Misunderstanding the average impact of microcredit?

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Photo: Peter Haden. Microfinance center leaders tally the week’s loan payments in India.

By Milford Bateman and Maren Duvendack

A recent article on the “average impact of microcredit” by Dr. Rachel Meager (LSE) has received much praise over the past few weeks. Meager deploys Bayesian hierarchical modelling to provide a new take on the argument in favour of a reformed system of microcredit. Her work builds on the data provided by six randomized control trials (RCTs) conducted by Abhijit Banerjee and colleagues (see Banerjee, Karlan and Zinman, 2015). Meager makes an attempt to exculpate the microcredit model from the awkward fact that its impact on the poor has been very much less than originally envisaged. She also claims to show that the critics have overstated the negative impact of microcredit. Microcredit should therefore continue to be a policy intervention, she goes on to say, but there need to be changes in the operating methodology for a more meaningful development impact to be possible in the future.

While seemingly a well-meaning attempt to explore the impact of microcredit, we were struck by the way that her overall argument appears to seriously misunderstand, and it definitely misrepresents, the existing research on microcredit as a development instrument.

Meager begins by looking at the various ‘microcredit meltdowns’ that have regularly occurred around the world, starting with Bolivia in 1999. These, she claims, arose thanks to the inefficient lending practices of even the best-intentioned microcredit institutions. Perhaps the problems arise, she speculates, because “loans (…) have to be repaid frequently”? Or maybe it is because of a low take-up of loans, which she attributes to microloans ‘not being as desirable’ as many hoped they would be. Or perhaps it is because most microcredit institutions are forced to charge high interest rates in order to “cover the costs of administration”? Meager seems to be suggesting that well-meaning microcredit institutions simply do not have sufficient knowledge of what their clients really want and need, nor do they make sufficient surpluses in order to lower their admittedly high interest rates, and that these operational factors are responsible for the growing number of disasters that have affected the global microcredit industry. Crucially, this might mean that things can be corrected by giving better advice and technical support to microcredit institutions so that they can better help the poor.[1]

Meager’s explanation here is entirely unconvincing. She claims that “microloans often have very high interest rates to cover the costs of administration” when it is actually clear that in all but a handful of the remaining non-profit microcredit institutions, high interest rates are purposely deployed in order to generate high profits (Sinclair, 2012, Militzer, 2014). In fact, there is largely consensus about who is mainly responsible for the ‘microcredit meltdowns’ and client over-indebtedness that increasingly disfigure the global microcredit industry today – the often very knowledgeable CEOs and senior management of leading microcredit institutions. Reckless lending is now seen as an increasingly overt problem in, if not a defining characteristic of, the global microcredit industry (Bateman, 2010; Bateman, Blankenburg and Kozul-Wright, 2018a; Black, 2012; Butcher and Galbraith, 2019; Guérin, Labie and Servet, 2015Guérin, Morvant-Roux and Villarreal, 2013).

Furthermore, several of the six case studies by Banerjee and colleagues upon which Meager’s own analysis is based, are themselves flawed. Simply covering administration costs does not appear to be what most of the microcredit institutions they examined had in mind. Rather, generating profit was usually the priority. For example, Angelucci, Karlan and Zinman (2015) focused on Banco Compartamos, Mexico’s largest microcredit bank. Their paper entirely ignores the fact that Banco Compartamos has enjoyed spectacular profits for many years and, moreover, that the profits were largely channeled into the spectacular salaries, bonuses and dividends that were enjoyed by the co-CEOs, senior managers and core investors (see Butcher and Galbraith, 2019). Also ignored was any serious discussion of the reckless lending practices that were deployed by Banco Compartamos in order to generate such spectacular profits and which, as a direct result, have plunged many poor Mexican women into serious over-indebtedness (Correa and Vidal, 2018).

The Bosnia case study by Augsburg, De Haas, Harmgart, and Meghir (2015) is similarly flawed. The authors omit any meaningful discussion of the reckless lending strategies, naked profiteering and outright fraud that combined to cause the destructive meltdown of Bosnia’s microcredit sector in 2009-10 (see Bateman and Sinković, 2017). Sweeping these important issues under the rug was perhaps necessary in order to come to the required positive evaluation [2]. Tellingly, almost all of the most damaging downsides to the microcredit model that should have been raised in the case studies by Banerjee and colleagues, were largely ignored (Bateman, 2013) [3]. Accordingly, because it was built upon the flawed foundations of the work undertaken by Banerjee and colleagues, right from the start Meager’s own findings were inevitably going to be flawed and biased.

We also found puzzling Meager’s belief in the veracity of the RCTs deployed by Banerjee and colleagues. Her contention is that she can explain some of the anomalies in the results of these otherwise valuable RCTs using Bayesian hierarchical modelling. On the surface, this sounds a laudable goal. However, it is now becoming increasingly accepted that drawing on RCTs is a fundamentally flawed way of assessing impact (e.g. Barrett and Carter, 2010; Deaton and Cartwright, 2018; Deaton, 2010), including with regard to analysis of microcredit impact (see Bedecarrats et al., 2019). Among other things, the RCT methodology omits downside impact factors that are quite critical to obtaining a genuine assessment of microcredit impact, such as exit, displacement and market saturation (Bateman, Duvendack and Loubere, 2019). If Meager’s analysis was to have carried any real weight it might have been better to have some discussion of these and many other flaws in the RCT methodology, and perhaps an attempt to correct for these failings. But she chose not to do this.

