microfinance: its impact, outreach, and sustainability

World Development Vol. 39, No. 6, pp. 875–881, 2011� 2011 Elsevier Ltd. All rights reserved

0305-750X/$ - see front matter

www.elsevier.com/locate/worlddevdoi:10.1016/j.worlddev.2009.10.021

Microfinance: Its Impact, Outreach, and Sustainability

NIELS HERMESUniversity of Groningen, The Netherlands

and

ROBERT LENSINK *

University of Groningen, The NetherlandsWageningen University, The Netherlands

University of Nottingham, UK

Summary. — This symposium brings together recent empirical contributions with respect to a number of related and highly relevantissues on the economics of microfinance. In particular, the contributions provide answers to the following two main questions: (1) doesmicrofinance have an impact on the social and economic situation of the poor in developing nations; and (2) are microfinance institutionssustainable in the long term and is there a trade-off between sustainability and outreach?� 2011 Elsevier Ltd. All rights reserved.

Key words — microfinance, impact, outreach, sustainability

* Final revision accepted: October 30, 2009.

1. INTRODUCTION

The role of microfinance has attracted significant interest inrecent years, both from policy makers as well as in academiccircles. However, as has been pointed out in a recent specialissue on microfinance in The Economic Journal (Hermes &Lensink, 2007), many questions regarding microfinance re-main unanswered. In particular, the following two pressing is-sues should receive more attention: (1) does microfinance havean impact on the social and economic situation of the poor indeveloping nations? This question is very relevant since a lot ofeffort and resources have been put into developing microfi-nance, especially since the beginning of the new millennium,as an instrument to combat poverty. (2) Are microfinanceinstitutions sustainable in the long term; is there a trade-off be-tween sustainability and outreach? Again, this is a very rele-vant question, since putting emphasis on poverty reductioncomes at a price, which may reduce the scope for financial sus-tainability and vice versa.

This symposium contains eight original contributions thatprovide new empirical evidence on these two issues. First ofall, four of the eight contributions address the question ofthe impact of microfinance on the well-being of the poor indeveloping nations. Does microfinance have a measurable im-pact on the social and economic situation of the poor in devel-oping nations? The other four contributions focus on thetrade-off between reducing poverty and being financially sus-tainable at the same time, that is, can MFIs finance theirown operations without compromising their mission to reachout to the poor?

The current symposium for World Development elaborateson the special issue in The Economic Journal (Hermes & Len-sink, 2007) in a number of ways. In the 2007 special issue weprimarily dealt with joint liability group lending, providingnew insights with respect to why and how this type of lendingworks in enhancing repayment rates. We also touched uponthe issue of the trade-off between the financial sustainabilityand outreach of microfinance programs. In this symposium,we provide much more evidence on the trade-off between

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sustainability and outreach. Moreover, the analyses in thissymposium do not explicitly focus on group lending; insteadthey include different types of lending.

The remainder of this introduction consists of brief reviewsof the existing literature on the two issues the papers in thissymposium deal with. Section 2 deals with the impact ofmicrofinance on the well-being of the poor; Section 3 discussesthe tradeoff between sustainability and outreach.

2. THE IMPACT OF MICROFINANCE

The advocates of microfinance argue that access to financecan help to substantially reduce poverty (Dunford, 2006; Lit-tlefield, Morduch, & Hashemi, 2003). Access to finance maycontribute to a long-lasting increase in income by means ofa rise in investments in income generating activities and to apossible diversification of sources of income; it may contributeto an accumulation of assets; it may smooth consumption; itmay reduce the vulnerability due to illness, drought and cropfailures, and it may contribute to better education, health andhousing of the borrower. In addition, access to finance maycontribute to an improvement of the social and economic sit-uation of women. Finally, microfinance may have positivespill-over effects such that its impact surpasses the economicand social improvement of the borrower. The positive assess-ment of the contribution microfinance can make to reducingpoverty has convinced many governments, NGOs, and indi-viduals to put efforts in supporting MFIs and their activities.

