December 2008 Danida reference: 104.A.1.e.100
Introduction and background
Microcredit is regarded as a key development tool when it comes to reaching the poor and vulnerable. The (still growing) appeal of microcredit rests on its reliance on private enterprise as well as the (perhaps perceived) notion that channelling money to the poor through microfinance can be effective, sustainable and profit- able.
As a consequence of the growing recognition and use of microcredit, the UN desig- nated 2005 to be the International Microcredit Year. In addition Bangladeshi economist and microcredit pioneer, Mohammad Yunus and the high-profiled Grameen Bank (founded by Yunus) shared the 2006 Nobel Peace Prize for their efforts to create economic and social development from below.
Microcredit has in effect become part of the mainstream development toolkit, which has resulted in a parallel and very significant growth in funding and outreach. The increase in outreach is, for example, reflected in the 2008 annual report of the Microcredit Summit Campaign. The report summarizes data collected from more than 3,300 microcredit institutions reporting to reach 133 million clients by the end of 2006. This is up from approximately 600 institutions reporting having reached 13 million clients just nine years earlier.
Despite the broad recognition (and increasing commercialization) of microcredit, thoroughly tested knowledge about its impact and effect arguably remains partial and contested. The knowledge base has mostly consisted of anecdotal evidence, case studies and research that did not account for the potentially severe problems related
to endogeneity (see below) and/or failed to measure associated costs and benefits properly.
This is, however, beginning to change as recent and emerging research address key questions of whether and why microcredit works. The recent contributions can be categorized into:
o Controlled and quasi experiments: Gine et al (2006), Karlan and Zinman (2007), and Cason et al (2008) all attempt to untangle causal relationships within microcredit by conducting controlled experiments (microcredit games), in which a few parameters are randomly varied and the effects meas- ured. Coleman (1999) is an example of a quasi-experimental approach. o New estimation techniques: The research conducted by Kaboski and Town-
send (2005) represent a novel estimation techniques using variations in poli- cies and institutional characteristics to evaluate the impacts of village-level microcredit institutions in rural Thailand. Recent donor-based evaluations also occasionally rely on propensity score matching to create synthetic con- trol groups.
o Comprehensive surveys: Hermes and Lensink (2007) present research filling an entire issue of the Economic Journal (volume 117, issue 517) devoted to presenting evidence on the impact of microcredit. Goldberg (2005) summa- rizes and synthesizes the evidence emerging from case studies, whilst Ar- mendariz and Morduch (2005) is a thorough and comprehensive analysis of the available economic research.
Overall, the research based evidence base have thus been both growing and devel- oping in new directions over the past five years. Whether this is also the case when it comes to the donor-based evaluations is not entirely clear at this stage. Some de- velopment cooperation agencies appear to have conducted comprehensive evalua- tions and analyses of microfinance programmes, including: The International Food Policy Research Institute (IFPRI), and the Asian Development Bank (ADB). It is, however, not clear whether this is a trend.
The context of a growing evidence base, substantive developments in evaluation methods and the growing mainstream adoption (and financing) of microcredit has prompted the Evaluation Department of Danida to commission a synthesis of the recent research and available finalized evaluations of support to microcredit.
Following this introduction the next section will outline the proposed approach, whilst the subsequent section describes the setup and practical details concerning the synthesis.
Approach
The key objective of the synthesis is to address the following key question: What works in microcredit? What can be said about the causal impact of a microcredit programme once an experimental/quasi-experimental evaluation design is applied? Answering this question will be the key focus of the synthesis report and will take up the majority of the consultants’ time and the final report. Secondary, and related to the above-mentioned key question, the consultants will also look into the meth- odology used in current microcredit evaluations undertaken by International Devel- opment Cooperation Agencies. This includes assessing the strengths and weaknesses associated with current evaluation methodologies?
The work preparing the synthesis will fall in three phases: literature survey and iden- tification of relevant studies, drafting the report, presenting the report and getting feedback from external reference group before finalising the report.
