a structural empirical
model of these mechanisms, calibrated to data from India. See Karlan and Zinman (2009) for an experimental
approach to “observing unobservables” in the context of South African consumer finance.

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 Microfinance and economic development 557

(in Mexico, roughly 100 percent annually and in Bangladesh roughly 24 percent annually)
– but the evidence shows that many are not. A lynchpin of the “win-win” commercial/social
vision (i.e., that borrowers are essentially insensitive to interest rates) fails the empirical test.
The main database on microfinance financial performance shows another set of ten-
sions. Table 20.3 draws on an appendix table in MIX Market (2017), the key industry
financial database for institutions focused on the bottom of the market. (The database
focuses on institutions that tend to be more commercial than those in the broad sweep
of the Microcredit Summit numbers described above.) The table disaggregates financial
performance by institutions with different legal status. The main lenders by customer
number are NGOs, non-bank financial intermediaries (NBFIs), and microfinance banks.
Row 1 shows that, together, the MIX counts the three kinds of institutions collectively
serving 112 million customers, or 94 percent of the data collected. We will focus on them
here (the first three columns of data in Table 20.3). NBFIs can be both for-profit or
non-profit and they hold a middle ground between (non-profit) NGOs and (for-profit)
microfinance banks. For that reason, contrasting business models are often easiest to see
through comparisons of NGOs and microfinance banks, columns 1 and 3.
Row 2 shows that NGOs tend to serve more women than the banks do (87 percent
versus 78 percent), and Row 4 that NGOs focus more sharply on microenterprise loans
(rather than small and medium-sized enterprise [SME] loans or household finance; 88
percent versus 51 percent). The comparison is even starker by volume (85 percent micro-
enterprise loans by volume for NGOs versus 31 percent for banks) (Row 6). The difference
in loan volumes reflects large differences in average loan sizes (Row 7), $289 for NGOs
versus $1021 for banks, and, with that (as seen in row 9), costs per borrower that are three
times larger for banks than NGOs. But while NGOs have managed to keep costs per
borrower low (in part by often serving customers in groups and limiting brick-and-mortar
operations), they struggle against relatively high costs per unit lent.
Given lending technologies with high fixed costs, there are large gains to making larger
loans. Row 10 shows this via the ratio of operating expenses to the size of loans. For NGOs,
the costs are about 15 percent per unit lent; for banks, the costs are just about 11 percent.
Not surprisingly, NGOs then must charge higher interest rates (about 25 percent nominally)
versus 19 percent for banks – even though NGOs have stronger loan repayment numbers
(rows 11, 12, and 13). Microfinance banks are more likely than NGOs to require that loans
be secured by borrowers via collateral, making it easier to create leverage (Conning and
Morduch, 2011), and row 14 shows that debt-to-equity ratios are more than three times as
large for banks as for NGOs. The two measures of profitability (return on assets [ROA] and
return on equity [ROE]) (rows 15 and 16) curiously show that profits are much higher for
non-profit NGOs than for for-profit banks, but our closer look at an earlier wave of data
suggests that the pattern is due to choices about capital costs made by the MIX Market (Cull
et al., 2017), and the distinction disappears with alternative (and more realistic) assumptions.
Cull et al. (2017) use the MIX Market database to analyze MFIs between 2005 and
2009, reflecting 3845 institution-years and 291 million borrower-years.12 Again, the focus

12
The 2009 data include 930 institutions with a combined 80.1 million borrowers. The Microfinance
Information eXchange, Inc. (MIX) provided data through an agreement with the World Bank Research
Department. Confidentiality of institution-level data has been maintained. The MIX Market now collects data
on social outcomes, although it did not do so initially.

