Microfinance may be one of the world’s most powerful new solutions to poverty, as well as to the wars, diseases, and suffering that poverty ignites.

If it works.

Supporters of microfinance contend that small loans fuel economic self-sufficiency. They point to the billions of dollars that microfinance institutions (MFIs) such as Grameen Bank, Acción International, and Opportunity International (OI) have given to millions of small-time, impoverished entrepreneurs. They cite research showing that microloans increase household consumption, ¹ give women more clout in their communities, encourage the use of contraceptives, and improve the nutrition of young children.²

Critics, in contrast, contend that the world’s most vulnerable people are often in no position to take on the risks of entrepreneurship. They point to evidence showing that stable jobs in large industries, not volatile small businesses, lift people out of indigence (see “Microfinance Misses Its Mark” in the spring 2007 issue of the Stanford Social Innovation Review). They cite research showing that microfinance clients have been known to scrimp on food, sell their furniture, borrow from loan sharks, and take second jobs to pay off their loans;³ that husbands, sons, and fathers-in-law often take control of women’s loans;⁴and that, overall, microfinance fails to find its way to the world’s poorest people.⁵

These two camps disagree partly because studies of microfinance are, indeed, inconclusive. MFIs vary so much in their missions, strategies, and tactics that assessing their overall impact – or comparing them to each other – is not yet possible. At a more prosaic level, MFIs usually operate in places where it is difficult to conduct research – places that are geographically isolated, politically unstable, technologically backward, and educationally disadvantaged.

But the largest barrier to understanding whether microfinance works is that few MFIs have clearly articulated what it would mean for microfinance to work – let alone how it could work, for whom it could work, where it could work, or when it could work. In other words, few MFIs have explicitly formulated their theory of change – that is, an explanation of how their activities could lead to their desired outcomes. Without a clear theory of change, these MFIs invest resources, launch programs, and track outcomes that have little to do with their ultimate goals.

For most MFIs, that ultimate goal is to alleviate poverty. Many MFIs do not explicitly state this. Instead, they say that their goal is to give poor people access to credit. But their donors, staff, and beneficiaries draw the last two links in the chain of logic: Access to credit will help beneficiaries establish profitable businesses that will, in turn, make them economically self-sufficient. We call these organizations institution-centered MFIs, because their theory of change – often implicit – is that building financial institutions for poor clients will eventually help lift these clients out of poverty. In keeping with this theory of change, institutioncentered MFIs aim to serve as many clients as possible by offering a few basic, high-quality, low-cost services. They assume that their clients will be able to use these services to improve their businesses and, in turn, their socioeconomic standing. And like banks, they track financial outcomes such as loan repayment rates, loan sizes, and number of clients.

Yet few MFIs elaborate exactly how their beneficiaries will create those successful businesses. This is an egregious oversight, as the vast majority of microfinance clients have no prior business or banking experience and little formal education. We have even heard about female clients who were not sure whether they were allowed inside banks.

Through our fieldwork and research in Ghana, Malawi, Zambia, and Nicaragua, we have started to formulate a different theory of change for microfinance – a theory that addresses the unique needs of poor clients. We call this approach clientcentered microfinance. (See figures on p. 42 and p. 43 for the logic models of institution-centered and client-centered MFIs.) Rather than nurturing only the success of the MFI, client-centered microfinance also nurtures the profitability of borrowers’ businesses – and, in turn, clients’ economic and social well-being. To do this, MFIs must provide far greater services than traditional financial institutions do. They must offer not only financial products and services, but also financial education, management training, value chain support, and social services. They should track how their clients use their loans and how they allocate their profits. They should monitor poverty alleviation using measures of not just income, but also health, nutrition, housing, and education.