We should also point out that Meager is also being quite unfair, if not unethical, when she refers to the existence of critics but refuses to name them or reference their work, still less objectively discuss what exactly their ideas and findings are. Of late there is no shortage of carefully argued outputs on the failings of microcredit as a poverty reduction and development policy (for example, Bateman, 2010; Bateman and Maclean, 2017; Bateman, Blankenburg and Kozul-Wright, 2018a; Duvendack and Mader, 2019; Mader, 2015), several of which have clearly influenced the debate (see Zietinger, 2013). These analysts were all ignored, and so the casual reader thus has only Meager’s opinion as to what these and other critics are ‘really’ saying. Sadly, this deceptive tactic is widely adopted today by mainstream economists and international development institutions (Häring and Douglas, 2012), perhaps most notably by the World Bank [4].

But by also deliberately ignoring the serious downsides to microcredit that have been consistently pointed out by many critics, just as Banerjee and colleagues did before her, it is simply not correct for Meager to claim that “There is little evidence that microcredit generally harms borrowers as was feared by some critics”. Especially when some of the most high-profile advocates for microcredit are now changing their mind about its poverty reducing power (notably Morduch (2017), one might have expected a greater degree of willingness on the part of Meager to engage with the possibility that significant downsides to microcredit exist and should be at least discussed.

Finally, it is surprising to us that Meager ends with a plea to ‘find alternatives to microfinance’, after essentially having embarked on a determined (but, we believe, failed) mission to rescue it from its increasing obsolescence.

Footnotes

[1] Indeed, an entire sub-industry within the microcredit movement, termed Social Performance Management (SPM), already exists to do just this: to educate MFIs that apparently do not know any better regarding how they can best help their poor clients, including by not over-indebting them – see https://sptf.info

[2] The Bosnia evaluation was headed up by the then Deputy (now Head) of Research at the European Bank for Reconstruction (EBRD), which also financed the project. With the EBRD being the main promoter of, and also the main investor in, the microcredit sector in Eastern Europe since 1990, a negative evaluation of its huge effort in this sector was quite out of the question. 

[3] It is not the first time that Banerjee has misrepresented such events in this manner. For example, he led the effort by a group of high-profile economists to misrepresent the roots of the Andhra Pradesh ‘microcredit meltdown’ that took place in India in 2010 (see Banerjee et al., 2010). While very clearly a reckless lending-driven crisis created from the early 2000s onwards by the CEOs of the ‘big six’ microcredit institutions (see Arunachalam, 2011: Bateman, 2012), Banerjee et al. sought to pin the blame instead on the Andhra Pradesh government for passing a law in late 2010 that seriously curtailed lending. Their claim was ludicrous and not unlike blaming the 2008 financial crisis on the Troubled Assets Relief Program (TARP) passed in October of 2008 which was, of course, exactly like the move by the Andhra Pradesh government, a response to an emerging crisis and not the cause (see also Bateman, Blankenburg and Kozul-Wright, 2018b: 18, footnote 10).

[4] World Bank outputs are infamous for overwhelmingly referencing the work of the World Bank’s own employees or, at a pinch, work by like-minded economists within their orbit (e.g. their regular collaborators, consultants and conference participants).

References

Angelucci, Manuela, Dean Karlan, and Jonathan Zinman. 2015. ‘Microcredit Impacts: Evidence from a Randomized Microcredit Program Placement Experiment by Compartamos Banco.’ American Economic Journal: Applied Economics, 7(1): 151-82.

Arunachalam, Ramesh. S. 2011. The Journey of Indian Micro-Finance: Lessons for the Future. Chennai: Aapti Publications.

Augsburg, Britta., Ralph De Haas, Heike Harmgart, and Costas Meghir. 2015. ‘The Impacts of Microcredit: Evidence from Bosnia and Herzegovina.’ American Economic Journal: Applied Economics, 7(1): 183-203.

Banerjee, Abhijit., Pranab Bardhan, Esther Duflo, Erica Field, Dean Karlan, Asim Khwaja, Dilip Mookherjee, Rohini Pande and Raghuram Rajan, R. 2010. ‘Microcredit is not the enemy’, The Financial Times, December 14. 

Banerjee, Abhijit., Dean Karlan and Jonathan Zinman. 2015. ‘Six Randomized Evaluations of Microcredit: Introduction and Further Steps’, American Economic Journal: Applied Economics 7(1): 1–21.

Barrett, Christopher B. and Michael R. Carter. 2010. ‘The power and pitfalls of experiments in development economics: Some non-random reflections’, Applied economic perspectives and policy, 32(4), pp.515-548.

