Recently I've been hearing a lot about the difficulties involved in understanding microfinance customers and tailoring products to their needs. Microfinance experts across the industry have identified the need to understand microfinance customers better in order to meet the "double bottom line"; that is, provide a financial return as well as creating a positive social impact.
Making a profit and fulfilling social needs simultaneously is challenging. In fact, some argue that the "products for the poor" model is fatally flawed because the goal of profit is incompatible with the goal of generating social benefits. Unable to turn a profit, organizations suffer from "mission drift."
A problem with microfinance is that profit margins have to be very narrow to keep costs down. If prices rises even a little, the world's poorest people–for whom these products are intended–will not be able to afford them. This is why it is often necessary to keep a product range simple: offering one product to thousands, or millions, of people takes advantage of economies of scale. Mobile money in particular takes advantage of this scalability.
Where a market alone cannot support a product, non-profit funders (such as NGOs and multilateral development banks) may step in to provide support. This has been the case with both microcredit and mobile money, both of which are profit / non-profit hybrids. These kinds of partnerships have an advantage in that they can make use of the innovative capacities of private enterprise, while staying focused on achieving social goals.
There is, however, a catch. Whether microfinance is socially beneficial or not is difficult to measure. David Roodman, in his book Due Dilligence: An Impertinent Inquiry into Microfinance (2012), argues strongly that it is almost impossible to prove that microfinance alleviates poverty. For every success story, he says, there is one of disaster, such as easy credit leading to unmanageable debt.
This doesn't mean, he qualifies, that microfinance is a waste of time. It’s just not the "silver bullet" that many people have hoped for. Rather, microfinance needs to be conceptualized as one of many methods to stimulate socioeconomic development, along with roads, ports, job creation, anti-corruption measures, and the development of governance.
So, how can we figure out just what is the place of microfinance in a broader swathe of socioeconomic development initiatives? It requires good, solid research to figure out what is working where, how, and for whom. One aspect of Roodman's book that I really appreciate is his insistence that both quantitative and qualitative research methods are necessary to make our assessments, including ethnography and randomized studies.
Quantitative data can tell us what is going on, but generally not not why. It can be really useful to get a big picture view of what is working where, and help to us frame questions for further investigation. If the numbers tell us that mobile money is far more successful in Kenya than, say, Haiti, we can send in teams to find out what is happening on the ground.
Qualitative research, such as ethnography, can reveal patterns of behaviour that we never would have expected. The best example of this that I have come across in recent times is David Stoll's study of a Guatemalan village, described in his 2013 book "El Norte or Bust!: How Migration Fever and Microcredit Produced a Financial Crash in a Latin American Town."
Over many years of repeated visits, Stoll watched as the community he workd in generated two of its very own speculative bubbles: one in credit, and one in the housing market. High aspirations, migration fever, private lending, swindling, and a desire to purchase property in one's own town led to a situation in which many people seemed to be in piles of debt.
His description shows just how much microcredit's impact is contingent upon a range of social, cultural, and economic factors that vary from person to person. Microcredit was part of some of this town's success stories, and some of its failures. But it was always just a part of the story, not the whole story.
Ethnographies such as Stoll’s illustrate that real-life financial situations are complex. Rather than being discouraged by the analytic difficulties in dealing with complexities, however, we should embrace them. There is no escaping the human dimensions of socioeconomic development, and the historical fact that it occurs through multiple means.
Moreover, the economic approach of judging success based on consumption levels is not appropriate when it comes to microfinance: just because people are using more services does not mean they are better off. Without qualitative data documenting people's needs, opinions, and behaivours, whether the "double bottom line" has been met or not will generally be judged from the narrow perspective of providers, not the richly diverse perspective of people who they are supposed to be helping.
Roodman, David. 2012. Due Diligence: An Impertinent Inquiry into Microfinance. Brookings Institution Press.
Stoll, David. 2013. El Norte Or Bust!: How Migration Fever and Microcredit Produced a Financial Crash in a Latin American Town. Rowman & Littlefield Publishers.