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Debt from microfinance traps Bolivia’s poorest

Microfinance debt is increasing the vulnerability of the poorest in Bolivia, according to an impact assessment of the industry. Microfinance organisations (MFOs) are improving income, investment and employment - but only for their wealthier clients.

In 1999, Bolivia was hit by severe economic crisis. A stable financial period of five years came to an end. Political upheaval and economic recession followed. This created a great deal of anger among the working classes. And as tension between creditors and debtors mounted, the country’s microfinance industry began to face increasing hostility.

Reliable data on the effectiveness of microfinance in Bolivia was urgently needed. So an impact assessment was launched by the Association of Financial Institutions for Rural Development (FINRURAL) - a not-for-profit Bolivian non-governmental organisation (NGO) with 15 microfinance organizations under its umbrella. This aimed to go further than most impact assessments, which measure only institutional development. It aimed to measure the social and economic impacts of microfinance upon the performance of all clients, and upon the lives of all affected (at the level of individual, household, and community). The first round of assessments was carried out in 2002, involving eight MFOs. A second round began in 2004.

Researchers from FINRURAL and the UK's University of Sheffield now summarise the results of the 2004 assessments, revealing that:

All microfinance organisations had a positive impact on food security.
Impacts on income, investment and employment were positive for clients with sales in excess of US $500, but negative for poorer clients.
Social networks, higher education levels, and risk protection (access to emergency loans from a MFO reserve fund) all help clients to escape from poverty.
‘Credit-plus’ institutions (offering savings, training and insurance services) were not as affected by recession than fashionable ‘minimalist’ (credit-only) institutions.

Unfortunately, the results indicate that many of Bolivia’s very poor people risk falling deeper into the poverty cycle by taking microfinance credit, especially during the recession. The authors suggest that the industry must adapt to address this problem, by:

offering poorer clients low-risk products – such as savings or insurance
designing special financial products for the poorest
or increasing the indirect impacts of microfinance on poverty.

FINRURAL’s approach to impact assessment may be new. But do the benefits outweigh the costs? Total costs from 2001 to 2004 are estimated at US $153,000, or US $19,135 per institution assessed. These are predicted to fall to just US $12,200 per institution during the second round of assessments. Benefits amongst MFOs include: mediation between themselves and their market, exposure of service deficiencies, and useful data for publicity material and sponsor appeals. Benefits for FINRURAL staff include broader organisational links, increased professional competency in quantitative research, and new contacts within academia, government and NGOs. And the assessments are believed to have strengthened the microfinance industry as a whole against recession.

The authors conclude the FINRURAL impact assessments to have been cost effective. The number of institutions willing to pay for them rose from eight to ten between assessment rounds, despite an increase in charges.

Source(s):
‘The FINRURAL Impact Evaluation Service: a Cost-Effectiveness Evaluation’, Small Enterprise Development, 15:3, by Reynaldo Marconi and Paul Mosley, September 2004

Funded by: FINRURAL and the University of Sheffield

id21 Research Highlight: 3 March 2006

Further Information:
Paul Mosley
Department of Economics
9 Mappin Street
Sheffield S1 4DT
UK

Tel: +44 (0)114 2223397
Contact the contributor: p.mosley@shef.ac.uk

Reynaldo Marconi
FINRURAL
Av. Arce 2081 Esq. Montevideo
Edif. Montevideo, Piso 3
La Paz, Bolivia

Tel: (591-2) 2441326 2121005
Fax: (591-2) 2443504
Contact the contributor: gerencia@finrural-bo.org

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