Bateman, Milford. 2010. Why Doesn’t Microfinance Work? The Destructive Rise of Local Neoliberalism. London: Zed Books.

Bateman, Milford. 2012. ‘How Lending to the Poor Began, Grew, and Almost Destroyed a Generation in India, Development and Change, 43 (6): 1385–1402.

Bateman, Milford. 2013. ‘The Art of Pointless and Misleading Microcredit Impact Evaluations’, Governance Across Borders 29 May.

Bateman, Milford, Stephanie Blankenburg and Richard Kozul-Wright. 2018a (Eds) The rise and fall of global microcredit: Development, debt and disillusion, London: Routledge.

Bateman, Milford, Stephanie Blankenburg and Richard Kozul-Wright. 2018b. ‘Introduction’, in: Bateman, Milford, Stephanie Blankenburg and Richard Kozul-Wright (Eds). The rise and fall of global microcredit: Development, debt and disillusion, London: Routledge. 

Bateman, Milford., Maren Duvendack., and Nicholas Loubere. (2019) ‘The Curious Case of M-Pesa’s Miraculous Poverty Reduction Powers’, Developing Economics, June 14th

Bateman, Milford., and Kate MacLean. 2017. Seduced and Betrayed: Exposing the Contemporary Microfinance Phenomenon (Eds), Santa Fe, NM and Albuquerque, NM: School for Advanced Research Press and University of New Mexico Press.

Bateman, Milford and Dean Sinković. 2017. ‘Bosnia’s postconflict microfinance experiment: a new Balkan tragedy’, in Bateman, Milford., and Kate MacLean. Seduced and Betrayed: Exposing the Contemporary Microfinance Phenomenon (Eds), Santa Fe, NM and Albuquerque, NM: School for Advanced Research Press and University of New Mexico Press.

Bateman, Milford and Khadija Sharife. 2017. ‘The destructive role of microcredit in post-apartheid South Africa’, in Milford Bateman, and Kate Maclean, Seduced and Betrayed: Exposing the Contemporary Microfinance Phenomenon (Eds), Albuquerque and Santa Fe, NM: University of New Mexico Press in association with School for Advanced Research Press.

Bedecarrats, Florent., Isabelle Guerin., Solène Morvant-Roux., and François Roubaud. (2019) ‘Lies, damned lies, and RCT: A J-PAL RCT on rural microcredit in Morocco’, Working Paper DT/2019-04, UMR DIAL February.

Black, W. K. 2012.Microcredit Accounting Control Fraud Deepens Bosnia’s Nightmare,’ New Economic Perspectives, March 11. 

Butcher, Will and James K. Galbraith. 2019. ‘Microfinance control fraud in Latin America’, Forum for Social Economics, Vol 48(1):98-120.

Correa, Eugenia and Laura Vidal. 2018. ‘Mexico and the microcredit model’ in: Bateman, Milford, Stephanie Blankenburg and Richard Kozul-Wright. The rise and fall of global microcredit: Development, debt and disillusion, (Eds), London: Routledge.

Deaton, Angus. 2010. ‘Instruments, randomization, and learning about development’, Journal of Economic Literature, 48(2), pp.424-55.

Deaton, Angus and Cartwright, N., 2018. ‘Understanding and misunderstanding randomized controlled trials,’ Social Science & Medicine 210, 2–21.

Duvendack Maren and Philip Mader. 2019. ‘Impact of financial inclusion in low‐ and middle‐income countries: A systematic review of reviews’, Campbell Systematic Reviews2019(2)

Guérin, I., M. Labie, and J-M. Servet (eds). 2015. The Crises of Microcredit, London: Zed Books.

Guérin, I., S. Morvant-Roux, and M. Villarreal. 2013. Microfinance, Debt and Over-indebtedness: Juggling with Money. London: Routledge.

Häring, Norbert, and Niall Douglas. 2012. Economists and the Powerful: Convenient Theories, Distorted Facts, Ample Rewards. London: Anthem Press.

Mader, Philip. 2015. The Political Economy of Microfinance: Financialising Poverty. London: Palgrave MacMillan.

Militzer, James. 2014. The Eternal Struggle of Microfinance: The Microcredit Summit raised questions about the sector’s future – but does anyone have an answer?Next Billion, September 11th

Morduch, Jonathan. 2017. ‘Microfinance as a credit card’, Limn, 9.

Sinclair, Hugh. 2012. Confessions of a Microfinance Heretic: How Microlending Lost Its Way and Betrayed the Poor. Berrett-Koehler Publishers.

Zeitinger, Claus-Peter. 2013. Comments to ‘Why Doesn’t Microfinance Work? The Destructive Rise of Local Neoliberalism’, ProCredit Academy in Fürth, Germany, in May 2013.

Milford Bateman is a Visiting Professor of Economics at the Department of Tourism and Economics, Juraj Dobrila University of Pula in Croatia.

Maren Duvendack is Senior Lecturer in Development Economics at the University of East Anglia, UK. @Marenduvendack.

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