FRINGE-BENEFITS: The Contributions of Microcredit to the UN Sustainable Development Goals Don’t Include Reducing Poverty
By Sally Dawoud, PEng, MEng, MBA
Measuring Benefits of Microcredit
Over the past couple decades, numerous randomized studies conducted by independent third parties have explored the impact of microcredit on poverty in developing countries. In aggregate, independent studies show that microcredit tends to have only modest, non-transformative, impacts on families and communities[i]. Yet, there are many anecdotal success stories featuring individuals – often single mothers struggling financially – that were lifted out of poverty through a microcredit program or a more pervasive microfinance institution. Despite the inherent complexities of these programs, these stories offer simple and powerful arguments in favor of how microcredit can benefit individuals, and therefore, tempt one to ignore empirical evidence to the contrary.
But studies consistently show that microcredit has its greatest positive impact when it is part of a broader, more integrated local financial system that includes savings accounts, insurance options, credit unions, and cooperatives encouraging an ownership stake along with an underlying reliable infrastructure supported by secure technology and enforceable regulations. Financial markets expand financial options for the poor, without the burden of high interest loans[ii] that has necessarily become a mainstay of some microfinance programs.
Although microcredit can help people address short term financial needs, the evidence suggests it has limited ability to impact poverty levels. Yes, individuals may benefit, but there is an overall lack of statistical evidence that microcredit by itself alleviates poverty across broader populations and communities, especially if measured at the national level.
This does not mean that the microcredit movement has been a failure. It simply means that we may be using the wrong metrics and definition of success. This is the time to pause and consider what we are not measuring.
Relevant Sustainable Development Goals
In September 2015, 193 member countries adopted the United Nations’ Agenda 2030 and its 17 Sustainable Development Goals (SDGs). The UN identified SDG 1 as “No Poverty”, with one of its targets being to:
“ensure that all men and women, in particular the poor and the vulnerable, have equal rights to economic resources, as well as access to basic services, ownership and control over land and other forms of property, inheritance, natural resources, appropriate new technology and financial services, including microfinance.”
As mentioned earlier, microfinance has a limited ability to alleviate poverty. But poverty expands far beyond income; it is a multidimensional state[iii] of being that encompasses more than the lack of monetary wealth. It has ramifications on physical health and malnutrition, mental health and stability, access to healthcare and education, access to clean water and sanitation, safety, security, peace, and justice. So rather than limiting success measures of the impact of microfinance to SDG 1, we should measure the impact of microfinance on other SDGs, such as:
· SDG 2: Zero Hunger
· SDG 3: Good Health and Well Being
· SDG 8: Decent Work and Economic Growth
· SDG 10: Reduced Inequalities
SDG 2: Zero Hunger
The aim of SDG 2 is the elimination of malnutrition by supporting sustainable agriculture, small-scale farmers, and food-producers through equal access to land, knowledge, technology, and markets. Two progress indicators on the elimination of hunger are the number of micro-financed farmers and volume of food produced for local markets and consumption. Tracking year over year sustainability of small farms and their resilience needs in the face of climate change and extreme weather events may further inform how best to use precious microfinance funds.
SDG 3: Good Health and Well-Being
The aim of SDG 3 is the achievement of universal health coverage, including financial risk protection and access to health care services, medicines, and vaccines. It targets the reduction of maternal, neonatal, and infant mortality, as well as premature mortality from non-communicable diseases through prevention, treatment, and promotion of mental health and well-being. SDG 3 progress associated with microfinancing in geographical districts may be as straightforward as tracking mortality statistics, health care activity, vaccination numbers, and associated demographics locally, regionally, or nationally. In fact, much of the information could be self-reported by those accessing microfinance.