Yet, microfinance has also received criticism. In particular,the critics of microfinance doubt whether access to financemay contribute to a substantial reduction in poverty. Theyclaim that microfinance does not reach the poorest of the poor(Scully, 2004), or that the poorest are deliberately excludedfrom microfinance programs (Simanowitz, 2002). First, theextreme poor often decide not to participate in microfinance

http://dx.doi.org/10.1016/j.worlddev.2009.10.021

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programs since they lack confidence or they value the loans tobe too risky (Ciravegna, 2005). The poorest of the poor, theso-called core poor, are generally too risk averse to borrowfor investment in the future. They will, therefore, benefit onlyto a very limited extent from microfinance schemes. Second,the core poor are often not accepted in group lending pro-grams by other group members because they are seen as abad credit risk (Hulme & Mosley, 1996; Marr, 2004). Third,staff members of microfinance institutions may prefer exclud-ing the core poor since lending to them is seen as extremely ris-ky (Hulme & Mosley, 1996). Fourth, the way microfinanceprograms are organized and set up may lead to the exclusionof the core poor. Examples for this exclusion are the require-ment to save before a loan can be granted, the minimumamount of the loan that needs to be accepted and the require-ment that a firm is registered before the loan can be granted(Kirkpatrick & Maimbo, 2002; Mosley, 2001).

Finally, critics of microfinance doubt whether it has a posi-tive impact on women. Many microfinance schemes have aclear focus on women. Research shows that women are morereliable and have higher pay-back ratios. Moreover, womenuse a more substantial part of their income for health and edu-cation of their children (Pitt & Khandker, 1998). Thus, womenplay a very important role in reducing poverty within house-holds. However, the critics argue that often women are forcedto hand over the loan to men, who subsequently use the loanfor their own purposes. This may lead to an additional burdenfor women if they are held responsible for the repayment(Goetz & Gupta, 1996).

The disagreement about the contribution microfinance canmake to reduce poverty impact of microfinance has triggereda large number of empirical assessments. In this respect, re-search has tried to address one or more of the three followingquestions: (1) does microfinance reach the core of the poor ordoes it predominantly improve well-being of the better-offpoor; (2); which contribution is seen as the most important(improvement of income, accumulation of assets, empower-ment of women, etc.); and (3) do the benefits outweigh thecosts of microfinance schemes? (Chemin, 2008; Dunford,2006). The latter issue deals with the question to what extentsubsidies to microfinance organizations are justified. Moststudies aiming at evaluating the impact of microfinance ad-dress the first of the above three issues.

Even though several assessments of the impact of microfi-nance on poverty reduction have been made, there is surpris-ingly little solid empirical evidence on this issue. 1 One majorproblem with respect to investigating the impact of microfi-nance is how to measure its contribution to poverty reduc-tion. Several studies measure the impact of microfinance bycomparing recipients of microfinance with a control groupthat has no access to microfinance. In most cases, these stud-ies apply non-randomized approaches. These approachesmay be problematic, however. First, changes of the socialand/or economic situation of the recipients of microfinancemay not be the result of microfinance. For instance, it iswell-known that relatively rich agents are less risk aversethan relatively poor agents. This may induce rich agents toapply for microfinance whereas poor agents do not apply,that is, there may be a self-selection bias. In this situation,an ex post comparison of income of the two groups may leadto the incorrect conclusion that microfinance has stimulatedincome. Second, in order to improve the probability ofmicrofinance being successful, MFIs may decide to developtheir activities in relatively more wealthy regions (i.e., non-random program placement). Obviously, this biases any com-parison between recipients of microfinance and the control

group (Armendariz de Aghion & Morduch, 2005; Karlan,2001).

The evidence from available published non-randomizedmicrofinance impact evaluations is mixed. One of the mostinfluential studies in this field is by Pitt and Khandker(1998) on the impact of microfinance in Bangladesh, usinghousehold survey data for 1991–92. They find that access tomicrofinance increases consumption expenditure, especially ifloans are taken by women. Khandker (2005), in a follow-upstudy using panel data for 1991–92 and 1999, concludes thatthe extremely poor benefit more from microfinance than themoderately poor. The results of both these studies have beencontested recently in a study by Roodman and Morduch(2009), however, showing that the instrumentation strategymay have failed and that results may be driven by omittedvariables and/or reverse causation problems. Chemin (2008),using the same Bangladesh surveys, applies the propensityscore matching technique and finds that access to microfinancehas a positive impact on expenditures, supply of labor, andschool enrollment. In contrast, Copestake, Dawson, Fanning,McKay, and Wright-Revolledo (2005) are less optimisticabout the impact of microfinance. Based on data from a sur-vey carried out in collaboration with a village banking pro-gram, Promuc, in Peru in 2002, and using a mix ofevaluation methods (among which are the difference-in-differ-ence approach and qualitative in-depth interviews) they findthat it is the “better off” poor rather than the core poor whobenefit most from access to microfinance.

