Bringing Development Back Into Microfinance
by Maria Otero

The purpose of this paper is to explore three points at which microfinance intersects with development: reaching the poor, building sustainable microfinance institutions, and deepening the financial system's reach. The paper argues that it is microfinance's ability to connect in all three of these points that make it so compelling as a development strategy. These three dimensions of microfinance are not a discussion about the trade-offs of one over the other; without all three, the strong points of intersection between microfinance and development will fade into oblivion and microfinance will become either a set of highly profitable institutions that have abandoned their market, or a set of insignificant donor-dependent and localized credit programs. Keeping the collective eyes of microfinance professionals on these intersection points is the huge challenge of this field today.

Measuring Transformation: Assessing and Improving the Impact of Microcredit
by Susy Cheston, Larry Reed

The question of impact assessment is one that continues to plague microcredit practitioners. Some contend that existing impact assessment studies are meaningless, while others maintain they are absolutely necessary. The authors of this paper advocate a renewed focus on the transformation of clients and their communities, as well as a new impact assessment model to support and document this focus. The outline the key principles for conducting impact audits that include measurement of transformation among clients. The also review a series of practitioner-oriented impact assessment tools and outline future challenges for practitioners, donors, and academics in improving performance through impact assessment.

The Impact of Outcome-Based Assessment on Microenterprise Programs
by Margaret A. Johnson, Umasundari Akella, Julie Lalende

The changing environment in the nonprofit sector has subjected microenterprise programs to a new paradigm that emphasizes rationality principles. These principles ask practitioners to increase their outcomes while minimizing costs and to demonstrate that they are doing so with outcome-assessment measurements. This paper presents a case study of what happened to 11 microenterprise programs that adopted outcome assessment. Factors affecting the adoption of outcome assessment were changing norms in the nonprofit sector, demands from state legislators for information on program outcomes, and mandates from funders. A funding formula was implemented; program responses included going along, adopting practices to fit the formula, embracing outcome assessment as a way towards program improvement, and possibly eliminating ineffective programs. Unintended consequences and ways to avoid them are discussed.

Microenterprise Development in the Heartland: Self-Employment as a Self-Sufficiency Strategy for TANF Recipients in Iowa 1993-1998
by Salome Raheim, Jason J. Friedman

There has been a significant interest in the microenterprise movement regarding its effectiveness as a welfare-to-work strategy. A decade’s worth of program results, demonstration projects, and research strongly suggest that the benefits of microenterprise development for welfare recipients outweigh the costs and risks. The state of Iowa has been a leader in promoting microenterprise development as a welfare-to-work strategy. Iowa was the first state in the US to incorporate microenterprise-development training as an eligible activity in its welfare-reform program. Since 1993, the Iowa Department of Human Services (IDHS) has contracted with the Institute for Social and Economic Development (ISED), a statewide microenterprise development organization, to help welfare recipients become self-sufficient through self-employment. IDHS requires an annual third-party evaluation of the program. The purpose of the evaluation is twofold: (1) to document program implementation and results, including goal attainment and participant characteristics; and (2) to analyze participants’ movement toward self-sufficiency, as compared to that of welfare participants not enrolled in the program. This article reviews ISED’s program and summarizes the findings of the first five years of the program. Among other findings is the fact that the program has experienced a three-year business survival rate of 56.4%.

Village Banking Dynamics Study: Evidence from Seven Programs
by Judith Painter, Barbara MkNelly

The primary question examined in this study is whether client loans grow or stagnate over time. Loan growth is important to financial sustainability and is also a proxy for positive impact. The relationship between loan growth and a variety of factors—program loan and savings policies, site selection, membership dynamics-are explored in the context of seven village band programs. The study concludes that on average, loan size did not stagnant but increased steadily, although at a rate lower than the original village bank model projections. Only programs that allowed non-poverty level loans (loans above US$300) approached the original loan growth rate. Other factors positively associated with more rapid loan growth were urban site selection and restricted internal fund policies. Membership turnover—influx of new clients and drop-out of original clients—was also evident across all programs, dampening loan growth rates by approximately 25%. While factors external to the program affect these dynamics, program policies can play an important role in stemming the drop-out rate. In early loan cycles, initial program promotion and orientations need to clearly articulate program requirements and terms. In later loan cycles, policies pertaining to savings access, meeting frequency, and membership requirements may require flexing to enhance clients’ incentives to remain.

Are Grameen Replications Sustainable, and Do They Reach the Poor?: The Case of CARD Rural Bank in the Philippines
by Hans Dieter Seibel, Dolores Torres

The Grameen Bank in Bangladesh is known worldwide for its success in providing credit to the poor. However, subsequent replications of its methodology in other parts of the world have been less successful. Is there really an infallible solution that works everywhere, and is outreach to the poor compatible with sustainability? A Grameen replicator in the Philippines, the Center for Agriculture and Rural Development (CARD), has recently set itself firmly on the path to sustainability by becoming a formal sector, rural bank—the first credit NGO in the country to do so. During the period, from 1993 to June 1999, CARD’s all-female outreach soared from 1,711 to 26,369. Its operational self-sufficiency ratio increased from 0.46 to 1.09. At the end of June 1999, CARD’s loan portfolio stood at US$2.7 million, its repayment rate was 99.9%, and its financial self-sufficiency ratio was 0.85. The principal lesson to be learned from the CARD’s success is that Grameen-type microfinance institutions (MFIs) can be sustainable and can substantially increase their outreach. CARD’s social capital comprises (a) a core of good Grameen practices, such as high moral commitment on the part of the leaders, based on values instilled through training; peer control, to preclude adverse selection and moral hazard; and a strict credit discipline; (b) innovative adaptations to suit the Philippine context, such as the adoption of rural bank status under central bank supervision; vigorous mobilization of voluntary savings; the provision of differentiated, profit-making loan and insurance products; and a broadening of the clientele to include poor and nonpoor depositors, while adhering to its mission of lending to poor women only.

The Microcredit Summit’s Challenge: Working Toward Institutional Financial Self-Sufficiency While Maintaining a Commitment to Serving the Poorest Families
by David S. Gibbons, Jennifer W. Meehan

Institutional financial self-sufficiency (IFS) is necessary for a microfinance institution (MFI) to obtain the large amount of funds required to reach and benefit truly large numbers of the poor and poorest households. There is no necessary trade-off between serving large numbers of the poorest households and the attainment of IFS by an MFI, as proven by the case studies in this paper. Cost-effective identification of the poor and the poorest women is essential to maximizing the effectiveness and efficiency of providing microfinance services to them. If the service is not exclusively for the poor and the poorest, it should be operated separately for them to minimize leakage to the nonpoor. The total cost of efficient microcredit to the poor, i.e., the appropriate interest rate, will vary between 35% and 51% of their average loans outstanding, depending on the conditions under which it is provided, and on the quality of the loan portfolio. The poorest women in Asia, Africa, and Latin America are proving that they can and will pay the required cost of this opportunity to reduce their poverty and to provide a better future for their children. This is made possible by the impressive returns to their microenterprises, averaging normally more than 100%.

Book Review
Defying the Odds: Banking for the Poor By Eugene Versluysen
by Shad Morris