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Table 20.3 Financial performance of leading microfinance institutions

(1) (2) (3) (4) (5) (6)

NGO NBFI Bank Credit Union/Coop. Rural Bank Total
(1) Borrowers, 000 34 458 38 518 38 912 2762 1495 118 849
(2) % Female 87 89 78 57 84 84
(3) Loans, 000 37 572 42 878 37 121 2832 2045 123 156
(4) % Microenterprise 88% 55% 51% 39% 27% 63%
(5) Loans, USD million 9977.8 25 946.7 48 815.7 6642.1 822.8 92 442.9
(6) % Microenterprise 85% 54% 31% 22% 30% 42%
(7) Average loan size (USD) 289 590 1021 1904 523 674
(8) Avg deposit balance 72 705 542 558 159 411
(9) Cost per borrower $40 $76 $118 $211 $81 $81

558
(10) Operating expense/loan portfolio 14.8% 13.9% 10.6% 9.9% 18.2% 12.0%
(11) Avg nominal interest 25.4% 25.2% 18.5% 16.7% 28.2% 21%
(12) PAR > 30 days 3.2% 5.1% 5.8% 6.5% 12.1% 5.3%
(13) PAR > 90 days 2.6% 4.0% 4.0% 4.8% 7.7% 3.9%
(14) Debt-to-equity 1.7x 4.5x 5.9x 4.7x 4.7x 4.6x
(15) ROA 5.8% 2.4% 1.9% 1.4% 2.8% 2.4%
(16) ROE 16.2% 13.2% 12.7% 8.2% 17.5% 13.2%
Observations 304 421 114 144 21 1033

Note: Borrowers are active borrowers (in thousands), “Loans, 000” is number of loans outstanding (in thousands). “Loans, USD million” is gross loan portfolio
in millions of US dollars. “Average loan size” is average loan balance per borrower. “Avg nominal interest” is yield on gross loan portfolio (and includes fees and
interest; not adjusted for inflation). “PAR” is portfolio at risk.

Source: Adapted from appendix table, “Key operational and legal metrics by legal status”, p. 35 of MIX Market (2017).

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 Microfinance and economic development 559

100

80

60 NGO
Percent

NBFI
40 Bank

20

0
0 1 2 3 4 5
Avg loan balance per borrower/GNI per capita for the poorest 20%

Note: Observations: 446 NGOs, 380 NBFIs, and 82 microfinance banks. The figure is restricted to
observations in which the ratio of the lender’s average loan size divided by the per capita gross national
income at the country’s 20th percentile is under 5. Original, underlying data provided by Microfinance
Information eXchange, Inc. (MIX). GNI is gross national income.

Source: Cull et al. (2017).

Figure 20.2 Operating expense per unit lent

is on variation among for-profit microfinance banks, credit unions and cooperatives,

NGOs, NBFIs, and public-sector rural banks.13
Cull et al. (2017) highlight the challenge created by high fixed costs in lending described
above. They estimate a median unit cost of $14 in operating expenses for each $100 of
loans outstanding (in 2005–09). The distribution of unit costs are skewed though, as
seen in Figure 20.2. Institutions making small loans face particularly high unit costs. The
horizontal axis measures average loan sizes normalized by the income per capita at the
20th percentile of the income distribution in an institution’s country. High fixed costs
imply cost advantages when making larger loans (holding all else the same). The median
commercial microfinance bank makes loans that are, on average, three times larger than
the median NGO. The median commercial microfinance bank thus can reduce unit costs
to 11 percent – versus 18 percent for the median NGO.
Following “best practices” promoted by donors, institutions respond by raising interest
rates. Figure 20.3 shows that, after adjusting for inflation, the median microfinance lender
charged borrowers 21 percent per year, as measured by the average real portfolio yield.
Strikingly, NGOs, the institutions that tend to serve the poorest customers, lent at an

13
As noted by Cull et al. (2017): “Participation in the MIX database is voluntary, and the microfinance
institutions in the sample tend to feature institutions that stress financial objectives and profitability (though
the database has become more broadly representative as it has expanded over time). The skew is shown by
Bauchet and Morduch (2010) who calculate that the average operational self-sufficiency ratio (a measure
of organizational efficiency) of institutions reporting to the larger, socially-focused Microcredit Summit
Campaign database is 95 percent, compared to 115 percent for institutions reporting to the MIX Market.
Scores above 100 percent reflect ‘operational self-sufficiency’”.

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60

50

40
NGO
Percent

30 NBFI
Bank
20

10

0
0 1 2 3 4 5
Avg loan balance per borrower/GNI per capita for the poorest 20%

Source: Cull et al. (2017).

