MYC4

So why is it so hard to come up with a simple answer to this question?

A true micro-entrepreneur

When conducting any social science, a researcher must always have a number of limitations and assumptions. This is a direct heritage from the natural sciences where themes and scientific fields are more easily demarcated. However, within social science these limitations and assumptions will always reflect some sort of bias. For example, a focus on only economic factors indicates that one believes that improved economic conditions will necessarily lead to a better life. Picking certain Microfinance Institutions(MFIs) and environments to study will reflect the conditions and performance of that specific context.

Sadly, the real world is not fit for a lab with fancy models and equations. Surely they can help researchers to some extent if they start out from an informed basis, however, this has not been the case for many of the studies to date. Three issues make it hard to conduct an informed search for proof of the positive effects of microfinance. The first of these is the environment around the loan takers and MFI. The state of the economy affects all businesses, both multinational corporations and micro-enterprises. Therefore, bad economic conditions will make it hard for borrowers to pay back their loan, and thus the likelihood of default increases, independent of the performance of both MFI and business. This has led to the development of Randomized Controlled Trials (RCTs) which measure the difference between two groups of people, one receiving microfinance services, and the other being excluded from these services. By using this methodology, the environment becomes less of a factor since both the impact group and control-group are in the same environment[2].

A sustainable and well-run MFI

However, RCTs do not solve the two other problems connected with microfinance impact studies, the quality of the MFI has a huge effect on its ability to improve the livelihood of its borrowers. A badly run MFI will surely lead to entrepreneurs not being able to pay back their loans as a result of bad operational procedures. Therefore, when making a study of the impact of microfinance, it is important to be weary of how the MFIs conduct their business and try to exclude those that do not have sustainable operations. For example, several researchers have noted the importance of training, collateral, and insurance as prerequisites for getting a loan[3]. If these procedures and regulations are not in place, you risk doing the borrower a disservice by luring them into a debt they cannot repay.

Connected to this is the wider discussion about microfinance, as studies have a tendency to see microfinance as only microcredit, which it is not. Microfinance includes a wide range of services such as economic training, savings accounts, and insurances. To claim that such services do not under any circumstances lead to a better economic infrastructure would seem hasty, just imagine your own life without access to these services. The same goes for microcredits. Banks are the mechanism in society that transforms unproductive capital into productive capital, microcredit is simply the same mechanism channeling needed capital to the sectors of the economy unattractive to regular banks. To say that this mechanism surely will have an adverse or no effect on the economy would seem reckless and simply wrong. Thus, any study of microfinance would require a study of how these services function together as they depend on each other for a positive impact.

Another micro-business

Third, the width and length of a study will impact which and for how long factors are included. Regarding width, any research must limit its study to looking at certain economic or social factors. However, even though a borrower might not have increased his or her monthly income as a result of the loan, should not the fact that he or she feels emancipated and more economically secure be included in the study? The real world cannot always be explained only by looking at indicators and numbers [4]. Furthermore, the time span of the study will also impact the results. Many of the published studies have a very short time span of only two or three months, but we know that many investments made in companies in other economies do not expect to pay off within several years, so why should this necessarily be different for micro-enterprises?[5]

To conclude, before making general claims about the efficiency of microfinance as a tool to fight poverty one must remember that it is an instrument that comprises a wide range of services being used in different ways in varying environments.

To ask the question whether microfinance reduces poverty would be like asking the question whether banks improve the economy.

As we saw in the recent economic crisis, this depends on the banks practices as well as the regulatory framework surrounding it. Suffice to say that microfinance is a tool that, if it is used responsibly and with regard to the environmental conditions, have the power to financially include the unbankable of the world by giving them access to services such as loans, savings accounts, and insurances. One does not have to be a researcher to see that this in itself is a desirable end-goal.