Phase 1
A literature survey will be undertaken to identify a gross list of studies and evalua- tions that should be included. The identification of studies on the gross list will be based on the following criteria:
o Definition: As mentioned previously microfinance in principle covers all types of financial services (credit, savings and insurance), whilst microcredit is the provision of small loans. The latter will be the focus of the studies and evaluations considered for this synthesis evaluation.
o Period: Pitt and Khandker (1998) was an influential study because it was among the first attempts to use statistical methods to generate a truly accu- rate assessment of the impact of microcredit. Hence, most relevant studies will by implication be from the last decade, rendering attempts to define any other period than this unnecessary.
o Geographical coverage: Other synthesis evaluations published by the Danida Evaluation Department focus on sub-Saharan Africa, reflecting the overall distribution of development challenges and aid across the major regions. The
concentration and influence of microcredit institutions and programmes in South East Asia and Latin America will, however, make it difficult to main- tain (and justify) a focus on SSA when it comes to microcredit. Hence, al- though no specific geographical orientation will be imposed, the basis for the synthesis is likely to be dominated by studies of South East Asian or Latin American origin.
o Type of studies/evaluations included: The focus on methodological rigour and empirical testing is expected to result in (but will not be restricted to) a focus on empirical studies presented in peer-reviewed journals.
In addition, answering the question of what methodology is used in current micro- credit evaluations undertaken by International Development Cooperation Agencies will, of course, also necessitate a survey of evaluations conducted by bi- and multi- lateral organisations.
o Type of impact considered: Here focus will be on studies that attempt to measure the causal impact of microcredit on economic outcomes such as consumption and income. Although of obvious and central importance this is, as pointed out by Armendariz and Morduch (2005), not sufficient basis to act.
Funding and implementing agencies should also consider and assess the cost- effectiveness of the programmes under evaluation. This will, however, be outside the scope of this synthesis evaluation. In addition, evaluations and studies that con- sider support given to develop microcredit infrastructure and/or tools (like, for ex- ample, customer or institutional rating schemes) will not be considered either. Having identified studies that are relevant and meet the above mentioned criteria, the consultants will present a list of evaluations and studies, which will also be an- nexed to the final report. Based on the list the consultants will propose a sample of evaluation and studies to be analysed in more detail in the report. The sample, which will be approved by the Evaluation Department of Danida, should be se- lected based on the above mentioned criteria.
Phase 2
Based on the list of selected studies, the consultants will complete a draft report that seeks to answer the two key questions: (i) what can be said about the causal impact of a microcredit programme once a proper evaluation methodology is applied? And (ii) what type of evaluation methodology is applied by development cooperation agencies when it comes to assessing impact?
The studies and evaluations contributing to answering the question of “what works?” must to some extent have addressed the potential problems such as en- dogenous programme participation and placement, which may contaminate the evaluation design and result in biased causal inference.
Phase 3
The consultants will present a draft report subject to discussion and feed-back from both Danida staff and a reference group of external experts established for this study.
Suggested members of the external reference group include:
o Nikolaj Malchow-Møller, Department of Business and Economics, Univer- sity of Southern Denmark
o Yet to be decided
The input collected from Danida and the reference group will be used to finalise the report. The final report will be a synthesis report of not more than 30 pages plus appendices.
The final synthesis report will be published and made available on the Internet by the Evaluation Department of Danida.
Study setup
The team of consultants will consist of:
o Team leader Jens Kovsted, Ph.D., Centre for Economic and Business Re- search, CBS,
o Thomas Barnebeck, Associate Professor, Ph.D., Department of Economics, University of Copenhagen,
The Synthesis Evaluation will be managed by the Danida Evaluation Department, but officials from other departments in Danida can be consulted during the elabora- tion of the Synthesis Evaluation.
The work of the consultants will commence at 1. December, 2008. Total working time allocated to this project is 12 weeks of which 6 are reserved for Thomas Ba- rnebeck.
The proposed set of evaluations and studies to be included in the sample will be presented to Danida not later than 5. January 2009.
A draft report will be submitted to the Evaluation Department of Danida not later than 3. March 2009, and a final report not later than two weeks after comments to the draft report have been received from the consultants undertaking the study.