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33 Chapter Two Poverty Reduction or the Financialization of Poverty? Maren Duvendack and Philip Mader Introduction For decades, many have claimed that microfinance successfully alleviates poverty and empowers women. Yet the scientific research on microfinance’s impacts hardly offers such a clear picture. In this chapter we discuss the evidence , reviewing the existing literature on the impact of microcredit and squaring it with evidence on payments extracted from and discipline instilled in the poor. Such a review of what we know—and do not know—about the impacts of microfinance is all the more important in light of the continued enthusiasm for extending financial services to poor people, an enthusiasm that is often based on anecdotes narrated by charismatic individuals such as Muhammad Yunus. Microcredit has evolved over the years and now includes not only credit for the poor but also a myriad of other services such as savings, insurances, remittances , and even nonfinancial services such as financial literacy training and skills development programs—hence the term microfinance.The core of almost all microfinance institutions (MFIs) remains microcredit; however, microfinance is primarily the business of small debts, so we concentrate here on the effects of this business. A key feature of microfinance has been the targeting of women on the grounds that they perform better as clients compared to men and that their participation has more desirable development outcomes. The Microfinance Success Story: What Is the Evidence? Despite the popularity of microfinance, we have no clear evidence to show that these programs have positive impacts on the poor and the poorest. But thanks to visionary individuals backed by international supporters and strengthened 34 Maren Duvendack and Philip Mader by unsystematic, outdated, and, in some cases, arguably misleading literature reviews (e.g., Sebstad and Chen 1996; Gaile and Foster 1996; Goldberg 2005; and its follow-­ up, Odell 2010), microfinance has risen to prominence and become the darling of donors, the media, and the public. Since the late 1990s, however, critical voices have become louder (starting with Fernando 1997 and followed by Dichter and Harper 2007; Bateman 2010; Roy 2010; and Sinclair 2012a), warning that microfinance is not a silver bullet and may even do more harm than good. The sceptical view is, moreover, confirmed by three recent UK government–­ funded systematic reviews (Stewart et al. 2010; Stewart et al. 2012; Duvendack et al. 2011a) that examine microfinance and find no clear evidence of it having positive or negative impacts overall .1 Another systematic review (Vaessen et al. 2014) examining the impact of microfinance on women’s empowerment comes to broadly similar conclusions. Let us dig a little deeper into the recent evidence of the impact of microfinance . Maren Duvendack and colleagues (2011a) located nearly three thousand studies of relevance, which they screened in several stages and reduced to fifty-­ eight that were found to be adequate to be examined in detail. They conclude that these impact evaluations almost all suffer from weak methodologies and poor data quality, which adversely affected the reliability of their impact estimates. This problem of reliability has led to serious misconceptions about the actual effects of microfinance. All four systematic reviews find that rigorous quantitative evidence on the nature and magnitude of microfinance impact is still scarce and overall inconclusive; as a result, one can neither support nor deny the notion that microfinance is pro-­poor and pro-­women. In other words, we still do not know under what circumstances, and for whom, microfinance has been and could be of real, rather than imagined, benefit. Going further, we have noticed a lot of enthusiasm among development economists for randomized control trials (RCTs), which some see as the gold standard for assessing the impact of development interventions. Relatively few RCTs have been conducted on microfinance interventions to date, but their numbers are growing. However, the validity and usefulness of RCTs has been extensively debated. Many scientists believe that randomization—the technique of selecting the members of “treatment” and “control” groups for a given intervention at random—is the only method that can establish the causality of outcome variables. These scientists claim that RCTs provide an accurate counterfactual for comparison (i.e., they simulate what would have happened to beneficiaries in the absence of the program under scrutiny) and control Poverty Reduction or the Financialization of Poverty? 35 for self-­ selection bias (i.e., individuals who are more likely to benefit—or differ on other parameters—are also be more likely to participate, thus skewing the results). Proper randomization...


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