Despite the apparent success and popularity of microfinance, no clear evidence yet exists that microfinance programmes have positive impacts (Armendáriz de Aghion and Morduch 2005, 2010; and many others). There have been four major reviews examining impacts of microfinance (Sebstad and Chen, 1996; Gaile and Foster 1996, Goldberg 2005, Odell 2010, see also Orso 2011). These reviews concluded that, while anecdotes and other inspiring stories (such as Todd 1996) purported to show that microfinance can make a real difference in the lives of those served, rigorous quantitative evidence on the nature, magnitude and balance of microfinance impact is still scarce and inconclusive (Armendáriz de Aghion and Morduch 2005, 2010). Overall, it is widely acknowledged that no well-known study robustly shows any strong impacts of microfinance (Armendáriz de Aghion and Morduch 2005, p199-230).They go on to comment that -
Because of the growth of the microfinance industry and the attention the sector has received from policy makers, donors and private investors in recent years, existing microfinance impact evaluations need to be re-investigated; the robustness of claims that microfinance successfully alleviates poverty and empowers women must be scrutinised more carefully. Hence, this review re- visits the evidence of microfinance evaluations focusing on the technical challenges of conducting rigorous microfinance impact evaluations.
There are only two Randomised Control Trials [RCTs] of relevance to our objectives; neither has appeared in peer review form. In our judgement, one has low-moderate and the other high risk of bias; neither finds convincing impacts on well-being. We found nine pipeline studies reported in ten papers, all based on non-random selection of location and clients; most have only ex-post cross-sectional data, some with retrospective panel data, allowing only low validity impact estimates of change in outcome variables.More pungently, the conclusion states that -
We find no robust evidence of positive impacts on women’s status, or girl’s enrolments - this may be partly due to these topics not being addressed in valid studies (RCTs and pipelines). Well-known studies which claim to have found positive impacts on females are based on weak research designs and problematic IV analyses which may not have survived replication or re-analysis using other methods, i.e. PSM.
Given their importance in validating perceptions of the beneficence of microfinance interventions, we devote considerable effort to the assessment of with/without studies which have low inherent internal validity notwithstanding analysis with sophisticated methods. In particular, we discuss the two historically most significant studies (Pitt and Khandker 1998 and USAID funded studies in India, Zimbabwe and Peru – see sections 3.4.1 and 3.4.2, which, partly as a result of their prominence, have been replicated. The replications fail to confirm the original beneficent findings, and conclude that there is no statistically convincing evidence in these studies to either support or contradict the main claims of beneficence of microfinance. This is partly because of their weak research design. ...
[O]ur report shows that almost all impact evaluations of microfinance suffer from weak methodologies and inadequate data (as already argued by Adams and von Pischke 1992), thus the reliability of impact estimates are adversely affected. This can lead to misconceptions about the actual effects of a microfinance programme, thereby diverting attention from the search for perhaps more pro-poor interventions. Therefore, it is of interest to the development community to engage with evaluation techniques and to understand their limitations, so that more reliable evidence of impact can be provided in order to lead to better outcomes for the poor.
If indeed there is no good evidence to support the claim that microfinance has a beneficial effect on the well-being of poor people or empowers women, then, over the last decade or so, it might have been more beneficial to explore alternative interventions that could have better benefitted poor people and/or empowered women. Microfinance activities and finance have absorbed a significant proportion of development resources, both in terms of finances and people. Microfinance activities are highly attractive, not only to the development industry but also to mainsteam financial and business interests with little interest in poverty reduction or empowerment of women, as pointed out above. There are many other candidate sectors for development activity which may have been relatively disadvantaged by ill-founded enthusiasm for microfinance. Even within the microfinance sector, the putative success of basic models of lending such as the Grameen Bank and related models, may well have diverted attention from opportunities for alternatives; for example, recent studies (Collins et al. 2009) have pointed out that poor people do not just need credit but access to other financial products such as savings, and insurance. Also, the financial products offered by MFIs must become more flexible and adjust to rapidly changing circumstances faced by poor people. Many MFIs have already moved in that direction, providing more diverse and flexible products.
However, it remains unclear under what circumstances, and for whom, microfinance has been and could be of real, rather than imagined, benefit to poor people. Unsurprisingly we focus our policy recommendations on the need for more and better research. Thus, to have obtained a clearer picture on the impacts of microfinance, on whom, where, and when (e.g. under what circumstances), and the mechanisms which account for these effects, more and better quality quantitative evidence was required at an earlier stage in the diffusion of this intervention. While there is currently enthusiasm for RCTs as the gold standard for assessing interventions, there are many who doubt the universal appropriateness of these designs. Indeed there may be something to be said for the idea that this current enthusiasm is built on similar foundations of sand to those on which we suggest the microfinance phenomenon has been based.