Three lessons for cash transfer programmes from microfinance

Published on 2 October 2018

Critically reappraising microfinance is one thing, learning lessons from the faults of the sector is another. Conditional and unconditional cash transfer programmes have a significant opportunity to draw insights from some of the problems microfinance has faced.

Earlier this year the Cash Learning Partnership released The State of The World’s Cash Report: Cash Transfer Programming in Humanitarian Aid (PDF). While it identifies areas for improvement, none of these draw on one obvious source of lessons, microfinance.

Flash back to the mid-2000s: the United Nations declared 2005 to be the “Year of Microcredit”, and microfinance was celebrated by many western organisations as the ideal development tool. Many believed it could reduce poverty while still making a profit, by turning poor people into small business entrepreneurs.

However, shifting trends in development thinking (PDF) as well as emerging research, which showed, at best, limited results, meant that microfinance’s popularity has waned particularly since the catastrophic Indian microfinance crisis of the year 2010.

Meanwhile, two types of programmes that are similar to microfinance in terms of directly giving money to poor people, but different in that they do not demand money (and interest) back, have risen to the fore: conditional cash transfers (CCTs) and unconditional cash transfers (UCTs).

Although research analysing the efficacy of these programmes has broadly found them to be effective – for example, UCTs can improve food security and overall psychological wellbeing (PDF), while CCTs seem to work better at promoting investment in human capital (PDF) such as higher school attendance rates –  few have explicitly highlighted some of the lessons that can be learned from microfinance.

Microfinance has been critically reassessed in many ways, but three issues are particularly important when thinking about CTs:

  • Microfinance focuses on getting clients into paid work – without paying attention to conditions of work.
    The tiny businesses that microlending facilitates often fail and are economic dead-ends (PDF). Moreover, microfinance institutions (MFIs) often focus on lending to women, and assume that women are not (yet) working. In reality, they are already often overworked, but their work is undervalued, forgotten and invisible.
  • Microfinance’s industry structure gives client no voice or opportunity for feedback and input.
    Microfinance is still often perceived as a “bottom-up” approach to development, but its design and implementation are very much top down. International organisations, investors, and the MFIs themselves, have the power to impose their own ideas, beliefs, passions, and values. Making them contractually obliged to repay, often no-matter-what, leaves little room for feedback or impulses for change from clients.
  • Microfinance’s structure as a financial industry makes it crisis-prone and potentially client-harming.
    In pursuit of market shares and profits, stiff competition between MFIs in many countries has led MFIs to target the same clients with debt. Some, consequently, have spiraled into unmanageable debt cycles, which, when affecting many clients at once, have led entire national microfinance sectors to crash.

Three lessons can be learned for conditional and unconditional cash transfers

1. CCTs and UCTs must be mindful of the increased work they place on women

Women around the world are burdened with unpaid care work. CCTs and UCTs need to make sure that their transfers can be used for a wide range of household needs and investments.

Since UCTs are unconditional in nature, there is no forcing recipients to work in order to receive funds. Although CCTs should remain focused on what they can do best: increasing human capital and recipients’ immediate welfare, they must also be mindful of who is responsible for ensuring these conditions are completed.

The current gender-blind approach as used by most CCTs ignores the imbalance in household responsibilities, resulting in conditions that primarily increase women’s workload (PDF).  And cash transfers can work better by integrating with wider social programming, which microfinance (as a finance-led intervention) could not.

2. CCTs and UCTs should include and promote beneficiaries’ voice

CCTs are usually government programmes, so they have a lower risk of foreign managers or investors imposing their own values; though domestic elites will have their own biases, too. But many UCT programmes are (still) operated by NGOs; GiveDirectly, an NGO, for instance, openly says it recruits from “top firms”.

The broader problem, which is that recipients have little say over the intervention remains. Some organisations have already tried to formalise standards and best-practices (PDF), as happened under the World Bank’s aegis for microfinance in the 1990s and 2000s.

While this could help more programmes reach more people with financial assistance, the risk is that the recipients may be individually and politically disempowered, if decisions about their welfare and the conditions attached to payments are only taken by others. CCT and UCT programmes, unlike microfinance, are not governed by market forces and logics, and therefore the opportunity to create systems of feedback and change would be greater.

3. CCTs and UCTs should establish success metrics based on client wellbeing

MFIs’ key success metrics are still loan portfolio size and repayment rates; these focus on the money rather than the wellbeing of the client. The greatest lesson for CCTs and UCTs perhaps lies here: outreach and efficiency are not the same as success.

Many UCT NGOs publish financial documents that show what share of donations directly goes into programming.

While such efficiency is not trivial, other important administrative tasks such as following up with recipients or institutional innovation may be neglected, and low overhead costs may not directly increase the wellbeing of the recipients.

Changes in wellbeing and effects on the wider community need to be monitored, and the metrics continually and critically assessed. For instance, a CCT that focuses on getting children into school, by making attendance the condition for payment may overlook problems in educational quality; for, a strict focus on improved test scores could lead to biased results; and so on.

To sum up: the gradual shift from microfinance to cash transfers in development practice offers great opportunities for learning. The answers are all about putting the welfare and voice of the recipients themselves front and center.


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