In Tuesday’s column I wrote about Grameen Bank , the pioneering microfinance organization, which has come under attack by the government of Bangladesh. The government has ruled that the bank’s founder, Muhammad Yunus, who won the Nobel Peace Prize in 2006 , must step down from his post as managing director. Yunus has fought the order and taken his case to Bangladesh’s Supreme Court. I argued that it’s important to protect successful social institutions from political maneuvers that could be damaging to them, and that an abrupt and forced removal of Yunus could damage confidence in the bank, which has 8.4 million mostly women borrowers and holds $1.5 billion in villagers’ savings. Over the past two weeks, I’ve interviewed numerous people in Bangladesh — including current and former government officials — to try to ascertain the motives behind the government’s actions. Many suspected that Yunus was being targeted for political reasons. But others said that there were people within the government, as well as across Bangladeshi society, who opposed the work of the Grameen Bank on principled, if ideological, grounds. Simply put, many people don’t think that microfinance helps the poor and they believe that socially- minded businesses, like the Grameen Bank, undermine the work of government. Today, I’d like to address these concerns. On Tuesday I noted that researchers are still debating the effectiveness of microfinance. One reader, Lowell D. Thompson from Chicago ( 11 ), wrote in with a pointed question: “There are questions about the effectiveness of the bank in alleviating poverty? I thought that was its very reason for being in the first place.” The question: ‘Does microfinance work?’ has been posed increasingly in recent years — sometimes in accusatory tones because microfinance, and its leading practitioner, Grameen, have received so much praise. A number of randomized studies (notably those available at the Financial Access Initiative and M.I.T.’s Poverty Action Lab ) have not substantiated the findings of poverty reduction that had been made over the years by researchers relying on less rigorous methods that did not always use comparable control groups. An overview of available research by an independent economist, Kathleen Odell, can be found here (pdf). (Odell’s report was commissioned by the Grameen Foundation, a U.S.-based nonprofit that supports microfinance, but her report is considered by other researchers in the field to be well- balanced and unbiased.) Odell notes that evidence from studies using different methodologies in different settings suggests that microfinance — including both loans and savings services — is, in fact, good for microbusinesses. But she adds that the “overall effect on the incomes and poverty rates of microfinance clients is less clear, as are the effects of microfinance on measures of social well-being, such as education, health, and women’s empowerment.” If this conclusion seems a little confusing, it’s because microfinance is not, itself, one simple thing. It may involve loans, or savings, or a combination of the two, plus training, insurance or other services. Different mixtures can produce different results in different settings. Moreover, the effects of microfinance may unfold slowly over time, while controlled studies, because of their expense, are rarely conducted for more than a year or two. But the biggest new insight may be that researchers are beginning to discover that the way poor people manage their households is far more complex than anyone had previously understood. The elephant in the room is the question: If microfinance doesn’t accomplish anything positive, then why are 128 million poor families busy taking loans? Should we assume that poor people simply don’t know what’s in their best interest? Or do we need to look more deeply into the way poor people survive? That’s what a number of creative researchers are doing today. One example is the collaboration between Daryl Collins, Jonathan Morduch, Stuart Rutherford and Orlanda Ruthven that culminated in the excellent book “ Portfolios of the Poor: How the World’s Poor Live on $2 a Day. ” The book takes a penetrating look into 300 poor families in Bangladesh, South Africa, and India, with interviews conducted every two weeks to track expenses, earnings and cash flow at a granular level. What the researchers found was striking, and it gets to the question of what it really means for most people to be poor: to live with perpetual uncertainty. “What the research taught us is that the problem of living on $1 or $2 a day is that you don’t actually earn $1 or $2 every day,” explained Jonathan Morduch. “ That’s just an average. Some days you receive $5 and then nothing for two weeks. Life is unreliable. So the challenge for the poor is that you need to put together the right sums to deal with the right challenges in life. And what we saw microfinance was doing for people was offering them a reliable source of money. With microfinance, you get a sum of money that’s promised on the day it’s promised in the amount that’s promised. It’s often the only reliable service that poor people have — and that’s incredibly powerful.” Morduch is far from a microfinance booster. He co-authored a study in 2009 ( pdf ) that challenged a 2005 study that had often