Microfinance: Women Being Cheated?

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As microfinance moves more and more into the mainstream of the banking world, is some of its original mission getting lost in the shuffle? That's the implication of a landmark study released on Thursday by Women's World Banking (WWB), a network of microfinance institutions in 29 countries. The study examined what happened at 27 outfits as they morphed from non-governmental (typically not-for-profit) organizations into regulated financial institutions, and found that they often end up lending to a smaller percentage of women — the very people they are often started to help.

The WWB study did find real benefits associated with the evolution of microfinancing, which aims to help lift people out of poverty by lending them relatively small amounts of money to start and run their own small businesses. Commercialized microfinanciers, for instance, are able to reach more borrowers and offer important new products like savings accounts. (Microfinance started out with loans largely because in most countries not-for-profits aren't allowed to take deposits; as instititutions legally become so-called non-bank financial institutions or all-out banks, this changes.) But WWB also found evidence that such growth might be pushing institutions' interests to be more in line with those of their profit-seeking investors.

The detailed study comes at a critical time for the field. In the past few years, investors have realized that making a lot of tiny loans to poor people in the developing world can actually be a lucrative endeavor. The microfinance industry, which dates back decades and has historically been made up of not-for-profit organizations, has subsequently seen a flood of new money. As microfinance institutions look to tap that capital, they are increasingly becoming regulated financial institutions, which puts them under the purview of a local banking authority.

WWB studied 27 microfinance groups (in Latin America, Asia, the Middle East and North Africa) that had undergone this regulatory shift, dubbed "transformation," and compared them with 25 that had not. Over a five-year period, microfinance institutions that had become more traditional commercial enterprises saw their number of active borrowers increase by 30% a year on average, compared with 15% for institutions that remained NGOs. In addition to reaching more clients with loans, the transformed microfinance institutions were also able to significantly ramp up the number of clients with savings accounts — a life-changing thing for people who have never before had a safe place to put away money for the future. Over the five-year period, transformed microfinance institutions grew savings accounts by an average of 45% a year, compared with 28% for the insitutions in the control group that were already able to offer such accounts.

But a more troubling finding of the study was the steep drop-off in the percentage of female clients in the years following transformation. Over five years, the percentage of clients who were women moved from an average of 88% to 60%. That is concerning not only because many institutions start out with the goal of serving female entrepreneurs, but also because women are much less likely than men to spend business gains on consumable goods like TV sets, and more likely to pay for health care and education for their children — investments that can help further lift their families out of the cycle of poverty.

The study also showed that transformed microfinance institutions loaned larger amounts of money — with average loan sizes that were two to three times greater than those of outfits that hadn't commercialized. Some people in the microfinance industry have pointed to that sort of result (which has been noted in prior research) as evidence that the profit motive leads microfinance institutions to abandon their poorest clients, who take out smaller loans and are therefore less profitable. The WWB study didn't draw that troubling conclusion, indicating that a third variable, such as improving economic conditions overall, might be at play in increasing loan size. But the authors did indicate the need for further study — not to mention increased vigilance as microfinance institutions continue to evolve. "We're very excited about the upside of commercialization," says WWB CEO Mary Ellen Iskenderian. "But profit doesn't have to trump social mission."