More than 1.4 billion people around the world remain unbanked—meaning they don’t have access to financial services that can improve their quality of life such as credit, savings accounts and insurance.
Kiva’s approach to microfinance focuses on promoting financial inclusion among these underserved communities, while employing strategies to protect borrowers and ensure that microfinance products are providing the most positive impact.
Learn more about microfinance here, and read on to find out more about Kiva’s approach.
What is the impact of microfinance?
To understand microfinance's impact, we must first define what we mean by microfinance. Microfinance is a category of financial services designed for low-income populations around the world who often lack access to traditional financial services. Microfinance is an umbrella term that includes credit, insurance, savings, and payment services. Even though Kiva primarily supports the expansion of micro-credit, customers receiving micro-loans often gain bundled access to savings accounts and insurance products, resulting in many of Kiva's customers increasing their access to a broader range of financial services.
Most of Kiva's customers have small, irregular, and unpredictable incomes. They need tools that can help them cope during a financial emergency or be able to raise lump sums of money quickly to take advantage of an opportunity. Microfinance provides tools that the poor can use to manage their finances better. Micro-credit specifically can improve customer liquidity, financial resilience, and occupation choices. Access to microfinance services is an essential step in improving financial health and the incomes of the poor.
Over the past 15 years, Kiva has continuously investigated which lending models work best across various sectors and customer populations. Kiva has learnt about microfinance's impact by conducting its own research, learning from its Lending Partners' impact studies, and monitoring academic research.
Microfinance is one of the world's most studied poverty reduction and pro-development interventions. Academic studies have found that the impact of microfinance, or micro-credit specifically, largely depends on how the loan product is structured and the characteristics of the customers. While some studies have found small effects on income increases, others have found transformational effects.
Over the past decade, evidence has shown that microloans can help low-income customers in various ways. This includes:
- helping customers by increasing household incomes and self-employment (Crepon, 2020),
- increasing business profits (Augsburg, 2015), (Fiala, 2017),
- enabling borrowers to transition from casual occupation to self-employment (Crepon et al., 2015), (Crepon, 2020),
- helping borrowers cope with risk and strengthening access to informal credit (Karlan & Zinman, 2010),
- increasing women entrepreneurship and food consumption (Attanasio et al. 2015),
- improving aggregate wages for a region (Breza and Kinnan, 2016),
- and improving food security, job retention and income (Karlan & Zinman 2007), (Fink et al. 2015).
A review of recent microfinance impact literature showed that microfinance can be a powerful tool for occupational change and risk management, and has not been shown to have harmful effects on clients (Cai, Meki, et al. 2021). A 2020 randomized control trial in China showed that the introduction of a rural microcredit program increased incomes by 46% and decreased poverty by 17% (Cai et al. 2020).
More recently, the 60 Decibels Microfinance Index offered an important perspective by interviewing more than 18,000 microfinance customers to ask them directly about the effects their loans had on their lives. The study gathered data from microfinance institutions’ (MFI) clients from 72 countries, revealing that on average, 58% of customers were accessing loans for the first time, 84% reported their business incomes increased, and 88% agreed that their quality of life had improved since receiving their loan.
At Kiva, we also often measure the impact of our microloans based on data coming from our Lending Partners who have interviewed their own borrowers.
- Rural farmers in Kenya who borrowed through Kiva Lending Partner One Acre Fund reported increased incomes of 40 to 50% compared to a control group.
- In Bolivia, dairy farmer clients of MFI Sembrar Sartawi who received training classes saw their profits increase by 50%.
- An external impact study of Bangladeshi-based global MFI BRAC found that 92% of clients who were surveyed had increased their earnings after working with the organization.
Read more: Can microfinance actually help people?
Not all microfinance is created equal
The most straightforward answer to the question, "What is the impact of microfinance?" is that it depends. The impact of a loan depends on the quality of the lending institution, loan product design, and the borrower's characteristics. This means that careful partner selection and responsible loan design is a core focus within Kiva's social impact model.
Over the years, impact-minded microfinance institutions have learned that a “one size fits all” approach to microlending doesn’t work for everyone. Amended or specifically designed products and services provide better support for individuals and communities.
In addition to offering small loans, many MFIs also offer services that help build financial stability, including:
- savings accounts,
- business training,
- access to health services,
- and other educational programs.
Research shows that business training and educational programming are important ways to increase impact. For example, in a randomized control trial conducted between 2002 and 2005 with FINCA-Peru, researchers from Innovations for Poverty Action found that clients who received business training improved business knowledge, practices and revenues.
And borrowers themselves are excited about the opportunity to learn. In a study Kiva conducted in partnership with the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP), 90% of surveyed women microfinance recipients from the Asia-Pacific region said they’d like to attend a business course, with a focus on management skills and business coaching.
Many MFIs also provide education on non-financial topics such as healthcare or literacy. In a study conducted by the global non-profit Freedom from Hunger, women who participated in its microcredit educational programs reported more income, healthier children, and a greater sense of personal empowerment than women who did not participate in the program.
Many of Kiva’s Lending Partners offer unique products and services designed to support borrowers’ financial health. These wraparound services are offered to a significant percentage of Kiva’s 4.4 million borrowers:
- 50% have access to savings accounts
- 50% have access to health services or health insurance
- 25% receive business training services
- 25% have access to life insurance
How does Kiva choose Lending Partners?
When it comes to making a positive impact, it matters what type of financial products and services are offered by microfinance institutions (MFIs). Kiva chooses to partner only with MFIs and social organizations that are soundly committed to responsible lending practices and share our mission of financial inclusion.
All Kiva Lending Partners are required to undergo a rigorous vetting process and are subject to ongoing monitoring throughout the partnership. This due diligence includes:
- Responsible pricing reviews on all loan interest rates
- Regular financial and social impact audits
- Analysis of the current economic and social conditions of the MFI country
- Key focus on the client population
Learn more: Lending Partner 101
How do Kiva Lending Partners protect their borrowers?
Client protection and reasonable repayment terms remain the hallmark of Kiva loans.
To account for tenuous economic circumstances, 35% of Kiva borrowers receive loan products formally designed to have flexible repayment terms or grace periods included. The other 65% have repayment flexibility terms based on the credit policies of each Lending Partner, which determines terms and grace periods on a case-by-case basis.
If a borrower experiences sudden income loss due to unforeseen circumstances, in most cases the partner will provide a moratorium on repayments for a period of time. Other Lending Partners will restructure the loan for a longer repayment term or negotiate a smaller repayment balance to make sure the borrower doesn’t become overwhelmed with debt.
Preventing over-indebtedness for borrowers can include strategies like determining a maximum amount a client can borrow based on a cash flow analysis and helping them understand the terms and conditions of their loans.
Many microloans give borrowers a hand up into the world of finance by allowing them to build a record of their creditworthiness which means they can access traditional loans in the future, by allowing them to put away savings, or to protect their families and assets with insurance and finding healthcare.
Continuing to improve
Microfinance has grown around the world and today there are more than 140 million customers. Microfinance has created a strong foundation for innovators to continue to build on. We are seeing institutions innovate by strengthening their client protection policies, bundling non-financial services with loans, leveraging mobile money services to expand access, and experimenting with new lending products.
By experimenting with new loan products and services, and listening to the stories and feedback of clients, MFIs can continue to offer more impactful products and services to the financially excluded.