The macro effect of microfinance

Is it measured by the number of children in school or higher education, access to healthcare and the status of women in society? Or perhaps a better gauge of Samaritan efforts is access to credit, more consumption, new business creation and investment in durable goods?

Some proponents of microfinance or microcredit, the business of lending to the very poor, believe it can do the whole kit and caboodle: eradicate poverty and hunger; promote universal primary education, gender equality and women's empowerment; and improve the health of children and their mothers. Oh, and create millions of new entrepreneurs and businesses employing millions more of the poor, enriching communities, cities and countries.

In 2006, Mohammad Yunus and Grameen Bank, microfinance innovators, were jointly awarded the Nobel peace prize for reducing world poverty. By 2007, more than 150 million people  two-thirds of them women  were customers of the wider microfinance sector.

Nearly US$11 billion (NZ$14.6b) was committed to lending last year, although about half of that comes from governments, agencies and institutions such as the World Bank. The private sector's share of lending is growing, however, and for-profit companies are heavily involved.

Entrepreneur Derek Handley has put his money and time into Opportunity Bank, owned by an American charitable trust set up by Hyatt heiress Liesel Pritzker.

The 31-year-old, who made his money in mobile phone company The Hyperfactory, has just returned from Tanzania and Rwanda, where he saw first-hand the bank's operation. He has now offered to do more.

Handley says: "It's not aid, it's not a handout; it's a hand up, helping people to help themselves and that's interesting and attractive to me." Part of the allure, no doubt, is the beauty of a "market-applied model" to a problem that has vexed generations of governments. Traditional forms of aid have long been controversial for the amount of money absorbed up-front, incompetence and corruption.

Microfinance, it is argued, side-steps the problem by putting the cash in the hands of those most in need. These people, on average, repaid 98 per cent of their debt, a figure Handley confirms.

Yet doubts remain about the microfinance "miracle", as some have called it. Critics are troubled by the accumulation of debt and fear it could engender more extreme poverty in future years.

Part of the problem in assessing microfinance's impact is the lack of reliable data. Critics are right to accuse proponents of over-cooking their claims. Self-selection  the entrepreneurial are more likely to access the credit  makes rigorous evaluation difficult, researchers at the Massachusetts Institute of Technology economics department suggest.

In May they published the first proper evaluation of microfinance by working with Spandana bank to establish outlets in more than 50 slums in Hyderabad, India. They compared the results with 50 other comparable slums denied credit. Both samples were randomly selected and had similar levels of literacy and numbers of existing family businesses. After 18 months, the report authors  Abhijit Banerjee, Esther Duflo, Rachel Glennerster and Cynthia Kinnan  found there was no discernable impact on women's empowerment. Women spent more on child health and education than men, but access to credit has no impact on this gender difference.

Similarly, spending on schooling, medical treatment and sanitation did not change and there was no rise in enrolment of girls or boys.

Borrowing was higher, up by almost half compared to those without access to Spandana microcredit. New businesses flourished  32 per cent more in "treated areas". One in five of the loans were put to this use, although there was no comparable increase in employee numbers. Business profits were considerably higher.

Overall spending was similar, but interestingly, what they spent their money on changed. Treated households on average spend twice as much on durable goods for the business but drastically reduced their consumption of alcohol, tobacco, betel leaves, gambling and food consumed outside of the home.

The market can't do it all, Handley says. There is still a place for direct aid but his experience and reading of the literature shows microfinance can achieve remarkable results.

As for the health and education outcomes, give it time, he urges. "It may not be a perfect solution but at least I've seen what it has been able to do to communities in Africa.

"If there is a looming [debt] disaster in 10 years, then OK, but in that period people are changing their lives, lifting themselves up, educating their children and really making a lot of progress."

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Nick Smith is a senior freelance writer.

- AAP