As a response to the methodological flaws of non-random-ized evaluations, studies of microfinance impact have recentlyshifted to randomized approaches. These studies use random-ized controlled trials (or experiments), in which two groups—the treatment group and the control group—are exactly thesame along all relevant dimensions, except that the treatmentgroup has access to microfinance and the control group hasnot. The allocation of individuals in treatment or controlgroups is random. The randomization of the treatment maybe deliberately carried out, for example, by a microfinanceprogram, which randomly opens new branches in a previouslyuntapped slum of a big city. It may also occur due to an exter-nal (natural) event, such as, for example, a volcanic interrup-tion selectively hurting some microfinance clients, whileleaving others unaffected. Differences in outcome variables,such as consumption, investment and health can then be caus-ally linked to the treatment. 2

Also the evidence from studies using randomized experi-ments appears to be mixed; some of the results seem to suggestthat effects are stronger for groups that are not typically tar-geted by MFIs. Coleman (1999, 2006) is one of the first touse a randomized approach when evaluating the impact ofmicrofinance. In his study he is able to make use of an externalevent, that is, a microcredit program introducing microfinancein the Northeastern part of Thailand with random and unan-nounced delays. Based upon this quasi-experimental setting,his analysis shows that microfinance has a positive impacton the more wealthy villagers only. Karlan and Zinman(2009) study the effect of microcredit on small business invest-ment in Manila, the Philippines. The picture emerging fromtheir results is rather diffuse. One important result is that prof-its from business increase especially for male and higher-in-come entrepreneurs. Moreover, they find rather strikingresults showing that businesses substitute away from laborinto education and formal insurance into informal insurance.Banerjee, Duflo, Glennerster, and Kinnan (2009) evaluatethe impact of the opening of MFI branches in the slums ofHyderabad. Half of the 104 slums were randomly selected

MICROFINANCE: ITS IMPACT, OUTREACH, AND SUSTAINABILITY 877

for opening a new branch. They find mixed results, but on thewhole the effect of introducing microfinance appears to be verymoderate. Apart from these studies, several others are still inprocess (Roodman & Morduch, 2009). 3

Yet, also the use of randomized controlled trials has re-ceived criticism (Deaton, 2009; Rodrik, 2008). Perhaps themost important comment raised is the fact that results fromone experiment can hardly be generalized. So, if the evidenceshows that a specific microfinance program works in the con-text of the slums of a city in Sub-Saharan Africa in a particularyear, this does not necessarily mean that the same programworks elsewhere. In other words, context matters. The solu-tion to this problem, as argued by the proponents of random-ized approaches, is to repeat experiments in different contextsto see whether something works. Yet, it remains unclear howmany times a specific experiment should be repeated before itcan be safely concluded that something works. Moreover, run-ning repeated experiments is very costly and time consuming.Also, incentives for academic researchers to invest in rerun-ning experiments are absent, since leading journals are gener-ally not inclined to publish this type of research (Easterly,2009; Rodrik, 2008; Roodman & Morduch, 2009). As Rood-man and Morduch (2009) conclude, both randomized andnon-randomized approaches have weaknesses and strengths,and, therefore, both could be useful when analyzing the im-pact of microfinance.

The above brief discussion of the evidence on the impact ofmicrofinance on poverty and the difficulties related to its mea-surement shows that the debate is far from settled and thatthere is, therefore, much room for expanding our knowledgeon this issue. Four contributions in this symposium on micro-finance aim to provide in-depth and innovative analyses ofmicrofinance and their impact on poverty reduction. Below,we will shortly review the contents of these contributions.The first contribution is similar to previous non-randomizedapproaches; the second and third contributions come closeto randomized approaches to analyze the impact of microfi-nance; and the final contribution proposes an alternativemethodology for impact assessment.