Although client-centered microfinance practices are not widespread, and no single MFI, to our knowledge, currently implements all of the practices we recommend, early evidence suggests that client-centered microfinance would more readily alleviate poverty than institution-centered microfinance.⁶ At the same time, economic pressures and the growing importance of financial sustainability are pushing many MFIs to become even more institution-centered. Yet if the goal of microfinance is to alleviate poverty, MFIs should adjust their theories of change to a more client-centered approach.

Institution-Centered Microfinance

Microfinance refers to financial services – most commonly loans, savings, and insurance – delivered in small denominations to poor clients who lack the collateral, credit history, or other assets to enter the formal financial system. The MFI industry has long viewed its primary role as delivering loans to poor clients (see sidebar on p. 41 on the growth of microsavings). If clients are able to pay back their loans and take out new ones, the story goes, they must be getting economic and social benefits from them. Indeed, MFIs routinely report repayment rates of over 95 percent. And today, there are 100 million people receiving microcredit loans from more than 3,000 institutions.⁷

Yet these metrics can hide how poorly an MFI’s clients are faring. MFIs often lend to groups, and so they do not report when individual clients within the group default. From the institution’s perspective, this makes sense: There is no default if the rest of the group repays the loan. But from the clients’ perspective, one person’s default means more suffering for everyone. Other group members are forced to make up the difference – often with great hardship. And the debtor, in turn, faces the wrath and sometimes violence of the other members. Some debtors have even resorted to suicide, as several highly publicized cases in Bangladesh reveal.⁸ And so high loan repayment rates don’t necessarily indicate wealthier, happier clients.

Pressure to post high repayment rates also leads many MFIs to neglect the truly poor. For instance, the Mexican government designed the Solidaridad program to make loans to the poorest farmers in the country. Yet a recent study found that less than half of the loans went to the poorest 40 percent of the population. And more than 10 percent of the loans went to the wealthiest 20 percent of the population.⁹A recent study of MFIs in 49 developing countries shows why: The banks serving the poorest borrowers had the highest average costs.¹⁰

Another common indicator of an MFI’s health is the average size of its loans. Yet a study in Bangladesh found that the larger the line of credit, the more families borrowed, rather than saving some of their credit for future use. These families also continued to borrow from informal sources, thereby plunging them into excessive indebtedness.¹¹

Adopting the practices of commercial banks can allow MFIs to serve more clients and therefore can increase their social impact. But the pressure to instill more financial discipline often shifts organizations’ focus away from their original mission. As a result, many firms can recite their portfolio at risk (PAR) percentages to two decimal places, but few have even rough estimates of the percentages of their clients who eventually move out of poverty.

Services for Microentrepreneurs

Leaving poverty does not depend on repaying one’s loans. Leaving poverty depends on creating a successful business. Yet too few MFIs focus on helping their clients use their loans to create successful businesses. Some that have shifted to a client-centered approach appear to have had more success.

Beyond financial services, most MFIs offer basic loan repayment training. Generally the training is limited to emphasizing the importance of repaying the loan and of applying the loan to the business, rather than spending it on personal needs. Yet clients often face health emergencies and family crises, and also want to spend some of the loan proceeds on education. And so MFIs need to give clients more training in financial literacy and money management so that they can better meet both their business and personal needs. At present, MFIs do very little of this.

Moreover, mastering loan management does not lead to generating profits. Just because clients use a loan to stock more inventory, for example, does not mean that they will be able to sell the goods at a profit. And just because they sell goods at a profit does not mean that they can generate enough profits to support household needs, business reinvestments, and loan repayments – sometimes at interest rates as high as 60 percent per year. Yet that is exactly what most MFIs and clients presume.