Figure 20.3 Average yield on gross portfolio (real), %

average of 28 percent per year after inflation. For-profit commercial microfinance banks,
in contrast, charged an average of just 22 percent per year. Consistent with the pattern of
costs, NGOs as a group thus charge more than commercial microfinance banks.
Despite the high interest rates, and despite the finding that most firms earn positive
accounting profits, only a minority earn economic profit (which accounts fully for the
opportunity costs of inputs). Accounting profit reflects an institution’s ability to cover
its costs with its revenues. It is a helpful statistic, but it does not account for implicit
grants and subsidies. Cull et al. (2017) find that two-thirds of MFIs were profitable on an
accounting basis (weighted by the number of borrowers per institution). Turning instead
to economic profit (using the local prime interest rate as the alternative cost of capital),
they find that only about one-third of institutions were above the profit bar (weighted by
the number of borrowers per institution).
The data show that truly commercial microfinance exists, but it is not the norm. The
big policy questions are then: (1) What are the trade-offs between commercialization and
other goals, especially who is served and how they benefit? (2) More directly, how do the
subsidies line up against the impacts?

3 IMPACTS

Countries with greater financial development tend to have less poverty (Beck, Demirgüç-
Kunt and Levine, 2007), but it is unclear what the role of microfinance is. Microfinance
has not penetrated enough economies to the degree needed to say anything about
its impacts in country-level macrodata. Instead, economists have mainly focused on
establishing household-level impacts of microfinance.

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 Microfinance and economic development 561

Surveying the evidence in the 1990s, Morduch (1999) concluded:

Even in the best of circumstances, credit from microfinance programs helps fund self-employment
activities that most often supplement income for borrowers rather than drive fundamental shifts
in employment patterns. It rarely generates new jobs for others, and success has been especially
limited in regions with highly seasonal income patterns and low population densities. The best
evidence to date suggests that making a real dent in poverty rates will require increasing overall
levels of economic growth and employment generation. Microfinance may be able to help some
households take advantage of those processes, but nothing so far suggests that it will ever drive
them. (Morduch 1999, p. 1610)

That early conclusion has been broadly affirmed by a string of observational studies
that reveal modest impacts on average levels of household income and consumption
(Armendáriz and Morduch, 2010; Roodman, 2011), and early randomized controlled
trials largely concluded the same (Banerjee, Duflo, Glennerster and Kinnan, 2015). The
most recent studies, though, provide a deeper understanding of the diversity of experi-
ences (some of which are promising).
For a few observers, the evidence that microfinance is not a cure-all brands it as a failure
(e.g., Bateman and Chang, 2012). Yet that conclusion puts too much weight on the lofty
bar set by the early boasts about microfinance’s ability to turbo-charge entrepreneurial
finance and boost average household income. At the same time, it also puts too much
weight on the negative readings of the first pieces of randomized control trial (RCT)
evidence (six studies packaged together in an issue of the American Economic Journal:
Applied Economics; Banerjee, Karlan and Zinman, 2015).
Until recently, the main empirical challenge in the impact literature has been dealing
with selection bias. Measured impacts will be overstated if outcomes for microfinance
borrowers are compared to outcomes for non-borrowers without fully accounting for the
ways that participants may have advantages from the outset. Borrowers, for example, may
be more industrious and better connected to market networks, and many of these dimen-
sions are hard to control for in standard statistical frameworks. In contrast, there are cases
when biases go the other way, when, for example, MFIs target the most disadvantaged
populations.14
Beaman et al. (2015) construct an experiment to measure selection in a sample of
farmers in Ghana. They ask whether those who borrow have higher returns to capital
than those who choose not to borrow. Returns to capital are measured by measuring
changes in output after distributing capital grants to both borrowers and non-borrowers.
In general, returns to investment were large and positive, but those who had chosen not
to borrow had zero returns to capital at the margin. Comparing the returns of borrowers
to non-borrowers – without accounting for the endogeneity of borrowing – would then
wildly overstate the returns to access.
Coleman (1999) addressed selection bias in a study in Northern Thailand by forming a
group of prospective microfinance clients who signed up a year in advance to participate
with two village banks. Part of the group started receiving loans, and the other part had
to wait a year. This gave Coleman a comparison group mostly free of selection bias. The
study was not randomized, but both the borrowers and the non-borrowers had selected