The paper by Dalla Pellegrina (2011) contains two maininnovations with respect to the analysis of the impact ofmicrofinance. First, the paper aims at analyzing the impactof microfinance as compared to the impact of two othersources of credit, that is, bank loans and informal credit. AsDalla Pellegrina rightly points out, most impact studies onlyfocus on microfinance loans, without making the comparisonto other financial sources. Such a comparison is, however,important as it helps our understanding about the real contri-bution microfinance can make. Secondly, her study focuses onthe impact of credit on investment, whereas most other impactstudies tend to focus on income, consumption, education, etc.Dalla Pellgrina stresses that for improving living standards inthe long term, investments are needed so that borrowers candevelop productive activities. Using information from a largesurvey on almost 1,800 households in rural Bangladesh carriedout by the World Bank in 1991–92, she finds that microfinanceloans (in her study group loans) mainly help to increase work-ing capital expenditure (which are generally associated withnon-agricultural activities), whereas bank loans play animportant role in accumulating fixed assets (generally associ-ated with agricultural activities). The latter are most importantto generate long-term productive activities. These results indi-cate that with respect to the impact on long-term investments,microfinance may be less effective than bank loans. Dalla Pell-egrina suggests that microfinance may be less conducive tobuilding up fixed assets due to lending characteristics such as

short and regular repayment schedules and the group lendingmethod. These lending characteristics may push borrowersmore toward investments in projects with short-term revenues.

The contribution by Becchetti and Castriota (2011) analyzesthe impact of microfinance by focusing on its effectiveness as arecovery tool after a natural disaster. In their paper they eval-uate the contribution of microfinance loans in helping peoplewho were hit by the tsunami in Sri Lanka in 2004. They havedata for 305 randomly selected microfinance borrowers. Thetsunami disaster provides a unique quasi-natural experimentto test the impact of microfinance on people’s well-being, be-cause it creates two randomly selected groups. One group ofborrowers consists of those who are hit by the tsunami; theother group consists of borrowers who are not affected bythe disaster. Based on a rich dataset containing informationfor both before and after the tsunami, Becchetti and Castriotashow that before the tsunami access to microfinance was animportant reason for income convergence among borrowers.Due to the tsunami, the convergence process was severely dis-rupted, but again microfinance loans provided after the disas-ter were instrumental in reducing the income gap betweenthose who were hit and those who were not. According to Bec-chetti and Castriota this process of recovery was remarkablyfast. Moreover, they show that the positive contribution ofmicrofinance loans to improving and converging real incomeswas not observed for governmental subsidies, donations, andgrants. Their study thus finds strong evidence for the effective-ness of microfinance as a recovery tool. As far as we know thisis one of the very few comprehensive analyses of microfinanceand its role in post-disaster situations. These results may haveimportant policy implications for governments, NGOs, etc.that are active in such situations.

Rai and Ravi (2011) in their paper focus on the impact ofmicrofinance on women empowerment. They study this issueby making use of a unique dataset consisting of almost280,000 microfinance borrowers in India; these borrowersare required to purchase health insurance once they get a loan.In recent years, partnerships between microfinance and healthinsurance have been used in India to extend health insuranceto the poor. Usually it is difficult to reach the poor, but by cre-ating these partnerships health insurance delivery can makeuse of the existing rural networks of microfinance branches.Moreover, in many cases one of the aims of many MFIs isto empower women and these partnerships may contributeto this aim, since usually women are less likely to seek and ob-tain health insurance. The main finding of their analysis is thatborrowers make more use of health insurance (in terms of fil-ing claims) than their partners do. Moreover, and more impor-tant with respect to women empowerment, women who areborrowers make significantly more use of health insurancethan non-borrowing women who have obtained the insurancethrough their husbands. This latter result provides evidencefor the claim that access to microfinance may empowerwomen.