There are exceptions. Opportunity International, an Oak Brook, Ill.-based MFI with operations in 30 countries, gives business training to its clients. In Peru, the Foundation for International Community Assistance (FINCA), a Washington, D.C.- based MFI, teaches its clients how to identify their customers, market their products, and perform basic accounting. A recent study found that FINCA clients who received business training increased their profits, reinvested more profits into their businesses, and maintained better records than did clients who did not receive the training.¹²

Other MFIs offer enterprise-specific training. The Tanaoba Lais Manekat (TLM) not only helps poor cattle farmers in East Nusa Tenggara, Indonesia, buy cows, it also teaches them best practices in cattle husbandry and offers them support services, such as vaccinations. In another program in East Nusa Tenggara, TLM teaches seaweed farmers both business development techniques and better seaweed cultivation methods. Some 87 percent of TLM clients in the seaweed cultivation program state that their profits and savings have increased since they joined the program.

To make businesses even more productive, some MFIs have targeted the health and happiness of the clients themselves, offering training in areas such as nutrition, health care, and domestic problem solving. These social services not only help clients profit from their loans, but also aid in the development of human capital – an important contributor to the alleviation of poverty.

The Bangladesh Rural Advancement Committee (BRAC) makes the business case for improving the health of microentrepreneurs. The nongovernmental organization (NGO) noticed that borrowers had a much harder time repaying their loans when they or their families fell ill. And so BRAC introduced its essential health care program – monthly community meetings about disease prevention, nutrition during pregnancy, local sources of essential vitamins, and other health topics. A health program organizer facilitates the meetings with the help of community health volunteers whom BRAC trains. BRAC volunteers also go door to door to deliver information about sexually transmitted diseases, reproductive health, and domestic violence. Since the program’s inception, childhood malnutrition and mortality have declined more among BRAC member households than among nonmember households. The BRAC field staff strongly support the educational programs and believe that there is a strong correlation between clients’ participation in the programs and their successful use of credit.¹³

A final client-centered service that MFIs can provide is value chain support – which includes linking clients to customers and suppliers, conducting regional economic analyses, and standardizing production to enable bulk sales and export. TLM, for example, links seaweed producers in East Nusa Tenggara to domestic and international markets. Likewise, OI is organizing an agricultural cooperative in Granada, Nicaragua, that will deliver cassava to local as well as to U.S. and Canadian markets. Although cassava is one of Nicaragua’s leading exportable crops, low local market prices have discouraged farmers in Nicaragua from growing it. OI will help the cooperatives develop techniques that greatly extend the shelf life of the cassava, as well as establish business agreements with U.S. and Canadian distributors.

Client-Friendly Products and Practices

Client-centered microfinanciers need not only provide services after the fact of lending, they should also consider clients’ needs on the front end. Meeting clients’ needs begins with an analysis of client economics. Too few academics or practitioners have studied how clients use their loans. For example, MFIs award many of their smallest loans to traders and service providers who use the loans to purchase inventory. But no one seems to know how these clients use their inventory to generate profits. Do they sell it gradually over the sixmonth loan cycle, or do they replenish their inventory every two days? How do they decide how much to mark up their inventory? Will their markups be enough to cover the loan payments and meet household needs? In some cases, MFIs make inventory loans to clients who are unlikely to use them for inventory. What does a produce vendor with sales of $20 per day do with a $200 loan?

When standardized loans are mismatched with client needs, clients may borrow more than they need, pay higher than necessary costs, or make poor choices, like skimping on quality or selling out inventory stocks to meet an unforgiving payment cycle. And so understanding how clients use financial products can help MFIs tailor their financial products.

Prizma, an NGO in Bosnia and Herzegovina, is one organization that has adjusted its practices to accommodate its clients. Like poor people everywhere, Prizma’s rural clients often face family crises and intermittent income, which make it difficult for clients to pay back their loans consistently. To accommodate this reality, Prizma adjusted its incentive system so that loan officers were no longer under pressure to maintain zero arrears. Loan officers now take into consideration a client’s circumstances and renegotiate repayment terms when clients experience financial setbacks.¹⁴

In this and many other cases, the loan officer makes or breaks borrowers’ experience (for a related article, see “Luck of the Draw” in the spring 2007 issue of the Stanford Social Innovation Review). In addition to being the face of the MFI, the loan officer can give clients the information and support they need to thrive in business and at home. During early discussions of the loan process, the loan officer can help determine the appropriate loan amount and how the client will earn enough to repay. In other words, loan officers should spend less time chasing defaulting clients and more time avoiding defaults in the first place. To do this, loan officers need not only financial expertise, but also the knowledge and skills that will help them identify target clients, encourage them to learn about the MFI’s financial services, evaluate their needs, assess their character and capacity for repayment, and interact with them with the appropriate language and cultural nuance.