14
For a review of the statistical issues, see Armendáriz and Morduch (2010).

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 562 Handbook of finance and development

into the program at the same point in time, suggesting that unobservable differences might
plausibly difference out in the treatment–control comparison. Coleman then generates
two estimates of the impact of the program. The first is an estimate using the clients who
signed up in advance as the comparison group. The second is a “naïve” estimate using
a group of seemingly similar non-participants based only on observable characteristics.
Comparing the first, preferred estimate with the second shows that the naïve estimate
substantially overstated the gains from participation participants.
Pitt and Khandker (1998) also took aim at selection bias in an observational (i.e., not
randomized) study. They used a World Bank survey of 1798 member and non-member
households of three Bangladeshi MFIs. The program rules stated that members should
hold no more than half an acre of land in order to be eligible for the program. With
the half-acre rule providing the key to their identification strategy, they find very large
microfinance impacts: notably, every 100 taka lent to a female borrower was estimated
to increase household consumption by 18 taka. The result was widely cited, but it has
not proved robust to re-analysis. Morduch (2011) shows that the half-acre rule was not
followed closely in practice, and a simpler difference-in-differences model shows little evi-
dence for increased consumption. A re-analysis by Roodman and Morduch (2014) turns
up other problems with the original (see Pitt’s rejoinder in the same journal), suggesting
the need to look elsewhere for credible evidence.
These concerns led researchers to turn to randomized controlled trials in which access
to microfinance depends in part on a randomization process. Usually, lenders select some
communities (treatment) and not others (control) using a random number generator.
Researchers then compare the outcomes in treatment and control communities after a
few years.
The best known so far are six studies published in American Economic Journal: Applied
Economics 2014 (the studies are from India, Ethiopia, Bosnia-Herzegovina, Mexico,
Morocco, and Mongolia). As a group, the papers show strong increases in borrowing
but modest impacts of microfinance. The studies show the power of randomization
together with its limits. To give an example, the paper from India investigates an urban
microcredit program in South India. Banerjee, Breza, Duflo and Kinnan (2015) found
that small business investment and profits of existing businesses increased, but not aver-
age consumption by households. No significant impacts were found on health, education,
or women’s empowerment. A follow-up two years later (after the area had been more
widely covered by microcredit) found very few significant differences between the original
treatment and control groups. The findings point to some positive changes (especially in
business investment) but not on the main household economic and social indicators. The
study takes advantage of an expansion (into an urban area) but, as a result, does not speak
to the impact of the microfinance institution on customers in its core rural locations.
More generally, the impacts are on marginal customers, who are one group of interest in
understanding the impact of expansions. The measures, though, can say nothing clear
about impacts on infra-marginal customers, who form the majority of customers.
In Mexico, Angelucci, Karlan and Zinman (2015) tracked the expansion of the
country’s largest microlender (one that uses established microcredit lending methods and
targets low-income women but which charges very high interest rates). After an average
of two years of microcredit access, the researchers “find no evidence of transformative
impacts on 37 outcomes (although some estimates have large confidence intervals)” (p.

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 Microfinance and economic development 563

151). The outcomes considered include microentrepreneurship, income, labor supply,