The final paper contributing to the literature on the impactof microfinance presents a new methodology to measure theimpact of microfinance on the well-being of borrowers. Intheir paper McIntosh, Villaran, and Wydick (2011) developthe so-called Retrospective Analysis of Fundamental EventsContiguous to Treatment. According to the authors this meth-odology allows to measure welfare changes—due to a treat-ment such as, for example, access to microfinance—basedupon a single cross-sectional survey in which questions are in-cluded on fundamental events in the history of respondents.These fundamental events are defined as events in a house-hold’s history that are discrete, unforgettable, and important


to household welfare. By using questions that relate to suchevents researchers can create a retrospective panel dataset inorder to measure the impact of a certain treatment. In partic-ular, analyzing the timing of these events within a windowaround the timing of treatment allows for statistical testsbased on changes in household welfare variables occurringafter the treatment. The methodology proposed by McIntoshet al. has similarities with the event study, which is used exten-sively in the finance literature. They apply their methodologyto a survey among 218 Guatemalan households that have ob-tained access to microfinance in different years and examinethe effects of access to credit on dwelling improvements. Theresults of their analysis show that access to microfinance in-creases the probability of dwelling improvements, althoughthe effects are relatively modest. The most important contribu-tion of this paper, however, is a methodological one. The newmethodology may be very helpful for researchers when analyz-ing the impact of microfinance, since it does not demandexpensive and time-consuming multiple cross-sectional sur-veys, which are normally used in impact studies.

3. MICROFINANCE: SUSTAINABILITY VERSUSOUTREACH?

As was mentioned before, providing microfinance is a costlybusiness due to high transaction and information costs. Atpresent, a large number of microfinance programs are stilldepending on donor subsidies to meet the high costs, whichmeans they are not financially sustainable. In the 1990s, the is-sue of financial sustainability of microfinance institutions gaverise to an important debate between the financial systems ap-proach and the poverty lending approach (Robinson, 2001).The financial systems approach emphasizes the importanceof financially sustainable microfinance programs. This ap-proach stresses the importance of being able to cover the costof lending money out of the income generated from the out-standing loan portfolio and to reduce operational costs asmuch as possible. The poverty lending approach, however,concentrates on using credit to help overcome poverty, pri-marily by providing credit with subsidized interest rates. Theadvocates of this approach argue that the poor cannot affordhigher interest rates. Therefore, aiming at financial sustainabil-ity ultimately goes against the goal of serving large groups ofpoor borrowers. In other words, there is a trade-off betweensustainability and outreach. The proponents of the financialservices approach, however, claim that empirical evidence nei-ther shows that the poor cannot afford higher interest rates,nor that there is a negative correlation between the financialsustainability of the institution and the poverty level of the cli-ents. The main argument to support their view is that large-scale outreach to the poor on a long-term basis cannot beguaranteed if MFIs are not financially sustainable. During re-cent years, the debate appears to have been settled in favor ofthe proponents of the financial systems approach. In fact, theimportance of striving for financial sustainability has been em-braced by most parties involved in the microfinance debate.

In parallel with this development, donors, policy makers,and other financers of microfinance have recently made a shiftfrom subsidizing MFIs institutions toward a focus on financialsustainability and efficiency of these institutions. Among otherthings, this increased focus on financial sustainability and effi-ciency is due to a number of developments the microfinancebusiness has been recently confronted with, such as theincreasing competition among MFIs, the commercializationof microfinance (i.e., the interest of commercial banks and

investors to finance MFIs), technological change that alsohas become available for, and implemented in microfinance,and financial liberalization and regulation policies of the gov-ernment (Rhyne & Otero, 2006).

At the same time, however, there remains a huge variety inMFIs in terms of their financial sustainability (Deutsche Bank,2007). According to rough estimations, only 1–2% of all MFIsin the world (i.e., some 150 organizations) are financially sus-tainable. In most cases, these are larger, mature, regulated,and relatively well-known MFIs. Some 8% of all MFIs areclose to being profitable. Both these groups of MFIs are con-sidered to be commercial organizations, focusing on profitabil-ity and/or sustainability. A third group of organizations (20%of all MFIs) consist of mostly NGOs, which are not yet finan-cially sustainable, but may become sustainable in the near fu-ture. The remaining group of MFIs (70% of all organizations)consist of smaller, start-up organizations, which are still farfrom being financially sustainable and are, therefore, (heavily)dependent on subsidies.

Shifting the emphasis toward financial sustainability hasraised concerns with respect to the consequences of this shiftfor the outreach of microfinance, that is, the number (breadth)and socioeconomic level (depth) of the clients that are servedby MFIs. As was discussed above proponents of the povertylending approach claim focusing on financial sustainabilitygoes at the cost of lending to the poor. Lending to poor bor-rowers can be very costly, which means that outreach and sus-tainability goals are conflicting.

