REPUBLIC OF SOUTH AFRICA GOVERNMENT-WIDE MONITORING & IMPACT EVALUATION SEMINAR EVALUATIONS OF MICROFINANCE PROGRAMS SHAHID KHANDKER World Bank June 2006 ORGANIZED BY THE WORLD BANK AFRICA IMPACT EVALUATION INITIATIVE IN COLLABORATION WITH THE SOUTH AFRICA COUNTRY DEPARTMENT HUMAN DEVELOPMENT NETWORK AND WORLD BANK INSTITUTE
Why do we need micro-finance programs? High levels of poverty combined with slow economic growth forced a large part of the population to be selfemployed in informal and rural sectors Many governments press for raising productivity and growth in these sectors Informal and small business do not have access to formal finance but require full range of financial services A variety of financial institutions have found ways to make lending to the self-employed poor Experience suggests self-employed people repay loans and seek savings opportunities Provision of micro-finance appears a win-win situation
Different forms of micro-finance Mechanisms providing micro-finance services can be classified as: (1) Social programs run by formal banks (KUPDES of Bank Rakyat Indonesia; IRDP, India; Rural development Banks, Bangladesh)- most targeted banks schemes failed to reach the target poor clients (2) Intermediary programs, run by NGOs offering micro-business a link to the formal banking system (SEWA, India; Production Credit for rural poor, Nepal; Institute for the Development of the Informal Sector, Peru). These programs reached the target sector but reached somewhat better-off clients (3) Parallel programs that provide credit services alongside other social and development programs via non-bank institutions (social funds; Progreso, Peru; BRAC; Small business scheme of the National Christian Council of Kenya) many programs reached the target clients with heavy dependence on donors (4) Poverty-oriented development banks (originally started as parallel or intermediary programs) (e.g., SEWA Bank, India; Grameen Bank, Bangladesh; Caja Los Andes, and Banco Sol, Bolivia). Succeeded in running self-sustainable financial services to the poor and small-scale entrepreneurs
Why do we need to evaluate micro-finance programs? Micro-finance is a response to market failure Micro-finance helps reduce the impact of capital market imperfection and asymmetric information; Micro-finance registers high loan recovery rates, even if the rates are market-based It has potential for reducing poverty But the programs require grants for institutional development which might have alternate uses; Need to determine the efficiency and costeffectiveness to justify public support
What does micro-finance deliver? Financial services Loans Savings Insurance Remittance transfer Non-financial services Awareness and conscious building Employment and skill development training Extension and infrastructure development Legal and regulatory services
Modus operandi of micro-finance Physical collateral-free but social collateralbased lending Small loan size and small amount of savings Group-or individual-based lending/savings Peer monitoring/social pressure Targeted lending Market interest rate policy Social intermediation
Benefits of micro-finance Micro-finance helps expand income and employment Micro-finance helps strengthen financial sector Micro-finance supports poverty alleviation effort Micro-finance increases business opportunities through financial innovations that otherwise would not be adopted Micro-finance helps decentralize economic power and strengthen community groups Micro-finance empowers women and other socially excluded groups
Indicators of micro-finance benefits Short-term benefits Consumption and its smoothing Employment Income Poverty and vulnerability Long-term benefits Household asset and net worth Human capital Social capital Community assets
Case 1: Bangladesh: Grameen Bank Largest program in Bangladesh covering more than 2 million borrowers Impact assessments carried out in 1991/92 showed that GB loans reduce poverty, increase assets, raise schooling, and increase labor supply, but the impacts are much more for women than for men borrowers Programs largely depended on subsidized funds but increasingly reduced its subsidy dependence over time A follow-up impact study in 1998/99 that used panel data showed that the impacts are somewhat diminished with still the largest impact for women borrowers. Poverty is reduced by 1 percent per year for clients. The impact is higher for extreme than moderate poverty GB loans raise non-farm income growth and diversify agriculture Impact findings used to support a whole-sale WB MF facility
Case 2: India: Social Banking Experiment India pursued rural branch expansion over the period 1977-1990 Objective was to improve access to financial services, and to help exploit opportunities and exit poverty Using state-level data, a recent study shows the impact of this targeted policy intervention Results show that the rule helped expand rural credit expansion and significantly reduced poverty and increased non-agricultural output India is pursuing micro-credit expansion using the banking network via self-help movement
Case 3: Bolivia: Caja Los Andes Assessment of micro-finance loans on productivity and growth Higher firm size with higher amount of borrowing have higher growth rates Micro-enterprises with higher lending have higher revenue and sales Better-off clients experienced higher increases in income, investment, and employment Best-clients discontinue borrowing after the first loan The link between productivity growth and continuous borrowing from the same lender needs to be cautiously examined Although the impacts are positive on enterprises, the MFI impact on local economy or poverty is not obvious.
Conclusions Impact evaluations is a powerful tool to determine the cost-effectiveness of policy intervention An impact assessment of financial instrument demonstrates the need for public support for poverty reduction and targeted sectoral growth Micro-finance, mostly supporting informal and rural activities, especially for women, appears to have both short-term and long-term impacts Targeted MFI scheme development requires careful design and implementation supported by rigorous impact assessment