expenditures, social status, and subjective well-being. Again, the study is useful, but it
documents the impact of an expansion into new (and, in this case, recently violent) ter-
ritory, and cannot speak to the impact on the majority of (infra-marginal) customers in
the institution’s original locations.
In rural Mongolia, Attanasio et al (2015) find positive impacts on the entrepreneurship
of women and on food consumption by their households, but not on total working hours
or household income. In Bosnia-Herzegovina, with a better-off sample of customers but
a focus on a sample deemed relatively unpromising in terms of creditworthiness, Augsberg
et al. (2015) find positive impacts on self-employment and inventories, and, with that, a
drop in wage work. While the researchers find “some evidence of increases in profits”
they also find that consumption and savings fall and find no impact on average household
income. In Morocco, Crépon et al. (2015) also find an increase in self-employment cou-
pled with a drop in other forms of labor. The increase in business profit was thus offset
by falling income from other labor, leaving no net gain in average household income and
consumption. In rural Ethiopia, Tarozzi, Desai and Johnson (2015) investigated impacts
on income from agriculture, animal husbandry, non-farm self-employment, labor supply,
schooling, and indicators of women’s empowerment. They find that “despite substantial
increases in borrowing in areas assigned to treatment the null of no impact cannot be
rejected for a large majority of outcomes” (p. 54).
After the six papers were published, the summary view was that, in terms of impact
studies that pass muster with academic economists, the empirical case for supporting
microfinance was very weak (Mossman, 2015). The studies show a few bright spots, and
they show that microcredit generally helps businesses. But the studies show that the links
are not strong from business investment to broader measures of welfare.
The biggest concern with that conclusion comes from questions about the ability to
generalize from the studies. Pritchett and Sandefur (2015) make the case that the six
studies are an idiosyncratic sample without clear ways to extrapolate to microfinance
in other regions. Pritchett and Sandefur obtain the data underlying the six studies and
construct estimates of impact for each sample without depending on the experimental
set-ups. These estimates are prone to selection bias, but Pritchett and Sandefur show that
they tend to be more reliable predictors of impact in the given country than extrapolations
based on experimental estimates from other countries. In other words, limited external
validity undermines the ability to draw broad conclusions from the sample (though see the
Bayesian hierarchical approach to the studies developed by Meager, 2016 that provides a
systematic way to begin generalizing).
Wydick (2016) digs deeper. He notes that the six studies reflect very different microfinance
markets. For example, the experiments in Ethiopia, urban India, and Morocco took place
when microfinance was just taking root. The lack of penetration led to imprecise estimates
but some hopeful signs. For example, “Crépon et al. show point estimates on self-employment
income that are twice as large as the corresponding decreases in wage income. Banerjee et
al. find positive point estimates on both end-line measures of self-enterprise income, though
driven largely by the upper tail of businesses that pre-existed microfinance access” (Wydick,
2016, p. 263). In sharp contrast, the experiments in Bosnia-Herzegovina, Mexico, and
Mongolia took place in contexts in which microfinance had reached near-saturation (a very
high 61 percent coverage in Bosnia-Herzegovina). As a result, the experiments could only

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be run in particularly marginal contexts – and the evidence of impact was correspondingly
weakest. Wydick’s analysis is a reminder that context matters and that the six studies each
need to be understood on their own terms. (For a close examination of the Moroccan context
with a focus on low take-up rates, see the qualitative study by Morvant-Roux et al., 2014.)
Better understanding contexts may help sort why randomized evaluations of microfi-
nance tends to find low impacts while evaluations of capital grants find relatively high
impacts. Buera, Kaboski and Shin (2016) review empirical evidence on the impact of
microfinance loans relative to other similar financial interventions, concluding that both
grants of capital to microentrepreneurs and assets grants (often in the form of livestock) to
the “ultra-poor” have substantially larger impacts on recipients than microfinance loans.
The returns on modest capital grants to microentrepreneurs are sizable (up to six months
of pre-intervention profits for existing entrepreneurs), leading to greater investment
and higher sustained profits (De Mel, McKenzie and Woodruff, 2008; McKenzie and
Woodruff, 2008; Fafchamps et al., 2013; McKenzie, 2015), while asset grant programs to
the ultra-poor have generally led to substantial increases in assets, income, and consump-
tion (see Bandiera et al., 2016; Bauchet, Ravi and Morduch, 2015 give a counterexample).
Grants, of course, have an inherent advantage over microcredit in that recipients do
not incur a burden to repay. The high interest rates on microloans documented above
thus could, in principle, account for much of the lower returns on investment financed
by microcredit than that financed by grants. Microcredit repayment obligations also have
direct negative effects on income and consumption levels relative to grants. Moreover,
microcredit repayment structures typically entail installment payments beginning at or
near loan inception, which discourages investment over longer time horizons and thus
could depress longer-term profits and growth (Field et al., 2013).
But another part of the story is the clients that each of the respective interventions tar-
gets. As documented above, average loan size (an imperfect, but widely used proxy for the
wealth of borrowers) is substantially smaller for NGO MFIs than for more commercially
oriented MFIs, but many grant programs explicitly target very poor populations, for whom
impacts have proven to be especially large in some cases. In contrast, MFIs, even those that
are less commercially oriented, tend to lend to less poor clients, many of whom have access
to multiple sources of funding. Thus, microfinance may expand the funding envelope for
those borrowers to some extent, and may improve the terms on which finance is extended
relative to alternatives, but the evidence indicates that it is unlikely to have as large an
impact as grants to very poor households that generally lack other sources of funding.
Grants for entrepreneurship are also targeted in ways that could account for their
greater impact relative to microcredit. Similar to results for grants to the ultra-poor, entre-
preneurship grants have been shown to have larger impacts on those who start with fewer
assets. Whereas many microfinance programs target female borrowers, entrepreneurship
grants have shown substantially larger gains in profitability for males. Moreover, while
microcredit provides an influx of cash to borrowers, there is some evidence that in-kind
entrepreneurship grants (in the form of equipment or inventories) may deliver better
results than cash grants (Fafchamps et al., 2013). Finally, better-educated entrepreneurs
have benefited more from these grants. Since men tend to have more formal education
than women in many developing country contexts, this could in part account for the
gender disparity, and help explain the smaller impacts of microcredit targeted to women.
In short, targeting and repayment obligations can potentially account for a large share