The literature on this issue is not extensive and is largelyanecdotal. One of the few academically solid studies is pro-vided by Cull, Demirguc�-Kunt, and Morduch (2007). Thisstudy attempts to systematically examine financial perfor-mance and outreach in a large comparative study based on adataset of 124 microfinance institutions in 49 countries. Cullet al. empirically investigate whether there is a trade-off be-tween the depth of outreach and profitability of MFIs. The re-sults show that MFIs that mainly provide individual loansperform better in terms of profitability, but the fraction ofpoor borrowers and female borrowers in the loan portfoliois lower than for institutions that mainly provide group loans.The study also suggests that individual-based MFIs increas-ingly focus on wealthier clients—a process termed as missiondrift—whereas this is less so for the group-based MFIs. Thus,the study by Cull et al. provides evidence for a trade-off be-tween sustainability and outreach and stresses the importanceof institutional design in determining the existence and size ofsuch a trade-off.

From a policy making perspective it is very important toknow whether there is a trade-off between sustainability andoutreach. Given that there is hardly any solid evidence onthe existence of a trade-off, there is much room for expandingour knowledge on this issue. Two contributions in this sympo-sium explicitly deal with the trade-off discussion. Two othercontributions focus on determinants of outreach and efficiencyseparately.

Hermes, Lensink, and Meesters (2011) provide new evidenceon the existence of the trade-off between sustainability andoutreach, using data for 435 MFI for the period 1997–2007.In particular, the study focuses on the relationship betweencost efficiency of MFIs (as a measure of sustainability) andthe depth of outreach measured by the average loan balanceand percentage of women borrowers. Cost efficiency of anMFI is measured by using a stochastic frontier analysis. Thisapproach measures cost efficiency in terms of how close theactual costs of the lending activities of an MFI are to whatthe costs of a best-practice MFI would have been in case it


produces identical output under the same conditions. Hermeset al. find strong evidence that outreach is negatively related toefficiency of MFIs. More specifically, MFIs that have loweraverage loan balances are also clearly less efficient. Moreover,MFIs that have more women borrowers as clients are also lessefficient. The results remain robustly significant even after tak-ing into account a long list of control variables. To the best ofour knowledge, this paper is the most comprehensive study ofthe sustainability-outreach trade-off.

The contribution by Cull, Demirguc�-Kunt, and Morduch(2011) also adds to our understanding of the existence of thetrade-off. In their study they investigate whether prudentialregulation and supervision affect the performance and out-reach of MFIs. The issue of prudential regulation and super-vision has become increasingly important since several of thelargest MFIs have started to raise increasing amounts ofdeposits from the public, in most cases relatively poor people(Hartarska & Nadolnyak, 2007). Protection of these depositshas, therefore, become a policy relevant issue. Yet, prudentialregulation and supervision raise the costs of lending for MFIsand the question is whether this affects their profitability and/or whether it has an effect on their outreach. Cull et al., usingdata from the largest 245 MFIs, show that supervision has anegative effect on outreach, since supervision is positively asso-ciated with the average loan balance, whereas it is negativelyassociated with the percentage women borrowers. The out-come of this study is especially interesting in light of recentcalls suggesting that MFIs should broaden their services to-ward offering (more) deposits. This, as is claimed, is importantas it would also broaden the lending capacity of these institu-tions. The paper by Cull et al. clearly shows that such an ap-proach may not only be welfare enhancing.

Hudon and Traca (2011) in their paper focus on the relation-ship between subsidies and the efficiency of MFIs. Extendingknowledge on this relationship is highly policy relevant, sinceas was mentioned earlier, many MFIs still receive subsidiesfrom governments, donors, NGOs, etc. Actually, as Hudonand Traca report, only 5% of all MFIs are currently operation-ally sustainable. The providers of subsidies increasingly de-mand transparency related to the effects of their subsidies onthe performance of MFIs. In particular, questions have beenraised whether subsidization may compromise the efficiencyof institutions. One main issue is that subsidies may keep inef-ficient institutions alive. Yet, even though the demand for thor-ough analyses of the effects of subsidies seems large, very fewstudies have looked into this issue. Hudon and Traca usemicrofinance ratings data from two leading rating agencies,providing them with financial statement data for 100 MFIs.Using this unique dataset they find evidence for a positive rela-tionship between the subsidy intensity and the efficiency ofMFIs. Yet, they also show that there is a threshold effect,meaning that if the subsidy intensity goes beyond a certain le-vel, efficiency is compromised. The paper thus has a clear andpolicy relevant message: subsidizing MFIs may contribute pos-itively to efficiency, but only up to a certain maximum level.

