UNITED NATIONS CAPITAL DEVELOPMENT FUND    Microfinance

Issue 15 / August 2005

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Update

on the International Year of Microcredit 2005

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1. You have said, "One of the goals of the International Year of Microcredit is to improve statistics on the nature and scale of the penetration of microfinance." Why is data collection so important in building inclusive financial sectors?
   Data collection is important because without systematic data our knowledge of the extent to which finance is available to people, and our ability to analyze its impact, is limited. Many people - me included - believe on the basis of their experience and that of others that access to microfinance can have a major impact on the standard of living of those who use it. But until we have better data, we will not be able to measure just how important it is to provide access. In addition, with more data we will be able to learn what aspects of microfinance are more effective in providing opportunities to people and in reducing poverty, and thus to refine the policy approach to microfinance.
2. In collecting data regarding poor people's access to financial services, it is much easier to calculate percentages of populations who are financially "captured", or who have access to one or more financial products provided by a formal banking institution. How can data collectors determine percentages of populations who exclusively use informal financial services?

   This would be best done through surveys - household surveys if possible, otherwise specially designed surveys aimed at the populations most likely to use microfinance.

3. An absence of data in terms of demand for and access to financial services could explain why the formal financial sector and national governments have been slow to get on board in building inclusive financial sectors. How can data collection on the microfinance sector be used to influence public policy decisions regarding poor people?

   On the policy side, more than anything, it is important to persuade the public and policymakers that access to microfinance is an effective way of improving people's lives, typically at a very low cost. The private sector may want to be involved in microfinance both through their charitable activities and commercially. The more they can be persuaded that microfinance is commercially viable, the better.

4. What do you think the impact of better data will be on private sector involvement in extending financial services to poor people?

   Assuming that the data show that the provision of microfinance is potentially profitable, better data on profitability will encourage private sector involvement. But greater private sector involvement does not have to wait for comprehensive data - the recent experience of increasing private sector provision of financial services to the poor is already having a positive impact on the desire of other financial firms to enter this market. And that is very important.

5. Donors spend millions of dollars each year on microfinance. How should the effectiveness of this aid be measured?

   Measuring aid effectiveness is difficult at best. However it may well be possible to collect indicators of the impact of aid provided to particular microfinance projects. Such indicators should be related to the purpose of the aid. For instance, if the aim of the aid is to increase access to microfinance, then the impact of the aid can be studied by comparing changes in access to microfinance in areas where aid has been provided to changes in access where aid has not been provided. There are - needless to say - many difficulties in comparisons of this sort (e.g., the aid providers might be financing projects in areas that they judge most likely to be successful). But with sophistication and common sense on the part of the evaluators of the effectiveness of the aid, it might be possible to judge what types of assistance have been most useful.

   It is unlikely that the effectiveness of such aid can be judged using macroeconomic indicators, since so many other variables affect macroeconomic outcomes, and aid to microfinance has so far been on a quite limited scale.

6. There is a growing debate in the microfinance community about how to measure the impact of microfinance. The causal link between access to financial services and improvements in healthcare, education, and women's empowerment, for example, is often touted, but difficult to prove. Do you think it is appropriate to measure the social impact of microfinance?

   It is entirely appropriate and desirable to try to measure the social impact of microfinance. It is better to be able to show objectively that microfinance has a positive social impact than merely to state that repeatedly. Probably the best way to study the social impact of microfinance is through microeconomic studies of the type carried out by Professor Robert Townsend of the University of Chicago, using data that he has been collecting over a long period in rural Thailand.

7. You recently wrote a letter to the Gleneagles G8 Summit on behalf of the International Year of Microcredit (See article, International Year of Microcredit Advisors Group Urges G8 to Support the Development of Indicators of Access to Finance) requesting that they call upon the World Bank and the International Monetary Fund to "broaden the scope of their financial data to develop and include indicators of access to, and use of microfinance" as well as "to report on the microfinance sector and the access of poor and low income people to financial services" in their assessment programmes. Why?

   It is clear that the Fund and the Bank can each play an important role in gathering data - and in helping countries gather their own data - on microfinance. Staff members from both the Bank and the Fund have played a very active role in promoting data work during the International Year of Microcredit. Nonetheless, the members of the Advisors' Group thought it would be useful to encourage the Boards and the Managements of the two institutions to strongly support the data collection effort.

8. You were serving as Vice Chair of Citigroup when you agreed to become Chair of the Advisors Group for the International Year of Microcredit, and you have continued on in this role despite assuming the position of Governor of the Bank of Israel. Why is microfinance a priority for you?

   Thanks for the question. Incidentally, I don't think it is "despite" becoming Governor of the Bank of Israel: the cabinet decision on my appointment took note of and approved my role as Chair of the Advisors' Group. Microfinance is a priority for me because I believe access to microfinance can make an important difference to the lives of those who have it. I don't know quantitatively just how big a difference it does make, but I have seen enough and read enough to persuade me that this is something that should be promoted enthusiastically. Because by definition we are talking about the access of poor people, with very low levels of income, it may be difficult to show that access to microfinance makes a significant difference to the overall growth rate of the economy. But even if it doesn't, it very likely makes a significant difference to the lives of tens of millions of poor people, and perhaps now or later to the lives of hundreds of millions of people. And that is an excellent reason to treat microfinance as a priority.