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 Microfinance and economic development 565

of the difference in the impact of microcredit versus grants. Buera et al. (2016) argue that
comparisons with a third type of intervention, village fund programs, are instructive in
assessing the relative importance of repayment versus targeting since they represent a
middle ground between grants and microcredit. Village funds are constituted from a grant
to the village as a whole and the loans that are extended to individual borrowers carry
more favorable terms than typical microcredit contracts (7–8 percent interest rates and
a single repayment at the end of the loan).15 Comparisons with microcredit borrowers
therefore provide a rough indication of the potential impact of making the terms of
microcredit contracts less rigid. And indeed, take-up rates for village fund loans are in the
30–55 percent range, notably higher than that typically found for microcredit. In addition
to higher take-up, village fund loans have resulted in significant increases in borrowers’
income and consumption (Kaboski and Townsend, 2012; Cai, Park and Wang, 2016). In
addition, recent evidence from field experiments that relax the obligation to begin repay-
ing just after receiving a loan from a microfinance institution also find positive impacts
on investment and profits (Field et al., 2013).
Breza and Kinnan (2017) also show a promising result for microfinance, though they
do so by estimating the impact of not having microfinance. Breza and Kinnan take
advantage of an emergency ordinance issued in the state of Andhra Pradesh in South
India in October 2010. The ordinance was a dramatic response to over-lending by rapidly
growing MFIs. The ordinance caused a sudden supply shock, and Breza and Kinnan
explore the impacts on consumption, entrepreneurship, and employment. The absence
of microfinance, they find, drove significant cuts in casual daily wages, household wage
earnings and consumption (suggesting the importance of general equilibrium effects and
impacts via shifts in aggregate demand).
Banerjee, Breza, Duflo and Kinnan (2015) consider the heterogeneity of returns
to microfinance, also in Andhra Pradesh, extending insights from Banerjee, Duflo,
Glennerster and Kinnan (2015). They divide customers into “gung-ho entrepreneurs”,
who ran businesses prior to the introduction of microfinance, and “reluctant entrepre-
neurs”, who started businesses only when they started taking microfinance loans. The
gung-ho customers saw large and persistent benefits from microfinance borrowing:
revenues more than doubled and business expenses rose by 80 percent. Self-employment
hours increased by almost 20 percent and business assets by 35–40 percent. Reluctant
entrepreneurs, in contrast, saw negligible benefits. Targeting then matters: focusing on
expanding the businesses of existing entrepreneurs (the intensive margin) may do far more
to spur production than focusing on customers new to business (the extensive margin).
Reluctant entrepreneurs tended to use microfinance to displace informal capital, while the
gung-ho entrepreneurs used microfinance as a complement to informal finance.
These results, taken as a whole, suggest that the average impacts of microfinance are
modest. Still, target populations are liquidity constrained, and getting the right product
to the right population can yield substantial impacts.

15
The village fund studies are also instructive because they were undertaken in China and Thailand,
countries where the gender gap in education is relatively small. Similarly positive results for male and female
borrowers from village funds suggest that the gender disparities found for microcredit might be eliminated if
loans were extended to equally capable men and women.