been cited as evidence for microfinance’s success in alleviating poverty. But one big reason why studies have not shown evidence of the impact of microfinance, he said, is because researchers have been looking at the wrong things. They were focused on direct measures like income or household expenditures. Morduch and his colleagues suggest that microfinance may be most effective at helping poor people avert the traumas of a day- to-day, hand-to-mouth existence. It may allow them to smooth out their cash flows so that life is not such a bumpy and stressful ride. But this also needs to be more thoroughly examined. And contrary to the depiction of poor people as passive victims of microlenders — as the field is often portrayed by its critics — Morduch and his colleagues found that the families they followed were “strategic” in their use of credit, often mingling a variety of formal and informal sources. “They weren’t always making the best choices — some did well, some didn’t — but they were very actively managing their affairs,” he said. “Our view is that there’s a lot more going on with microfinance — that it’s helping people keep an income flow, deal with health problems, keep their kids in school, get food on the table every day, and perhaps invest in businesses.” David Roodman, a senior fellow at the Center for Global Development, who is writing a book on microfinance through an “ open book” blog , summarized it well. The stories in “Porfolios,” he wrote, are neither about “ascent out of poverty nor of descent into indigence, but of people getting by by grasping financial tools within reach.” (For those interested in an examination of the Norwegian documentary that sparked the Bangladeshi government’s actions against Grameen, Roodman has a thoughtful post here .) One area where a small, recent randomized study (pdf) has shown impact is in savings for the poor. Researchers Pascaline Dupas and Jonathan Robinson found that self- employed women in Kenya were able to invest more in their businesses and increase household spending when they had access to savings accounts. It appears that having a bank account helped them accumulate money for larger purchases as well as to smooth out risks — in some cases to prevent loss of income due to malaria. Some women used their savings to purchase malaria pills, for example. The researchers concluded that “extending basic banking services could have large effects at relatively small cost.” The other big criticism of Grameen Bank is that it is trying to do something that is properly the job of government. As Aaron from New York ( 18 ) wrote: “The best way to help the poor is not to lend them money … but for government to raise money through taxation and spend it in ways that strengthen infrastructure, educate people and provide for the type of institutions that support a modern, prosperous society.” This is, of course, a very old debate — it gets to the role of government versus the free market — and it will not be settled anytime soon. But in recent decades Grameen and many other organizations have added a new dimension to it by introducing a middle path: the social business — the business that seeks not to maximize profits but to maximize some form of social impact. Historically, economists have assumed that businesses serve society best when they put their heads down and focus only on the bottom line. The most famous expression of this thinking is the dictum, usually attributed to Milton Friedman, that “the business of business is business.” Social businesses seek to harness market forces to provide essential goods and services to people who are typically underserved. Around the world, as we have noted in this column, social businesses provide things like loans to small farmers , rural electricity and access to potable water . They also supply health services like ambulance care or cataract surgery . In addition to microfinance, Grameen has helped establish an array of for- and not-for-profit companies such as Grameen Danone, a joint venture with Danone (known to us as Dannon), which markets an affordable fortified yogurt product to address micronutrient deficiencies among the poor and Grameen Shakti, a renewable energy company. Social businesses have evolved to address both the operational weaknesses of many government agencies and the lack of affordable products and services available to the poor through the market. By and large, they are a new invention — and there are many questions about when they should be used. For example, it appears that social businesses can bring things like renewable energy, mobile technologies and affordable housing to poor people faster and more efficiently than governments. However, ongoing access to safe water for all is not something that can be guaranteed without the leadership of governments. Grameen has many such experiments going — which are legally independent of the Grameen Bank. Again, these organizations do not challenge the legitimacy of the government — the government is the only body that represents the will of society — but they can be vehicles that governments can support, and work through, to achieve public policy goals. In future columns, I will explore other examples of social businesses, and look at where and when they seem to be working, or not.
