Alternative Measures of the Effectiveness of Micro Finance Organizations

September, 2003

The current microfinance industry measurement standards rely on three benchmarks for assessing the effectiveness of microfinance organizations. While the limits of these benchmarks are acknowledged in the micro finance literature, there has been no consensus regarding alternative approaches. They are generally accepted in practice both by donors to, and operators of, microfinance organizations. They are: Repayment rate, outreach, and loan portfolio. The following tool offers an improved set of measures to more effectively assess the effectiveness of these organizations. It should be applied before decisions regarding intervention in the micro finance sector are undertaken. Without meaningful information about the effectiveness of current organizations it will be impossible to determine where, if at all, intervention would be useful. Encouraging the use of meaningful measures will also have implications for the behavior of micro finance organizations. The current standards arrange incentives such that micro finance organizations direct their behavior to satisfy the goals set out therein. By improving the standards by which micro finance organizations are evaluated, one would expect to improve the behavior and therefore the effectiveness of micro finance organizations as they adjust to meet these new challenges.

Assessing Microfinance and the USAID MABS Program in the Philippines

September, 2003

Overall security of property and freedom of contract are crucial ingredients of an institutional setting that promotes access to capital and enables a risk-taking environment. In the absence of secure property and the freedom of contract, or in situations where these ‘basic institutions’ are weak, as they are in the Philippines, MF practices have evolved to provide the capital for small-scale enterprises. These practices rely upon personal mechanisms of exchange to serve as proxies for collateral. And while these practices provide access to capital to the previously ‘unbankable’, providing real opportunities for substantial improvements in their standard of living, they cannot be the source of sustainable long-run development. Moving from institutions that promote personal exchange to those that promote market-based, impersonal exchange requires changes in the basic institutions of property and contract. MF is having a real impact on the lives of individuals. But if mismeasured, the true benefits and value of MF may not be fully recognized and policy decisions may, with the best intentions, upset what is currently a delicate balance. Pouring cheap money into more and more MFIs may result in a significantly increased outreach, but it risks dampening the incentives and increasing the costs associated with building institutions that move individuals from personal to market relations and ultimately, a social system that is able to capture, to a much larger extent, the gains from exchange.

 

To Market, to Market: In Whom We Trust?

February, 2004

Nobel Laureates have argued that development does not occur in a vacuum. Ideal conditions while impossible to attain are oft still considered in policy and aid decisions. The original promise of microfinance was that it would enable the poor, denied finance through established mechanisms, sufficient capital to bring their entrepreneurial vision tolife. Since its (microfinance) humble beginnings much has been learnt. Education is now considered an important ingredient in the enabling of the entrepreneurial poor. As such, government agencies and donors have placed a premium upon livelihood training and in some cases character building. In this working paper, Daley contends that explicit teachable knowledge, while beneficial, can never outweigh the tacit knowledge of the individual loan recipients. It is this knowledge of their surroundings and the institutional matrix in which they live, which will in large part, determine their prospects for continued growth and success. But if these gains are to be realized it will depend on the individual’s ability to move from those personal mechanisms of exchange, so common in developing areas, towards more impersonal mechanisms. Daley argues that it is the informal learning of more formalized market mechanisms that is essential if the current educational and training emphasis is to have more than a transitory impact.

Aggregation, Emergence and Economic Development

June, 2004

The world is full of well-meaning economists who believe intervention will do the trick if we can just get the right policy mix. But this belief is built upon the premise that our macro models are capturing enough of the real world so that interventions can be well crafted in an attempt to realize their goals, be that development or cyclic stabilization. Too much of the measuring of success relies upon aggregative statistics, which have become the de facto benchmark. But these aggregated measures have become much more than just information. They have become the very target a given policy is attempting to change. In this working paper, Dr. Daley argues that this approach is flawed for two distinct but interrelated reasons. First, the aggregated variables are taken as a representation of reality. Second, the aggregated variable is mistakenly seen as something upon which the policy maker can directly act upon or change.

Money and the Real Economy: A Computational Search for Cantillon Effects

October, 2004

Richard Cantillon's conjecture from 1735, that the particular path by which money is injected into an economy will exert real economic effects, is generally ignored in contemporary monetary analysis, perhaps because it would seem to imply some tradeoff between inflation and unemployment in a natural rate model. In this working paper, Drs. Daley and Wagner take a computational approach to economic modeling and develop a formulation whereby the path of monetary injection exerts real economic effects within the framework of a natural rate model. In this computational model, real effects operate through variations in the structural patern of economic activity, while leaving aggregate magnitudes approximately unchanged.

Does What We Don't Know Hurt Us? The Efficiency of Local Knowledge

October, 2004

This working paper explores the efficiency implications of imperfect knowledge in prices. Search theory, necessary because prices and their distribution are unknown, is then compared with the pristine world of perfect knowledge. Through the use of agent based modeling (ABM) Dr. Daley simulates economies in which the consumer agents have perfect knowledge and compare it against two variants of local knowledge, (1) information gathered through personal search and (2) this personally gathered information combined with lagged data on the aggregated price level. A social welfare function is used to determine the relative merits of each informational regime.

Microfinance in Action: The Philippine Experience

February 3, 2005

For the past 20 years, the Philippines has served as a natural experiment for microfinance. As one of the oldest and most active microfinance environments in the world, the Philippines has much to teach about the potential for microfinance to alleviate poverty, and to serve as a stepping stone to prosperity. However, one must not lose sight of the fact that microfinance has become a viable option only because the institutional environment in many developing countries is unworkable. Microfinance is a band aid, a necessary band aid at times, but a band aid nevertheless. While microfinance has proven its ability to combat poverty in the short-term, deeper institutional reforms are required if development efforts are going to put the poorest of the poor on the path to prosperity.

Citation - Chicago Style

Daley, Stephen and Frédéric Sautet. "Microfinance in Action: The Philippine Experience."  Mercatus Policy Series Policy Comment, No. 1. Arlington, VA: Mercatus Center at George Mason University, February 2005.