SDG 8: Decent Work and Economic Growth
SDG 8 targets sustained economic growth by encouraging entrepreneurship and job creation, both of which could be direct consequences of microfinancing. However, it is worth noting that sustained job creation and economic benefit is more likely to be a result of mid-sized enterprise growth and expansion[iv], not individual or very small entrepreneurial enterprises as previously believed. In fact, according to the OECD, small to mid-sized enterprises account for two-thirds of jobs in the private sector and are the principle source of new employment opportunities; whereas individual entrepreneurs are more likely to access microfinancing loans as temporary stopgaps during periods when expenses exceed income than for business generation. In order to measure the impact of microfinance on sustained job creation and economic growth, there needs to be finely tuned economic metrics at the local and regional levels, not just national GDP and employment rates. Furthermore SDG 8 specifically targets strengthening the capacity of domestic financial institutions to encourage and expand access to banking, insurance, and financial services. This goal extends beyond job creation to ensure financial access and inclusion for individuals in developing countries encouraging an ownership stake that would ultimately nurture economic growth. For the past decade, the IMF has annually conducted a financial access survey[v] to measure progress towards this particular target because it has been successfully correlated with lowered poverty levels.
SDG 10: Reduced Inequalities
The aim of SDG 10 is economic inclusion regardless of gender, race, disability, religion, or ethnicity by encouraging development assistance, cash flow, and foreign direct investment where assistance is most needed for sustained income growth that is customized to the needs of a target group. Microfinancing models are often generically designed to be self-sustaining funds where repayment with small interest is sufficient to sustain the funds and perpetuate the means of financing through the initial capital. An alternative approach could see some funding strategically invested to support the creation of local financial institutions and infrastructure such as credit unions and cooperatives to create a more equal access to capital based on the needs of specific and unique disadvantaged groups.
Reaching Fringe Benefits
While numerous studies have shown that microcredit programs benefit individuals and families in some ways, there is limited objective evidence that they have a material impact on poverty levels in general or that they are even accessed by those defined as poor, when measured at the national level. The alleviation or eradication of poverty requires more integrated economic actions and robust financial systems[vi], alongside targeted planning to reach the poorest participants in developing countries[vii].
However, the benefits of microfinance extend beyond poverty and may include outcomes such as improved nutrition and health, job creation, and more equitable economic development. International development organizations such as Rotary will want to focus on these other outcomes if they want to measure the true benefits of microcredit and microfinance.
As the old adage goes, “what gets measured gets managed”. We will only achieve the goals towards which we can accurately measure progress. If we measure the wrong things, or fail to measure progress at all, we run the risk of ending up in a different place than we intended.
Sally Dawoud is a Director of nGens (nGen Sustainability Inc., ngens.ca), a non-profit organization working to advance sustainable development efforts in Canada and the world through education, collaboration, consultancy, and practical solutions for a sustainably prosperous world. Sally can be reached at email@example.com for further discussion and commentary.
[i] Duvendack M, Palmer-Jones R, Copestake JG, Hooper L, Loke Y, Rao N (2011) What is the Evidence of the Impact of Microfinance on the Well-Being of Poor People? London: EPPI-Centre, Social Science Research Unit, Institute of Education, University of London. ISBN: 978-1-907345-19-7
[ii] Rhyne, Elisabeth (2010) Why are Microfinance Interest Rates So High? ACCION International, Centre for Financial Inclusion.
[iii] Alkire, S. (2013) "How to measure the many dimensions of poverty?", in Development Co-operation Report 2013: Ending Poverty, OECD Publishing, Paris.
[iv] Ody AJ, Ferranti D (2007) Beyond Microfinance: Getting Capital to Small and Medium Enterprises to Fuel Faster Development, The Brookings Institute – Policy Brief #159. Georgetown University, Washington, DC.
[v] Sherpa, Pemba (2019) The International Monetary Fund: Tenth Annual Financial Access Survey Results.
[vi] Singh PK, Chudasama H (2020) Evaluating Poverty Alleviation Strategies in a Developing Country. PLoS ONE 15(1): e0227176.
[vii] Dutrey, Alexander Peyre (2007) Successful Targeting? Reporting Efficiency and Costs in Targeted Poverty Alleviation Programmes. Switzerland GE.07-02752-November 2007-1,100 UNRISD/PPSPD35/07/8.