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 566 Handbook of finance and development

800

700

600

500 NGO
Dollars

400 NBFI
Bank
300

200

100

0
0 1 2 3 4 5
Avg loan balance per borrower/GNI per capita for the poorest 20%

Note: Observations: 364 NGOs, 303 NBFIs, and 71 microfinance banks. The figure is restricted to
observations in which the ratio of the lender’s average loan size divided by the per capita gross national
income at the country’s 20th percentile is under 5. Original, underlying data provided by Microfinance
Information eXchange, Inc. (MIX). GNI is gross national income.

Source: Cull et al. (2017).

Figure 20.4 Subsidy per borrower

4 SUBSIDY AND BENEFIT–COST RATIOS

In the face of modest average impacts of microfinance, it is natural to wonder

about relative costs. Having established the lack of profitability in economic (versus
accounting) terms, Cull et al. (2017) calculate the extent of subsidies (Figure 20.4).
They find that, on average, subsidies amounted to $132 per borrower, but again the
distribution is highly skewed. The median microfinance institution used subsidies at a
rate of just $26 per borrower, and no subsidy was used by the institution at the 25th
percentile.
There are two important implications. First, given how low subsidies are for some
institutions, even modest impacts on customers could yield impressive cost–benefit
ratios in social and economic terms. Second, the data show that subsidy is large for some
institutions, especially – and surprisingly – the most commercialized institutions. As a
group, their subsidy averages $275 per borrower, with a median of $93. In sharp contrast,
customers of NGOs, which focus on the poorest customers and on women, receive far less
subsidy: the median microfinance NGO used subsidy at a rate of $23 per borrower, and
subsidy for the NGO at the 25th percentile was just $3 per borrower.
In addition, Cull et al. (2017) show that the subsidies do not appear to be transitional.
Their analysis shows that subsidies in fact continue to be important in microfinance, even
for older institutions. Summing across the institutions, the total subsidy – both implicit
and explicit – was $4.9 billion as of 2009. Of the total subsidy, three-quarters went to

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 Microfinance and economic development 567

institutions that were older than ten years. Almost all of the subsidy came via equity
grants and cheap capital rather than direct donations.
The Cull et al. (2017) findings on modest but persistent subsidy suggest that the conver-
sation needs to shift toward measured impact so the costs analyzed by the authors can be
compared to benefits. Ultimately, cost–benefit ratios are of key interest for policymakers,
and – even with modest benefits – microfinance cost–benefit ratios can compare favorably
to intervention. However, systematic work here has hardly started.

5 MICROFINANCE AS LIQUIDITY SERVICES

Most of the discussion above is framed in terms of impacts on business and entrepreneur-
ship. It was posited that through business comes increases in income and, from that, social
gains. This, though, is a particular (and narrow) view of finance. Finance is also needed by
households to purchase consumer goods, however, and to help with basic, week-by-week
financial management. The kinds of questions that researchers asked with RCTs followed
from the business focus, and the same perspective was carried forward by the Microcredit
Summit Campaign, donors, and investors.
An alternative view emerges from financial diaries. The diaries are most closely associ-
ated with the work of Collins et al. (2009), which details the financial lives of low-income
families in Bangladesh, India, and South Africa. Stepping away from large-scale statistical
efforts, Collins et al. (2009) take a close-to-the-ground approach, aiming to track the
entire financial lives of a small set of households in both rural and urban areas. They
use the tools of empirical corporate finance to create linked balance sheets and income
statements for the households.16 Their focus is on the complete set of household financial
transactions connected to earning, spending, saving, borrowing, and informal sharing.
Rather than test hypotheses emerging from the economics literature, the researchers’ goal
was to watch and listen, and only then try to make sense (inductively) of households’
observed choices.
The picture that emerges is very different from the early microfinance vision. Collins et
al. (2009) find that even if microfinance does not raise income or launch businesses, it may
help households cope with the ups and downs of incomes and needs that arise through
the year. A central finding of Collins et al. (2009) can be boiled down in terms of global
poverty statistics: the hidden burden of living on $1 a day per person (or wherever the
global poverty line is set), is that rarely does anyone actually receive $1 per person each
and every day. Instead, farmers have high and low seasons, laborers have better and worse
months, and many people are vulnerable to the ups and downs created by boom-and-bust
economic business cycles. The financial problem of being poor, then, is both an issue of
low resources on average and an issue of the uncertainty and unpredictability of those
resources. Microfinance can then be an important asset in smoothing consumption in
the sense of Deaton (1992), not just for investment. Not surprisingly, this is how Stuart
Rutherford observes Grameen Bank’s microfinance customers actually using their money
(Collins et al., 2009, Chapter 6).

