Empirical research on the impact of microfinance (specifically micro-credit and micro-savings) on poor people in sub-Saharan Africa was reviewed. Thirty-five studies which compared the impact of having a loan or a savings account with not having either were identified. Of these, 15 were considered to be of good enough quality to include in the in-depth review. They included four randomised controlled trials, two non-randomised controlled trials and nine case control studies. Eleven of the studies included in the in depth review were of micro-credit interventions, two were of combined credit and savings interventions and two were of savings schemes alone. They include evaluations of microfinance programmes within Ethiopia, Ghana, Kenya, Madagascar, Malawi, Rwanda, South Africa, Tanzania (Zanzibar), Uganda and Zimbabwe, and include both rural and urban initiatives.
The main conclusions of the review are as follows:
1. Some people are made poorer, and not richer, by microfinance, particularly micro-credit clients. This seems to be because: they consume more instead of investing in their futures; their businesses fail to produce enough profit to pay high interest rates; their investment in other longer-term aspects of their futures is not sufficient to give a return on their investment; and because the context in which microfinance clients live is by definition fragile.
2. There is some evidence that microfinance enables poor people to be better placed to deal with shocks, but this is not universal.
3. The emphasis on reaching the 'poorest of the poor' may be flawed. There may be a need to focus more specifically on providing loans to entrepreneurs, rather than treating everyone as a potential entrepreneur.
4. Micro-savings may be a better model than microcredit, both theoretically (because it does not require an increase in income to pay high interest rates and so implications of failure are not so high) and based on the currently available evidence. However, the evidence on micro-savings is small and further rigorous evaluation is needed.
5. The rhetoric around microfinance is problematic and damaging. 'Clients' could also be called 'borrowers' or 'savers', and 'micro-credit' might just as well be called 'micro-loans' or even 'micro-debt'. There is an obligation amongst donors and policy-makers not to falsely raise expectations with development aid in this way. The apparent failure of microfinance institutions and donors to engage with evidence of effectiveness perpetuates the problems by building expectations and obscuring the potential for harm. A growing microfinance industry may as easily be a cause for concern as one of hope.
A number of recommendations for policy, practice and research are made.
EPPI-Centre, Social Science Research Unit, University of London, London, UK, ISBN 978-1-907345-04-3, 100 pp.