Forms of Micro Credit Interventions and Cost-effectiveness

Experimentation and local variation are likely to be important aspects of successful MFIs. A few studies have looked in detail at the impact and cost effectiveness of different forms of intervention. For example, Park and Ren (2001) look at the Chinese experience drawing on household survey data for 1997. They are able to compare three types of programs 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 institutions, allowing for a range of other factors, the 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.¹²

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 microfinance 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 “...micro finance has a particular advantage over almost (and probably) all other interventions” in providing cost-effective and sustainable services to the poor. 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 3 [ PDF: 89kb | 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 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 appeared to be very cost effective relative to the ‘food for work’ programs and to BRAC.¹³ Formal financial institutions are less cost-effective than Grameen for both female and male borrowers and less cost effective than BRAC in some, but 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 (see footnote 4), but nonetheless if such services are essential to the success of micro credit, including their cost in a cost-benefit assessment of micro credit is legitimate.

It is interesting to note that Khandker does not conclude from this that all subsidies to other poverty interventions should be withdrawn and reallocated to micro finance. Rather he points out that as participants to micro credit borrowing self-select (that is they judge that micro credit suits their particular needs, often for self employed work) others amongst the poor may not be able to benefit. For this latter group other forms of targeting will still be required.

The above data (Table 3 [ PDF: 89kb | 1 page ]) provide ambiguous support for the idea that micro finance is a cost-effective 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 have become available. Burgess and Pande (2003) examine whether the pattern of commercial bank expansion in India into rural areas, previously not served by banks, has had an impact on rural poverty and their work allows a simple comparison with micro finance. Their estimates suggest that it costs 2.72 rupees to generate an additional rupee of income for the poor via social banking programs. Compared with the data in Table 3 [ PDF: 89kb | 1 page ] this ratio is higher than the cost-effectiveness ratio for Grameen, but lower than that for BRAC.¹⁴ 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 3 [ PDF: 89kb | 1 page ], 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 3 [ PDF: 89kb | 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.

12. Fujita (2000) makes this point in the context of Bangladesh.
13. The study on this scheme by Wodon (1998) appears considerably more sophisticated than the other studies and compares costs with the future stream of estimated benefits to the poor in terms of gains from education. The ratio for this activity may not be directly comparable with the other figures in the table.
14. It should be noted that the benefits from Grameen lending found in Khandker (2003), which are almost half of those found in his earlier study, imply considerably higher cost effectiveness ratios to those reported in Table 3, unless there has been a corresponding rise in the efficiency of operations.

The views expressed in this paper are the views of the author/s and do not necessarily reflect the views or policies of the Asian Development Bank Institute nor the Asian Development Bank. Names of countries or economies mentioned are chosen by the author/s, in the exercise of his/her/their academic freedom, and the Institute is in no way responsible for such usage.

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1. altafsamo
   (posted 27 March 2008 / 01:42:42 PM)
   
   I think micro finance if implemented in true spirit can do wonders but in countries like Pakistan the impact has not been so impressive although several studies has shown its positive impact. On the ground realities are very different and these need to be addressed by these multilateral donor agencies.
   Most of the loans are not properly utilized.
   Special emphasis is needed to be given on the capacity building of the prospective borrower. Let the borrower train to catch fish themselves by building capacity to utilize the borrowed amount for investment that will benefit them in long run. This will help decrease poverty.
2. muneeb seyal
   (posted 09 November 2007 / 08:42:14 PM)
   
   Well, I guess microfinance is doing a great work.
   Normally banks are not interested in providing funds to poor people.
   It's proved in history that poor are more honest than the rich.
3. Eric
   (posted 26 September 2007 / 10:35:57 PM)
   
   Whereas Micro finance holds the key to poverty education, it is not just the provision of the financial services that matters, information on where to invest and manage the business is equally needed.
4. Syed Shah
   (posted 22 April 2007 / 12:50:06 AM)
   
   Well I think micro finance can play a power full role in poverty alleviation, nature conservation and biodiversity conservation because it has the potential to diversify the source of income for the poor people and hence can result in reducing the pressure on exploitation of natural resources.