16
For a related method see the important work of Samphantharak and Townsend (2009).

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 568 Handbook of finance and development

Put another way, even if poverty rates (defined by a given level of average income)
are not noticeably affected by microfinance access, some of the consequences of being
poor – such as having difficulty finding funds to meet health crises – may be ameliorated
by having access to extra money when needed (Gertler, Levine and Moretti, 2009). Such
access may be vital during emergencies (and are due more attention from policymakers
and researchers), but it is a very different story from the standard narrative upon which
the microfinance sector was built. Indeed, it is a very different story from that behind
efforts to address global poverty.
To the extent that this is so, microfinance has both been oversold and undersold. It has
perhaps been missing its biggest market – the billions of wage workers who have no inter-
est in (nor time for) self-employment but whose needs for finance are fundamental to their
well-being. This is not an argument for abandoning the aim to serve the poor: some of the
poorest workers anywhere are wage workers. The argument is instead to think differently
and bigger, while not losing grasp of the original vision (and tensions) of microfinance.17
This shift takes the discussion from microfinance to financial inclusion, a broader topic
than can be addressed in this chapter. Financial inclusion goes beyond loans to saving,
insurance, and payments (see, e.g., Singh, 2017).

6 CONCLUSION

Microfinance has been duly celebrated by the 2006 Nobel Peace Prize. The early innova-
tors can claim remarkable achievements: they demonstrated that it is possible to provide
reliable financial services in poor communities, to create workable business models, to
reach women especially, and to do so relatively cheaply and at wide scale. That, in itself, is
worth paying attention to. Beyond demonstrating the possibility of new kinds of financial
institutions, microfinance has inspired innovations adopted in other sectors, including
health, education, and energy. Early efforts to build social businesses and foster social
investment owe their inspiration to the pioneers of microfinance (Yunus, 2008; Conning
and Morduch, 2011).
Yet microfinance was always a contested idea, and statistics were collected to highlight
and promote some strands of thought over others. The notable divides were along social
versus commercial lines. The conflicts within microfinance have largely been constructive,
but the statistics have both revealed and (implicitly) concealed parts of the debate. In
terms of statistics and data, the history of microfinance shows that a full view is only
possible when very different kinds of data are brought together. The full picture cannot
be seen from just reading tables documenting the numbers reached, nor spreadsheets of
financial performance, nor randomized controlled trials of economic and social impacts.
The evidence described in this chapter poses challenges for microfinance. The data
show modest subsidies and modest impacts. They show growing scale, but a shift away
from the poorest. And they show regional differences in the kinds of populations served
by microfinance. If microfinance has been a clear success institutionally, how to ensure
impacts on customers is far less clear.

17
La Porta and Shleifer (2014) argue that small, informal businesses are often inefficient and that there are
efficiency gains from spurring formal business and the expansion of wage employment.

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Investors and entrepreneurs have difficult choices to make in enabling the next steps
for microfinance. One vision, provoked by evidence from financial diaries, opens up the
possibility of extending the ideas of microfinance to hundreds of millions of potential
customers, many in urban areas and most with jobs, who lack a strong interest in business
investment. They instead seek finance to help manage cash flows and seize opportunities
requiring lump sums. The kinds of impacts to expect will not be those initially envisioned,
nor those tested in most quantitative studies. Another, complementary vision entails
redesigning products to better fit the needs of existing entrepreneurs. The data from
the Microcredit Summit suggest that microfinance can evolve at mass scale, while the
(re-examined) data from the MIX Market suggest that subsidy still matters but, in some
cases, it is small enough to generate appealing cost–benefit ratios.
Microfinance is far from dead, but it needs fresh thinking.

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