Forms of Microcredit Interventions and Cost-Effectiveness

It is clear that experimentation and local variation are likely to be important aspects of successful MFIs. A few studies (more in Asia than in Latin America) have looked in detail at the impact and cost effectiveness of different forms of intervention. The Hulme and Mosley (1996) cross-country study of 13 institutions in seven countries (Bolivia in Latin America and Bangladesh, India, Sri Lanka and Indonesia in Asia) found that loan impact, in terms of change in borrower income, (which is not necessary the same as poverty impact) was greater in the more financially viable institutions (such as BRI and BancoSol). They explain this in terms of the screening efficiency of higher interest rates and tighter repayment conditions, which deter less financially sound borrowers. The institutions involved used a range of delivery mechanisms and the analysis does not allow firm judgements between these. Within-country comparisons by ownership are made explicitly in Park and Ren (2001), who look at the Chinese experience drawing on household survey data for 1997. They are able to compare three types of program based on ownership characteristics - NGO-based, mixed programs and government ownership. Whether in terms of conventional financial criteria like repayment rates, or measures of initial impact like targeting effectiveness, the NGO programs appear to function best, with the government-run programs the least successful.

Detailed mechanisms for micro lending are examined for Thailand by Kaboski and Townsend (2003) who look at different institutional variants such as production credit groups, women’s groups, rice banks and buffalo banks, as well as a variety of services included training and various savings facilities. Of the forms of institution, allowing for a range of other factors, women’s groups appear to have the largest positive impact on their members. Of the services offered, training in conjunction with credit appears to work well and the availability of savings facilities appears to be associated with asset growth amongst households. Of the savings services regular 'pledged savings' have the largest positive impact. Explanations offered for this include the use of savings as collateral for further loans either from the institution itself or from other sources, and a reduction in the cost and risk of infrequent deposits and withdrawals. However since the poorest may not be in a position of offer regular savings, this also provides an explanation for why they may benefit relatively less from MFIs.¹⁵

Most studies of the impact of different forms of micro finance do not conduct a full cost effectiveness analysis in order to judge both the effectiveness of different alternatives and how micro finance interventions compare in efficiency terms with other ways of reaching the poor. However there is often a general expectation that MFIs are an effective and efficient means of reaching the poor. For example, Wright (2000) argues that "...microfinance has a particular advantage over almost (and probably) all other interventions" in providing cost-effective and sustainable services to the poor. In fact the evidence to support such a strong claim is not yet available. Bangladesh and Bolivia, the most widely studied countries for microfinance, provide most of the evidence on its cost effectiveness.

The early work by Khandker (1998) attempts to assess the cost-effectiveness of micro credit in Bangladesh (that is costs per taka of consumption for the poor) as compared with more formal financial institutions and other poverty-targeted interventions. His data are summarized in Table 5 [PDF 76KB | 1 page] . They appear to be based on the assumption of a zero leakage rate to the non-poor. The interesting result that emerges is that the Grameen Bank is considerably more cost-effective than BRAC and that as expected loans to female borrowers are considerably more cost-effective than loans to males. Further, subsidies to Grameen (but not to BRAC) appear to be a more cost effective means of reaching the poor than various food for work programs. However a food for education scheme appears very cost- effective relative to the food-for-work programs and to BRAC.¹⁶ Formal financial institutions are less cost-effective than Grameen for both female and male borrowers and less cost effective than BRAC in some, both not all, cases examined (Khandker 1998:134-139). The high figure for BRAC is in part due to the range of services, such as training, offered in addition it micro credit, but nonetheless if such services are essential to the success of microcredit, including their cost in a costbenefit assessment of microcredit is legitimate.

The above data provide ambigous support for the idea that micro-finance is a costeffective means of generating income for the poor. The figures for Grameen support this view, whilst those for BRAC do not. More recently a couple of other estimates are available. Burgess and Pande (2003) examine whether the pattern of commercial bank expansion in India into rural areas, previously not served by banks (so-called 'social banking'), has impacted on rural poverty and their work allows a simple comparison with microfinance. Their estimates suggest that it costs 2.72 rupees to generate an additional rupee of income for the poor via social banking program. Compared with the data in table 5 this ratio is higher than the cost-effectiveness ratio for Grameen, but lower than that for BRAC.¹⁷

A further look at the effectiveness of Grameen is provided by Schreiner (2003), who calculates the subsidy-lending ratio at 0.22 over the period 1983-97. This is not directly equivalent to the ratios in table 5, but assuming the same return to borrowing as in Khandker (1998) these figures can be converted into a broadly equivalent ratio of cost to gains to the poor of 1.15. This is consistent with the figures in Table 5 [PDF 76KB | 1 page] which would need to be averaged to give an overall return to male and female borrowing combined. The result confirms Grameen as a relatively cost-effective form of poverty intervention, although it says nothing about how the benefits from its activities are distributed between the poor, the very poor and those above the poverty line.

For Latin America, Mosley (2001) provides a rare, if approximate, estimate of costeffectiveness of MFIs relative to other poverty interventions in Bolivia. He compares the estimated numbers in a particular area brought over the poverty line by four different MFIs, as a result of microcredit, with the organizations’ expenditure that can be allocated to activities in that area. This gives a cost per person brought out of poverty for four MFIs that use different approaches. BancoSol and Fundacion para la Promocion y Desarollo de la Microempresa (PRODEM) are more commercial with greater use of individual loans, whilst ProMujer lends largely to women in urban co-operative groups and Sartawi offers both group and individual loans, but also provides a range of training and education services in addition to credit. Cost-effectiveness in the MFIs, defined as the cost per person brought out of poverty, are $603 for BancoSol, $467 for ProMujer, $373 for PRODEM and $589 for Sartawi. These figures are not directly comparable with those for Bangladesh reported in Table 5 [PDF 76KB | 1 page], as the latter are the ratio of MFI costs to benefit in income (or consumption) received by the poor. Although the range is relatively wide, perhaps due to the approximate nature of the calculations, the author himself suggests that they show that there is little difference between the institutions and that no one model dominates microcredit delivery in Bolivia (or indeed elsewhere). There are also some approximate comparisons with the cost of poverty reduction from Social Fund investment in health, education and rural roads, which show microfinance from all of the institutions to be lower cost than the Social Fund programs.¹⁸ However, the cost effectiveness figures found for MFIs Bolivia in dollars per person brought out of poverty are much higher than some of the anecdotal figures used for Bangladesh. The fact these estimates, approximate as they are, provide one of the few indications of the costeffectiveness of MFIs in Latin America is an indication of the undeveloped nature of research on this issue in the region.

In general in terms of cost-effectiveness there is limited support for the view that MFIs can be cost-effective ways of reaching the poor, although the range of figures within both Bangladesh and Bolivia suggest that this is far from inevitable for all types of MFI. BRAC in particular appears relatively high cost. However even if it could be shown that microfinance uniformly outperformed other targeting measures in cost effectiveness terms one could still not conclude that other measures should be abandoned and their funds diverted to microfinance. As Khandker (1998) points out, participants to microfinance borrowing self-select (that is they judge that micro credit suits their particular needs, often for self employed work), whilst microfinance may not be suitable for others amongst the poor. For this latter group, perhaps more risk adverse or more disadvantaged, other forms of targeting will still be required.

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