A few weeks ago, Bloomberg published two scathing articles about the microfinance industry. The articles asserted that major investors—both public and private—are making massive profits through their investments in microfinance, while the industry systematically hurts borrowers. The article begins:
Suicides, debtors’ prisons and delinquent borrowers forced to sell their land—the grim social costs linked to microfinance a decade ago were supposed to be a relic of the past. But efforts to clean up the industry lost momentum, and today billions of dollars are flooding into a system that promises the world’s poor a better life while often compounding their misery.
As I shared in an article I posted on LinkedIn yesterday, the claims in this article are not supported by the data.
Most Impact Reports Are Nothing More Than Stories
How could this be?
It’s because this article falls into an all-too-common trap: relying on robust, objective data sets to profile the financial returns to microfinance investors; and resorting to a handful of interviews and case studies of borrowers, plus a number of expert interviews, to paint the story of social impact.
The question we must ask is: how can it possibly be that, in 2022, the social impact of an industry that reaches more than 140 million clients can credibly be assessed from a few dozen client interviews?
And the answer is: because this is common, accepted practice for assessing most social impact.
For most investors, even those who have a stated intention to create social impact, the “assessment” of this impact is a storytelling exercise. These stories are often based on a handful of anecdotes or case studies, which might include conversations with a small number of customers.
Indeed, if you pick up an annual social impact report from most investors or companies, what you’ll have in your hands is, most likely, a narrative exercise devoid of first-hand data.
So, it is no great surprise that microfinance—a well-established, well-respected sector in social investment—has fallen victim to this same sort of storytelling exercise…only this time, the individual case studies paint a particularly troubling picture of the industry.
Better Social Data is Available in Microfinance
My response to the Bloomberg article points out that there is, in fact, a massive dataset that captures the lived experience of nearly 18,000 microfinance clients who represent 25 million microfinance customers.
This dataset, gathered by the company I run, 60 Decibels, shows that microfinance is creating positive outcomes for the vast majority of borrowers:
Nearly three in four of the clients we spoke to said that their loan repayments are “not a problem”…. Seven in 10 of these clients credit their microfinance institution with helping them strengthen their financial resilience, meaning that they are better able to face a major expense. Four in five clients told us their lives are improved thanks to access to microfinance, with a subset of these, one in three, saying their lives are ’very much improved.’ Similarly, four in five clients say they are better able to reach their financial goals thanks to microfinance.
The dataset also shows that, for a small subset of microfinance customers, their microfinance loans are indeed a burden, that their repayments are causing major strain on their well-being, and that their lives are worse, not better, because of their microfinance loans.
The point is: like most financial products, microfinance has the potential to create both benefit and harm. How the service is delivered, and, in particular, product design and client protection practices, play major roles in determining the impact of this product on the lives of millions of customers.
Of course, this more nuanced version of the story doesn’t make for flashy headlines. Then again, we shouldn’t be surprised that the microfinance industry, or any industry that aims to create social impact, would be vulnerable to such a story being written.
Until we set a new standard, one in which regularly collected, objective, comparable, quantifiable social impact data is expected for anyone claiming to create social impact, we will remain an industry that relies on storytelling.
You can read my full article here.
