- Top charities
Published: May 2012
Published: May 2012
Microfinance organizations generally provide financial services - particularly loans, savings, and insurance - to people who are unable to obtain these services via traditional banking.
Microfinance is different from how it is usually presented. We feel that much discussion of microfinance - particularly microlending - is clouded by commonly held, appealing myths that have little or no basis in reality. Our 2009 blog post, 6 myths about microfinance charity that donors can do without, discusses and debunks myths including "microfinance has been shown to reduce poverty," "microfinance has been shown to work best when targeting women," and "microfinance donations get lent out again and again, and thus leveraged far more than other donations."
One point we feel most donors are particularly misled on is the question of how people use, and benefit from, micro-loans. Microlending is often presented as a way to help people escape poverty by giving them the capital to start or expand small businesses. However, the reality appears more complex: it appears that loans are often used for food, visits to the doctor, and other consumption. This isn't a bad thing - the poorest people in the world face considerable financial uncertainty, and loans may empower them to manage their own lives.1
For those interested in learning more about microfinance, we recommend the book Due Diligence.
There does not appear to be strong direct evidence that microfinance improves clients' incomes (or other measurable aspects of well-being), and the highest-quality studies of microloans in particular do not appear to show strong effects. (See our discussion of these studies on our blog as well as a more recent update by David Roodman of the Center for Global Development, whose work in this area we are very familiar with and believe to be of high quality.2)
Most microlending institutions do report data on their interest rates and repayment rates, and one take on microfinance is that when clients are taking out loans at relatively high interest rates and paying them back, this itself is evidence that the clients are being empowered (see our discussion with David Roodman). However, in examining microlending organizations, we have generally seen high dropout rates (i.e., many clients seem to pay back their loans but drop out of the program), and have seen some reasons to be concerned that loans can do harm as well as good to the borrowers. (See our discussion on our blog.)
Previously, we examined microfinance organizations using a set of critical questions both about microlending and microsavings. In searching for institutions with strong answers to these questions, we found that:
Another obstacle to finding great microfinance charities is the fact that telling oversimplified stories, and using oversimplified numbers, seems so widespread in the sector. See our posts on the potential difficulty of understanding a microfinance institution's true interest rates and repayment rates.
We have done substantial investigation of microfinance organizations and have not seen it pay off in finding outstanding giving opportunities, so for the time being we have de-prioritized this area (though we may revisit it at a later point).
We identified microfinance organizations to contact, completed in-depth reviews of promising organizations, and identified the following recommended organizations:
In a past investigation, we identified the Small Enterprise Foundation (SEF) as a standout organization. SEF is a microfinance institution operating primarily in the Limpopo province of South Africa. SEF demonstrated a strong focus on collecting the information necessary to assess its social impact, including (a) data on how many clients are dropping out of the program (and why), and (b) data on whether SEF is succeeding in its attempt to target people with very low incomes. We also had a positive impression of SEF when we visited its operations in South Africa (see our site visit notes) and we continue to check in on its operations. That said, we have concerns about SEF's social impact, particularly regarding its substantial dropout rates.
Roodman, David. Latest Impact Research: Inching Towards Generalization. http://microfinance.cgap.org/2012/04/11/latest-impact-research-inching-t... (accessed May 11, 2012). Archived by WebCite® at http://www.webcitation.org/67aLL8rPI