Explore Rice

12/15/2005

Microfinance: A way to determine whether the impact was micro or macro

Microfinance organizations like Opportunity International provide billions of dollars in loans to the world's very poor, but few organizations really know how their money is used and whether it has improved the recipients' economic and social welfare. A Rice expert in performance metrics offers a model to help microfinance organizations objectively measure the impact of their investments.

----------------

To draw attention to the contributions microfinance organizations have made to the world's poor, the UN proclaimed this year as the "International Year of Microcredit. " Despite the billions of dollars these institutions have made available in loans to small business entrepreneurs in developing countries, their effectiveness in alleviating global poverty has yet to be substantiated, according to Marc Epstein, a Rice expert in performance metrics .

"The anecdotal evidence for microfinance is very positive and shows great potential for scalabilty and for making a huge difference in alleviating poverty," says Epstein, the Distinguished Research Professor of Management at Rice's Jesse H. Jones Graduate School of Management.

"By carefully analyzing the specific drivers of success in microfinance," he says, "its contributions can be even greater."

In an analysis of Opportunity International, one of the world's largest microfinance organizations, Epstein has developed a model outlining the critical factors that contribute to the impact and success of microfinance. The model shows, for example, that evaluating a developing country's political, social and cultural environment is important in determining the most appropriate strategy, structures and systems for a microfinance organization to successfully operate in that country. To gauge a country's existing competition and economic structure - critical factors when considering microfinance investments -- Epstein's model offers several examples of performance measures, including the country's inflation rate, regulatory environment, physical infrastructure and unemployment rate. As part of the overall assessment of the country's business climate, Epstein suggests that microfinance organizations also conduct a country analysis where they hope to invest.

"Microfinance organizations also need to examine their own resources and the strategies and structures that will best meet their objectives," Epstein says.

"Their choice of clients and products will also greatly influence the direction a microfinance organization takes and the outcomes it will attempt to achieve. "

Epstein based his microfinance framework on an in-depth analysis of Opportunity International's savings and loan operation in Ghana, which he visited in June 2005. Established in 1994, the microfinance institution trust, known as the Sinapi Aba Trust (SAT), serves 55,000 clients, mostly women entrepreneurs earning an average of $500 a year.

The borrowers, who are generally organized around group loans, are primarily in trading and service businesses, selling food, making clothes or running beauty shops from stalls in the marketplace, in front of their homes and on the street.

Epstein interviewed 30 SAT borrowers as well as loan officers and supervisors, senior officers, the CEO and board chairman. He also conducted a thorough review of previous surveys, which showed that SAT has had a positive impact on the economic conditions of its clients, but its overall impact on their communities is less clear.

"The microfinance industry, as is true with philanthropy in general, has not standardized appropriate measures of success," Epstein says.

"Too often, studies have focused on client retention and default rates and less on how loans are used and how they have improved economic and social welfare, empowerment and self esteem, and the lives of the families. "

While Epstein provides numerous examples of the types of measures organizations can use to assess their impact, he points out that all impact studies must be guided by the particular goals and objectives of each organization and the country in which it is located.

"Microfinance organizations like Opportunity International serve as amazing models for helping alleviate world poverty," Epstein says. "More rigorous research into ways of objectively measuring their successes will dramatically improve their already impressive contributions. "

Epstein presented his initial report on SAT at a conference earlier this month at Harvard, where key business leaders and government representatives met to discuss America's role in alleviating global poverty.

The author of a dozen books that have won top academic, professional and business awards, Epstein joined Rice's Jones School in 1998. Prior to then, he was a member of the faculties of Stanford Business School, Harvard Business School and the European Institute of Business Administration. In the fall 2004, he was appointed Harvard's first Hansjoerg Wyss Visiting Scholar in Social Enterprise.

For more information on this research, contact Epstein at epstein@rice.edu or Debra Thomas in the Jones School at dthomas@rice.edu .