Financial institutions have typically evaluated loan repayment rates to determine successful outcomes and long-term impact on clients. But loan repayment may not be the most effective way, or only way, to evaluate success. Part of research evaluation includes clearly understanding an organisation’s goals. For an investment to be considered successful, the goals need to be met. If microfinance investing includes goals of social measures, such as health or education outcomes, traditional financial evaluation studies are not going to be adequate at evaluating long term impact.
But using outcome measurements that address the safety net services of people living in poverty may be too broad to clearly understand the impact of individual investments or initiatives. If a microfinance initiative has a stated goal, for instance, to reduce childhood poverty as measured by health outcomes and school attendance, then evaluation tools need to address the wide variety of variables that affect child health and school attendance.
Typical repayment rates may be too narrow for evaluation, and social outcomes may be too broad. One method that might be a better fit to evaluate if an investment is having the impact hoped for is to evaluate a wider measure of financial inclusion and behaviour. The Innovations for Poverty Action (IPA) laboratory, originally started by a Yale researcher, is bringing the standards of controlled scientific research to evaluating social and poverty reduction programs.
Why do those without access to formal financial services live in poverty? How are the two states related? Which came first? Does altering one alter the other? Some researchers believe that the key element is savings. Savings allows those who are currently unbanked and those who are living in poverty to change their financial health. The IPA recently did a study looking at unbanked people living in America, and evaluated an intervention to see if savings behaviours could be impacted.
Two interesting facts regarding financial health in America: there are nearly 10 million unbanked living in America, and nearly half of the households in America could not meet a $400.00 emergency expense. The rate of savings is pitifully low. The intervention attempted – a “cash and stash” system of savings at check cashing storefronts – was not successful.
The importance of the study may be in how the evaluation was designed and carried out, rather than the specifics of the study. We need to know if what we are attempting is actually making a difference for the long term financial health of families and communities. Measuring loan repayment or other short-term measures may not tell us if those goals are being met. But savings behaviours might give a better measurement.
Especially for agricultural business and farmers, the seasonal nature of their income means they must have savings to get through the months until harvest. The current methods allow those with ready cash to pressure farmers to pre-sell the harvest at steep discounts, in order to make it through the months before they can expect any money to come in. A steady system of annual loans to make it through until harvest is not the answer either, as loans come with a cost, and these is very little room in a farmer’s budget for loan fees. Savings, enough to cover a year’s worth of living expenses until the harvest, is a reasonable goal for financial health, and might be a better way to evaluate if a microfinance initiative or investment is actually having an impact on a family’s or community’s financial health.
To evaluate if a microfinance initiative is impacting financial health, goals should be clearly described, and those goals with extraneous variables that affect outcomes should be evaluated with an eye toward the complex and variable nature of the goals. Savings behaviours may be an effective evaluation tool, rather than loan repayment or more broadly social-based outcomes measures.
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