The final paper in this symposium, by Wydick, Karp, andHilliker (2011), investigates determinants of outreach. In par-ticular, the paper uses an innovative approach by looking intothe role played by social networks in determining access tomicrofinance loans. Recently, there has been a new wave of re-search emphasizing the role of social networks on individualdecision making. This research shows that individuals mayimitate the choices made by other members of the same socialnetwork or group for a number of different reasons. First, theymay make these choices because they face similar environ-ments as other members of the network. Second, they may

share the same background characteristics as other members.Third, they may simply copy behavior of other members ofthe network to show conformity to the network. Fourth, theymay copy behavior because this is instrumental in obtaining aspecified goal. Finally, individuals may imitate choices of oth-ers because these choices hold information about what kind ofbehavior is welfare enhancing. Wydick et al. apply the insightsof this research to microfinance, in particular on how the useof microfinance may diffuse to new users in rural and urbanareas. They use information for 465 households based on asurvey among households in Guatemala. Questions wereasked related to the adoption of new consumer goods, suchas bicycles, televisions, and cell phones, as well on the accessto credit. Answers to these questions, which are proxies forindividuals’ choices made with respect to buying consumergoods and obtaining credit, are then related to three differentsocio-economic variables, reflecting social networks. Thesevariables are: the village in which the household is located,their immediate geographical neighborhood, and the churchto which the household belongs. The empirical analysis con-vincingly shows that a household’s access to credit is closelyrelated to membership of a church network. In particular,the analysis suggests that households that belong to a churchnetwork in which there are other households that have accessto credit have a higher probability to also have access to credit.The practical implication of this result is that MFIs shouldconsider using existing social networks such as churches intheir attempts to broaden and/or deepen the outreach of theirmicrofinance services.

4. LESSONS TO BE LEARNT?

After having reviewed the contents of the contributions tothis symposium on microfinance, the question remains whatnew insights these contributions have provided regarding theimpact of microfinance on the one hand and the trade-off be-tween outreach and sustainability on the other hand.

(a) Impact

Starting with the contributions on impact, one lesson is firstof all that MFIs should be aware of the fact that the lendingtechnology and the type of contract they use may have impor-tant consequences for the way borrowers use the loans. Thework of Dalla Pellegrina (2011) supports the view that, forexample, using loan contracts with regular repayments maydiscourage borrowers to investment in projects requiring long-er gestation. Group lending systems in which social pressureand punishment are prominent may lead to using loans leadingto short-term returns. For MFIs, it is important to understandthe potential impact of the lending technology and contract onthe behavior and choices made by the borrower when decidingon what the ultimate aim should be of providing loans to thepoor. One potential response that accommodates this insightmay be to reconsider lending technologies/contracts used andturn to approaches in which the lending technology and con-tract allows for more flexibility than is usually the case. 4

A second lesson we draw from the contributions in the sym-posium is that there is convincing evidence for a positive im-pact of microfinance, at least in the two cases discussed inthe work of Becchetti and Castriota (2011) and Rai and Ravi(2011). So, microfinance does seem to make a difference inrecovery after a natural disaster and it does seem to helpempowering women. These results are reassuring as both areasare high on the agenda of many NGOs and policy makers.


Given the discussion on the difficulty of generalizing resultsfrom small case studies, however, it is necessary to extendthe work on microfinance in both areas and do replicationstudies to see whether the results found in both these studiesdo hold on a wider scale. 5 The results of both studies may,therefore, hopefully set at least part of the future researchagenda on microfinance.

