Microfinance is dead. Is it? Why and how metrics matter.

19 March, 2015

On the occasion of the launching of six randomly-controlled studies (RCTs), Daniel Rozas reflects on the importance of microfinance in his blog “Microfinance is Dead. Long live Microfinance”. The studies basically conclude that the notion of microfinance lifting poor people out of poverty is officially dead. Yet, the use of terminology already points to a caveat in the studies. While microfinance is indeed not all-embracing to change the lives of poor people, the studies first of all derogate the impact of microfinance as a whole by merely focusing on microcredit; thus loans only and without any context (e.g. so-called microfinance plus programmes, which add non-financial services like training and healthcare).

Second, microfinance (including savings accounts, insurance products and more) does offer opportunities to at least improve the often difficult lives of poor people. Hence, Rozas argues that the strength of microfinance and further financial inclusion should not be discredited: the microfinance sector is evolving from the ultimate goal of lifting millions from poverty, to embrace a new one - better and broader financial inclusion.

An important question, however, is how the microfinance/inclusive finance sector can speed up the process of including the majority of the 2+billion unbanked and what needs to be known and done to reach that. And this, says Rozas, touches upon a more fundamental problem in microfinance. The microfinance sector does not know what they exactly do, because we miss the right data or metrics that specify or reveal the quality of products and services the sector as a whole, and individual MFIs and/or investors, offer.

How can one extend financial services to the poor, without properly measuring what is currently taking place?  Thus Daniel Rozas appeals to more detailed, extended data analysis on the services provided. Rozas elaborates on this in a follow-up blog called “The biggest gap in Financial Inclusion? Metrics”. In this blog, he argues that relevant data is not missing, yet the most common platforms focus on the market side; at the same time, existing social metrics have little to offer with regard to financial inclusion. There is then a gap between financial and social metrics.

To close this measurement gap, Rozas concludes that defining clear standards, and adding new metrics to existing financial platforms, must be the path of financial inclusion. Rozas gives an interesting twist to the second blog’s title. “The biggest gap in financial inclusion isn’t metrics – it’s the lack of financial services available to the poor. But closing that gap will be harder if we can’t measure our progress.”

This news post has been written based on the two blogs by Daniel Rozas, referred to in the text. Daniel Rozas is a Senior Microfinance Expert at the European Microfinance Platform (e-MFP) and a consultant and researcher on a broad range of topics, including risk and crisis management, business strategy, market analysis, funding flows, and social performance. He has collaborated with many of the leading organizations in the sector, including research institutions, think-tanks, networks, rating agencies, and others.

For more information about Daniel Rozas, click here.

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