(2003)
Development Policy Review
, Vol. 21, No. 3, pp. 357–382.
In the next ten years, advocates of microfinance organizations (MFOs) will
seek more than $20 billion to provide small loans to 100 million of the poorest
families worldwide. In the United States, the newest federal budget proposes
a 159-percent increase in the about $200 million spent per year on domestic
microfinance. Most of the excitement for the promise of microfinance in the
United States has been sparked by reports of the success of the Grameen Bank
of Bangladesh. Was Grameen a good use of scarce funds earmarked to help the
poor? As far as I know, I am the first to address this question with cost-effectiveness
analysis. The answer matters since many MFOs, both in the United States and
worldwide, take Grameen as their model.
While MFOs do improve the welfare of those who use them, public funds have an opportunity cost. The poor can gain from more access to loans, but they can also gain from more and/or better food, water, health, clothes, houses, schools, tools, or markets. Since the employees of donors and governments do not spend their own money, they may lack incentives to make the best choices on behalf of the poor.
Cost-effectiveness analysis (CEA) is a way to check these choices. CEA differs from cost-benefit analysis (CBA) in two ways. First, CBA compares costs with benefits, while CEA compares costs with outputs. Second, CBA tells whether benefits exceed costs, while CEA tells the cost per unit of output. If average benefits exceed this average cost, then total benefits exceed total costs. The advantage of CEA is that it is less expensive to measure outputs than benefits. The disadvantage is that the analyst must judge whether unmeasured benefits are likely to exceed measured costs.
The Grameen Bank of Bangladesh has more than two million members, most of them female, rural, and landless. Grameen supplies saving services (average balance $65), loans (average balance $150), and flood insurance. Most loans are used for microenterprises. Many studies describe the benefits of Grameen, but none quantifies benefits or compares benefits with costs in a standard framework such as CBA or CEA.
For the time frame of 1983-96, I find that the present worth of benefits of Grameen exceeded the present worth of costs ($16.4 million) as long as the average member got more than $8 worth of surplus per year of membership. This result is robust to assumptions about opportunity costs. Given the documented impacts of Grameen, my guess is that benefits did in fact exceed costs.
Grameen seems to have been a good way to help the poor. Still, one good MFO does not a microfinance crusade make, and most MFOs in the United States and worldwide do not perform as well as Grameen. CEA is an inexpensive tool to help to inform the judgement of whether a given MFO is a good way to help the poor.