The third lesson from the symposium is related to the use ofresearch methodologies for analyzing microfinance impact. Inmany cases, these methodologies are very costly and time con-suming. It generally takes several rounds of surveys over a rel-atively long period of time before adequate data have beencollected. The contribution by McIntosh et al. (2011) in thissymposium proposes a smart solution to come around thisproblem. The methodology they suggest allows for creatinga retrospective panel database based upon a single survey,using the client base of the MFI(s) involved in the analysis.The simple idea is to ask respondents to think about majorchanges in the household in the past and link these changesto the timing of a treatment such as having access to a micro-finance loan. This methodology allows for explicitly analyzingthe dynamics of the impact of a treatment. This methodolog-ical innovation may, therefore, be very useful for bothresearchers and policy makers when evaluating the impact ofmicrofinance. 6

(b) Outreach versus sustainability

The lessons from the contributions on the outreach versussustainability discussion are threefold. First of all, there isstrong evidence that the trade-off between the two is existent.Aiming for sustainability does compromise the social goals ofMFIs (Hermes et al., 2011). Similarly, transforming MFIs intoformalized banking institutions does not only have positiveconsequences for the poor (Cull et al., 2011). This is a clear,yet provocative, message. It is relevant for policy makers whendeciding on whether or not to subsidize microfinance; it is rel-evant for microfinance practitioners for their decisions to fur-ther improve the efficiency of their operations; and it isrelevant for commercial investors, especially those who aimfor socially responsible investments. The next question then

is: what is the size of the trade-off? How much does a marginalimprovement of the financial sustainability of an MFI mean interms of reducing outreach to poor clients? There is hardly anyevidence on the size of the trade-off. One first attempt of ana-lyzing this issue is made by Galema and Lensink (2009). Basedupon a small sample of 25 MFIs, they calculate to what extentsocial investors are willing to accept a decrease on returns (oran increase in the riskiness of returns) to achieve higher out-reach. Interestingly, they show that whereas the trade-off isnot large for average loans of 180 US dollars or more, it isfor average loans below this level. This outcome suggests thatthe trade-off is particularly severe for the lower end of the pov-erty distribution, that is, the group that is typically targeted byMFIs. Obviously, more research into the size of the trade-off isneeded in future to be able to come to convincing conclusionson this issue.

Another, related lesson from the symposium contributionby Hudon and Traca (2011) is that subsidies do not have tocompromise efficiency of MFIs, as long as subsidy levels re-main moderate. In particular, providing smart subsidies (i.e.,subsidies for starting up new branches in untapped areas, sub-sidies for staff training, etc.) may actually improve the perfor-mance of MFIs. This contribution supports the view thataiming for financial sustainability only may not be a fruitfulvenue when discussing the long-term viability of microfinancework.

A final contribution focuses on how MFIs could improvetheir operations in terms of increasing their outreach whileat the same time reducing the costs of reaching out. The inno-vation provided by Wydick et al. (2011) focuses on the use ofexisting social networks between existing and potentially newmicrofinance clients. According to Wydick et al. MFIs couldmake more use of these networks when reaching out to thepoor as it turns out that households may be willing to applyfor microfinance because other households in the same net-work do so as well. Using these networks is a low-cost strategyfor MFIs when reaching out to new clients. With respect to thediscussion on the trade-off between outreach and sustainabil-ity this is an important conclusion, because this would betterenable MFIs to reach higher levels of outreach without havingto compromise its financial sustainability.

NOTES

1. Westover (2008) reviews the empirical literature on the impact ofmicrofinance and finds over 100 studies using the EBSCO Host database.He concludes that of these studies only six can be classified asacademically rigorous, the remainder being qualitative and/or case studiesof MFI program impact.

2. See Banerjee and Duflo (2008) for a comprehensive discussion of theuse of randomized experiments in development economics.

3. Especially the Abdul Latif Jameel Poverty Action Lab at MIT is activein carrying out impact analyses using randomized experiments; see theirwebsite: http://www.povertyactionlab.org. See also the website of theFinancial Access Initiative for research on this issue; http://financialac-cess.org/research/publications.

4. The case for more flexibility in lending technologies and contracts usedhas recently been also made by Collins, Morduch, Rutherford, andRuthven (2009).

5. To date, only a few studies have investigated the impact ofmicrofinance on recovery after natural disasters; see Khandker (2007),Hoque (2008), and Berg and Schrader (2009).

6. Actually, Becchetti and Castriota (2011) have used this approach intheir contribution to this symposium.

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microfinance: its impact, outreach, and sustainability

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