Responsible Finance Forum

The Case for Social Investment in Microcredit

Timothy Ogden
23 February 2017

There are strong arguments for continued investment in microcredit. These arguments are based on, not in contradiction to, the recent evaluations of microcredit impact. That the average impact of access to microcredit is modest is not in serious doubt. However, every evaluation of the impact of microcredit shows that there are people who benefit, and that most borrowers, when lenders behave responsibly, do not experience harm.

Comprehensive research on microfinance and subsidy shows that virtually all microfinance institutions are subsidized, but these subsidies are small. There are two clear paths for increasing microcredit’s impact through continued investment:

» Lowering the cost of microcredit by lowering operating cost or increasing subsidy
» Boosting the impact of microcredit through innovations such as better targeting (by identifying borrowers most likely to benefit) or better “products” (which more closely meet the needs of borrowers)

This paper particularly focuses on the latter. Investors must take into account several additional considerations:
» Absent continued investment, little innovation is likely to happen, and microfinance institutions are likely to move away from poor borrowers
» Infrastructure like the MIX, Smart Campaign and MIMOSA have been crucial for the industry and customer protection and will require continued investment
» Context will matter a great deal in determining the suitability and expected outcome of specific innovations
» Simply investing in microfinance institutions is not sufficient to yield necessary innovation