By Helen Moser
The assumption of many Microfinance Institutions (MFIs) is that providing microfinance to women is not only a social imperative – it is also one that may yield higher returns to capital, as women are typically more credit-constrained than men due to their limited access to formal financial services. Women in developing countries are 20 percent less likely than men to have access to formal credit. Additionally, women tend to be poorer than men on average and have less collateral to offer.
MFIs rose in popularity in the late 1990s and early 2000s, and many MFIs like the Grameen Bank began strategies of lending primarily to women that continue today. Over 80 percent of the poorest MFI clients worldwide (those who live on less than $1.25/day) are women. MFIs and their supporters often claim women make better use of loaned or granted funds than men do. But in actuality, microfinance may not be an effective solution to raise women’s business profits from microenterprise, nor their incomes.
Two World Bank studies in Bangladesh in the early 2000s showed promising results for returns to capital in lending to women, and for microfinance in general. These studies contributed to the narrative on MFIs’ effectiveness in raising women from poverty. However, the results of these studies have since been criticized for their lack of robustness and potential selection bias. As the programs were not randomly assigned, there was not enough rigor in controlling for the unobservable variables that may make a person more likely to opt into microfinance and inherently more successful in generating new income than non-participants. Additionally, there was controversy in the eligibility guidelines for microfinance, as qualitative evidence from Bangladesh showed that loan officers did not strictly adhere to the eligibility cutoff for program participants.
In the past five years, several randomized control trials (RCTs) conducted of microfinance programs have made a robust contribution to the body of knowledge regarding their impact generally, and also their impact specifically on women’s incomes. In these evaluations the treatment, or the grant or loan of microfinance, is randomized in order to mitigate the unobservable variables that would lead to selection bias. These have shifted the rhetoric: Providing microfinance to women perhaps remains a social imperative, but no longer one that MFIs can claim yields significant returns to income.
One such RCT was led by Abhijit Banerjee, Esther Duflo, Rachel Glennerster, and Cynthia Kinnan in Hyderabad, India, with results published in 2014. Evaluators randomized 104 slums in Hyderabad and offered a microcredit program from the Spandana organization, which lends only to women, to half of the slums. In the first year, the microcredit led to the creation of some new businesses by women. But profits for most businesses did not increase in the short or long-run. These results have been corroborated by studies in Mexico and Ghana, among other places.
Some explanations for this shortfall include that:
- Men re-invest a larger share of their profits back into their businesses. One possible explanation is that women invest more in the health, education, and consumption of their families instead.
- Women business owners experience entrepreneurship as a greater drain on family obligations than do men. Women are more likely to spend less time working on their microenterprises as a result, which may decrease profitability, even given influxes of capital.
- Men typically have more bargaining power in the household, which may give them more access to household resources, labor of their children and spouse, and in some cases access to their wife’s grant or loan.
- Women may work in different industries than men due to social conventions or their need to be closer to home to watch children. This may also limit them in traveling to access markets for their goods.
These factors may mean that given the same access to microfinance as their male counterparts, women are not able to take advantage of it in the same way. International development stakeholders should consider ways to mitigate these challenges to women through innovative programs – instead of spending more money to evaluate the same treatments. Additionally, even though microfinance alone does not significantly impact women’s profits or incomes, it has been demonstrated to have other important advantages – increasing women’s bargaining power within the home and household consumption, to name only some.
Where evaluations have succeeded in demonstrating that microfinance is likely not the solution to raising women’s incomes, there is not yet an ample body of evidence in demonstrating what does work. However, studies on extending access to savings accounts to women in Kenya and Nepal show a promising impact. The take-up rates and impacts on income in these studies are far higher than any demonstrated by rigorous evaluations on microfinance. These results show the necessity of international development actors such as USAID and the World Bank taking a closer look at their microfinance portfolios to determine how funds could be better spent to boost women’s incomes in developing countries.
Helen Moser is a Research Fellow with the Project on U.S. Leadership in Development & Project on Prosperity and Development at CSIS.