MFIs should also consider the burdens their clients bear when accessing financial services. Tangible costs include those of obtaining information about the services, applying for the loan, getting transportation to make loan payments, and tracking the debt. Intangible costs include the stress of getting temporary loans from other sources, the familial discord that arises from shifts in balances of power, and the time spent learning about lending – and away from business, family, and other activities. OI in Malawi recognizes these difficulties, and allows groups to shift from a weekly payment and meeting schedule to a biweekly or monthly schedule once they have proven their ability to repay the loans. The organization also holds its training sessions on a monthly basis, which reduces clients’ traveling time.

A final way that MFIs can better serve their clients is to measure whether their loans are actually moving people out of poverty. Grameen Bank does this with its poverty index. The index includes socioeconomic indicators such as whether schoolage children are attending school and whether family members are free from treatable health problems. Such metrics can show whether loan officers, branches, and MFIs are achieving their social goals. They can also be used as a basis for rewards and resource allocation decisions.

Expanding the Niche

MFIs have all but ignored how clients use loans and other resources to build profitable businesses. Many of them hold the view that giving poor people access to financial services alone will relieve poverty. Others know that increasing access to financial services is not enough to alleviate indigence, but think that providing other services and products is too far from their mission or too challenging and costly. The background of their senior staff members is often banking, and so they rightly believe that their core competence is banking services, not health and human services. And so most MFIs leave education, training, value chain support, and so forth to other organizations, and instead stick to their institution-centered niches.

If MFIs are serious about alleviating poverty, though, they must provide more training, support, and products tailored to poor clients. The success of microenterprises is critical both to alleviate poverty and to drive financial returns to the MFI. When microenterprises fail to make profits, clients must reduce their consumption, sell valuable assets, take on more debt from other sources, or default on their loans. MFIs also suffer, losing revenue and posting unfavorable returns.

Although the ranks of microentrepreneurs are swelling, MFIs must remember that their clients are often in business by necessity, rather than by choice. Most microfinance clients have no training, education, or role models in business, and therefore are unlikely to cultivate successful microenterprises on their own. They are not entrepreneurs in the traditional sense. If their communities had jobs and if their family situations permitted it, they would be employed. Yet the large-scale, laborintensive enterprises that generate stable employment will not arrive in most developing countries any time soon.

To make microfinance work for more people, more often, in more places, MFIs need to think clearly about how their practices will bring about the changes they seek. This may mean making fewer microfinance loans and incurring more costs to support the loans they’ve already made. The benefit, of course, is the building of sustainable businesses. The challenge is finding ways to provide these additional services efficiently. In our current research, we are designing and testing these client-centered practices. We hope that our results will ultimately lead to the broader application of effective and cost-efficient client-centered microfinance programs.

小额贷款机构可以更好地为他们的客户提供服务的最后一种方式，是衡量这些贷款是否真的使人摆脱了贫困。格莱珉银行就是用贫困指数来衡量的。该指数包括社会经济指标，如学龄儿童是否正在上学、家庭成员是否能在有小的健康问题的情况下得到及时治疗。这些指标可以显示贷款的人员，分支机构和小额贷款机构是否实现了其社会目标。这些指标也可以作为决定奖励和资源分配的基础。

