Micro or Macro: Determining Investments’ Impacts

Microfinance organizations like Opportunity International provide billions of dollars in loans to the world’s very poor, but few organizations really know how their money is used and whether it has improved the recipients’ economic and social welfare. A Rice expert in performance metrics offers a model to help microfinance organizations objectively measure the impact of their investments.

To draw attention to the contributions microfinance organizations have made to the world’s poor, the United Nations proclaimed this year as the “International Year of Microcredit.” Despite the billions of dollars these institutions have made available in loans to small-business entrepreneurs in developing countries, their effectiveness in alleviating global poverty has yet to be substantiated, according to Marc Epstein, a Rice expert in performance metrics.

“Too often, studies have focused on client retention and default rates and less on how loans are used and how they have improved economic and social welfare, empowerment, self-esteem, and the lives of families.” —Marc Epstein

“The anecdotal evidence for microfinance is very positive and shows great potential for scalability and for making a huge difference in alleviating poverty,” says Epstein, the Distinguished Research Professor of Management at Rice’s Jesse H. Jones Graduate School of Management. “By carefully analyzing the specific drivers of success in microfinance, its contributions can be even greater.”

In an analysis of Opportunity International, one of the world’s largest microfinance organizations, Epstein has developed a model outlining the critical factors that contribute to the impact and success of microfinance. The model shows, for example, that evaluating a developing country’s political, social, and cultural environment is important in determining the most appropriate strategy, structures, and systems for a microfinance organization to successfully operate in that country. Gauging a country’s existing competition and economic structure is critical when considering microfinance investments, and Epstein’s model offers several examples of performance measures, including the country’s inflation rate, regulatory environment, physical infrastructure, and unemployment rate. Epstein suggests that, as part of the overall assessment of the country’s business climate, microfinance organizations also should conduct a country analysis where they hope to invest.

“Microfinance organizations also need to examine their own resources and the strategies and structures that will best meet their objectives,” Epstein says. “Their choice of clients and products also will greatly influence the direction a microfinance organization takes and the outcomes it will attempt to achieve.”

Epstein based his microfinance framework on an in-depth analysis of Opportunity International’s savings and loan operation in Ghana, which he visited in June 2005. Established in 1994, the microfinance institution trust, known as the Sinapi Aba Trust (SAT), serves 55,000 clients, mostly women entrepreneurs earning an average of $500 a year.

The borrowers, who generally are organized around group loans, are primarily in trading and service businesses, selling food, making clothes, or running beauty shops from stalls in the marketplace, in front of homes, and on the street.

Epstein interviewed 30 SAT borrowers as well as loan officers and supervisors, senior officers, the chief executive officer, and board chair. He also conducted a thorough review of previous surveys, which showed that, while SAT has a positive impact on the economic conditions of its clients, its overall impact on their communities is less clear.

“The microfinance industry, as is true with philanthropy in general, has not standardized appropriate measures of success,” Epstein says. “Too often, studies have focused on client retention and default rates and less on how loans are used and how they have improved economic and social welfare, empowerment, self-esteem, and the lives of families.”

While Epstein provides numerous examples of the types of measures organizations can use to assess their impact, he points out that all impact studies must be guided by the particular goals and objectives of each organization and the country in which it is located.

“Microfinance organizations like Opportunity International serve as amazing models for helping alleviate world poverty,” Epstein says. “More rigorous research into ways of objectively measuring their successes will dramatically improve their already impressive contributions.”

Epstein presented his initial report on SAT at a conference last fall at Harvard, where key business leaders and government representatives met to discuss America’s role in alleviating global poverty.

—Debra Thomas