尽管只有少数小额贷款机构清晰地表述了他们的利益相关方是如何开展成功的商业项目的。现状仍旧令人感到震惊：大多数小额贷款客户没有商业领域或银行的过往经验，并且仅接受过少量的正规教育。我们更听说一些女性客户甚至连她们是否允许进入银行都不清楚。

通过在加纳、马拉维、赞比亚和尼加拉瓜的实地调研，我们尝试构建一个不同版本的小额贷款变革理论——一种关注贫困客户独特需求的变革理论。我们将其称为“客户导向的”小额贷款。（见42页及43页的“机构导向”和“客户导向”的小额贷款机构的逻辑框架图示）相较于仅追求小额贷款机构的成功，客户导向的小额贷款方式还能够实现贷款人的商业利润，以及随之带来的客户的社会经济地位提升。为实现这一目标，小额贷款机构必须提供远超过传统金融机构的服务。它们不仅需要提供金融产品及服务，还要提供金融教育、管理技能培训、价值链的支持以及相关社会服务。他们应该追踪客户的贷款使用情况及利润分配情况。还应通过包含收入在内的健康、营养、住房、教育等多维度监测扶贫效果。

尽管客户导向的小额贷款机构的实践案例并不常见，据我们所知也没有任何一家小额贷款机构目前能够实现我们建议的所有实践。但先前的证据显示，相较于机构导向的小额贷款机构而言，客户导向的小额贷款机构的扶贫成效更加明显。与此同时，经济压力和重要性与日俱增的财务可持续性促使很多小额贷款机构变得更加“机构导向”。但如果小额贷款的终极目标是扶贫的话，小额贷款机构将它们的变革理论向“客户导向”的方向调整。

商业银行的做法能使小额贷款机构为更多的客户服务，并提高他们的社会影响力。但是灌输过多金融规定的压力会是机构从原始的目标中偏离。因此，很多机构能把他们的风险率精确到小数点后两位数，但是对真正脱离贫穷的客户的粗略估计的机构却非常少。

脱贫不可能通过重新借贷，而是需要创造一个成功的业务。然而关注于帮助客户通过使用贷款来创造成功业务的小额贷款机构实在太少，而其中那些转型采取以客户为中心工作模式的机构显然取得更大的成功。

在金融服务之外，大多数小额贷款机构会向客户提供基本的还贷偿付训练，但是这种训练通常局限于强调还贷本身和申请创办业务的的重要性上，而不是考虑客户个人的需求。其实客户往往要面对身体健康上的突发事件和家庭困境，还会想将一部分贷款用于继续接受教育。因此，小额贷款机构需要给客户更多有关金融素养和财务管理上的训练，以便客户既能更好地满足贷款机构的业务要求，也能更好地实现自身的需要。可惜现在这样做的小额贷款机构寥寥无几。

更进一步地说，债务妥善管理不一定就能带来利润。举例来说，即便客户用贷款来储备一些存货，不意味着他们也有能力通过销售货物来获利，即便他们销售货物获利了也不等于他们获得足够的利润而能否承担家庭的日常支出、业务再投入和履行还贷计划，更不用说有时候年还贷利率高达6%。而这是大多数小额贷款机构和他们的客户视为理所当然的。

所幸也有例外。位于伊利诺斯州橡树溪的一家小额贷款机构，名叫国际机会，在30个国家和地区开展业务，向客户提供培训。在秘鲁，一个总部位于华盛顿的国际社区写作基金会向他们的客户教授如何确认自己的用户、推广产品和基本的记账方法。近期的一个研究发现该基金会接受过培训的客户与未接受培训的客户相比，表现出更高的盈利能力，实现了商业上的再投入，因而有更强的持续发展能力。

其他的小额贷款机构也会提供与行业相关的特定训练，如TLM机构不仅帮助印度尼西亚贫穷的牧民购买奶牛，还传授牧民们在养殖方面的最佳经验，提供他们持续的支持。该机构在印度尼西亚的另一个项目与海藻养殖有关，他们既教授农民们商业发展的技巧，也传授更好的培育海藻的方法。参与该项目的客户中大约87%的认为他们的盈利和储蓄因此而有所增长。

孟加拉国农村发展委员会 (BRAC) 用商业项目来提高微型企业家的健康。非政府组织注意到当借贷者的家庭出现病人，那么他的还款过程会非常艰难。因此BRAC推出了必要的健康护理项目-每月开展的社区会议是关于疾病预防，孕期营养，当地资源所富含的维他命以及其他的健康主题。这个会议是由一个健康项目的组织者与一些由BRAC训练的在社区关注健康的志愿者们一起共同促成的。这些BRAC的志愿者们同时上门去普及关于性是如何传播疾病，生殖健康以及家庭暴力的知识。从项目的初期开始，BRAC成员家庭儿童营养不良和死亡率相较于非成员家庭已大幅下降。BRAC领域的成员强力支持教育项目，他们还坚信客户更多地参与到项目中与成功地使用信用值存在紧密的关联。

最后，一项以客户为中心的服务是小额贷款组织能够提供一条有价值的支持连-包括把客户与消费者以及供应商联系在一起，来进行地区经济分析，标准化产品生产来确保大批量的销售和出口。TLM机构，举例来说，在东Nusa Tenggara国内的海藻生产者与国际市场的联系。同样的，OI机构正组织Granda与尼加拉瓜之间的农业化合作社，他们会将甜木薯运往当地，美国和加拿大的市场。尽管甜木薯是尼加拉瓜出口作物最高的一种，低廉的本地售价使得农民们失去了在本国种植木薯的信心。 OI机构将会通过最大程度增加木薯的保质期的技术来帮助这些合作社，同时月美国和加拿大的批发商建立起商业协议。

小额贷款机构忽略了客户如何利用贷款和其他资源来经营盈利的问题。许多微型金融机构认为只要给穷人提供金融服务，便可以减轻贫困。有些机构虽然明白仅仅依靠金融服务不足以扶助贫困，但认为提供其他服务和产品远远超出了他们的使命，或者太有挑战性，成本昂贵。这些机构的高级职员通常是银行业出身，因此自认为核心竞争力在于银行业务，而非健康和人道服务。所以，大部分小额贷款机构将教育、培训、价值链支持等环节交由其他机构掌管，自己则固步自封。

倘若小额贷款机构认真对待减贫问题，则必须提供更多适合贫弱客户的培训、支持和产品。小型企业的成功之于减轻贫困和刺激小额贷款机构收益都至关重要。小型企业不盈利时，客户便会减少消费，贩卖价值资产，在其他资源上负债更多，或是拖欠贷款。这时，微型金融机构同样遭殃，营业额损失，收益惨淡。

尽管微型企业的数量激增，小额贷款机构必须了解他们的客户往往都是不得已才选择经商。大多数的小额贷款客户没有受过商业的培训、教育、也不知道商业模型的概念，因此，仅依靠他们自己就成功建立小型企业的可能性微乎其微。他们并不是传统意义上的企业家，因为如果他们获得社区提供的就业岗位，或者他们家庭情况允许的情况下，他们会选择就业，而不是创业。然后期望大规模的劳动密集型企业在发展中国家提供稳定的就业，在短期内看来不太可行。

为了使小额贷款能在更多地方，更频繁地帮助更多人，如何能使他们所做的事最终却是带来他们所寻求的改变，这是小额贷款机构需要考虑清楚。这就意味着小额贷款机构要减少小额贷款的数量，承担更多的成本来支持他们那些已经贷出的贷款。这样做的好处在于可以建立一个稳定的交易；而挑战在于找到如何有效提供这些额外服务的方式。我们现在的研究主要集中在设计和测试以客户为中心的业务。我们希望我们的研究可以吸引那些有效、有经济效益并以客户为中心的的小额贷款项目的广泛的申请。