9 Microfinance-plus: a review and

avenues for research

Adriana Garcia and Robert Lensink

Introduction

Proponents of the microfinance movement long assumed that poor people

remained poor because of their lack of financial capital. Poor people were sup-
posed to possess sufficient business and production knowledge, so that offering
them a small loan would lead to high returns and a sharp reduction in poverty.
Muhammad Yunus (2007: 225) stated this prediction very clearly: “Rather than
waste our time teaching them new skills, we try to make maximum use of their
existing skills. Giving the poor access to credit allows them to immediately put
into practice the skills they already know.” The idea that a shortage of credit
is the main obstacle to initiating a growth process has been endorsed by many
­researchers and international organizations. The immediate policy advice would
be grant access to credit to the poor. Credit, and nothing but credit, would be all
that was needed.

Recent theoretical evidence challenges this assumption and questions the role of
microcredit in alleviating poverty (Banerjee 2013). Rigorous impact evaluations
suggest that simply providing access to financial capital does not have transforma-
tive effects. Banerjee et al. (2015) conclude, on the basis of randomized controlled
trials conducted in Bosnia, Ethiopia, India, Mexico, Morocco, and Mongolia, that
microcredit generally fails to help poor people raise their incomes or consumption
above subsistence levels. Similar conclusions come from Karlan and Zinman (2011)
in the Philippines, De Mel et al. (2008, 2009) in Sri Lanka, and Fafchamps et al.
(2014) in Ghana.

In contrast to the idea of providing only credit to the poor, some microfinance insti-
tutions (MFIs) have expanded their portfolio by offering additional financial as well
as non-financial services to their clients. For instance, from a sample of 478 rated
MFIs in 77 countries, 129 institutions are bundling financial and non-financial ser-
vices (Lensink et al. 2017). This strategy has become known as microfinance-plus
(Biosca et al. 2014a). It seeks to improve on the poverty-reducing effects of financial
services. It may even be that some microfinance-plus activities are prerequisites
before microcredit itself can have transformative effects.

111

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 112 A RESEARCH AGENDA FOR FINANCIAL INCLUSION AND MICROFINANCE

Accordingly, this chapter explains how a microfinance-plus strategy can enhance

the effects of the microcredit provision. We provide a summary of prior literature
on microfinance-plus activities and discuss avenues for further research. Out of
space considerations, we only summarize studies that address the impacts of these
programs on end users; we exclude studies that address the impacts of microfi-
nance-plus at the MFI level. A survey of this latter stream of research is available in
Lensink et al. (2017).

The microfinance-plus strategy

Figure 9.1 categorizes different activities conducted by MFIs, which include five
types of financial services—credit, savings, insurance, transfers, and payments—
and three groups of non-financial services that vary in their objectives—social
services, business services, and technical assistance. Each of these three groups can
be further classified into two sub-groups, based on its delivery mode: (a) general,
which implies serving many people at the same time, such as training to groups of
borrowers, or (b) individualized, which entails helping one person at a time accord-
ing to his or her specific needs.

Twenty seven percent of the rated MFIs over the world offer social services together
with microcredit (Lensink et al. 2017), seeking to encourage personal growth and

Credit

Savings

Financial Insurance
services

Transfers

Payments
Microfinance
institutions Social training
Social services
Personal assistance

Business training
Non-financial Business services
services Individual business
consulting

Technical training
Technical assistance
Individual technical
assistance

Figure 9.1 Microfinance services classified by objective and delivery mode

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 MICROFINANCE-PLUS: A REVIEW AND AVENUES FOR RESEARCH 113

address the overriding concerns in most developing countries, such as health, child
nutrition, female empowerment, basic education, and intra-household violence.
For example, Pro Mujer (2018) provides social training on healthy habits and oral
hygiene to groups of women in Latin America, along with personal assistance to
ensure their basic health. These social activities have indirect but highly relevant
benefits for enhancing the effects of microcredit (Biosca et al. 2014b). For instance,
health-related programs reduce the risk of illness, which represents one of the most
threatening shocks for poor families. Healthier borrowers with healthier family
members are more productive and can generate more stable incomes (Leatherman
and Dunford 2010; Littlefield et al. 2003). Female empowerment initiatives, such as
gender training, help increase awareness of gender inequality issues and enhance
women’s self-confidence, assertiveness and participation in decision making. These
activities in turn can boost women’s income-generating potential and improve
social and business outcomes overall (Bulte et al. 2016; Littlefield et al. 2003).

Providing business services is essential for many MFIs, for example around 25 per-
cent of the rated MFIs worldwide (Lensink et al. 2017). Since they mostly provide
financial capital for business development, they additionally offer business services
as an active support to microentrepreneurs to help them improve the success of
their businesses. Such services attempt to improve managerial processes by sharing
skills and knowledge pertaining to management, accounting, finance, marketing,
sales, operations, and entrepreneurship (Bruhn et al. 2010). Pro Mujer (2018) holds
business training workshops for groups of female microentrepreneurs, teaching
them leadership skills and financial literacy; Freedom from Hunger (2018) collabo-
rates with MFIs to offer individual business consulting to each client, based on her
or his needs. Such services help poor businesspeople run their businesses; despite
an apparent assumption embraced by proponents of microfinance, there is no a
priori reason to think that poor people are natural entrepreneurs (Banerjee 2013).
They struggle to cope with risk and lack managerial knowledge and skills, as well
as market connections. Microentrepreneurs in developing countries rarely apply
business practices that are standard among microentrepreneurs in more developed
countries and that would contribute to the success of their businesses, such as
accounts keeping and inventory control (McKenzie and Woodruff 2014).

Institutions, especially in rural areas, also increasingly offer technical assistance to

clients. This service differs fundamentally from business services. Technical assis-
tance still seeks to increase clients’ skills and knowledge, but it focuses directly
on the production of goods and services rather than managerial processes. For
example, an MFI providing technical assistance to tomato producers would advise
them on their choice of seeds, pest control, use of fertilizers and sowing and har-
vest processes. However, it would not teach them about accounting or finance.
Technical assistance can be delivered through technical training workshops, as
BRAC (2016) does in Bangladesh with its Agriculture Extension Programme.
Experts offer large-scale demonstrations to teach farmers how to use new agricul-
tural technologies, cultivate new varieties of crops, and improve production prac-
tices. Technical assistance can be customized to the microentrepreneur’s needs

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 114 A RESEARCH AGENDA FOR FINANCIAL INCLUSION AND MICROFINANCE

too, provided individually by a specialist who has a one-to-one relationship with

the client. Microentrepreneurs in developing countries produce goods and services
with the resources and knowledge they have—not always in the most efficient way.
Providing technical assistance is critical for helping them learn how to enhance
productivity-increasing practices.

Compared with social services, business services and technical assistance exert
more direct impacts on the effectiveness of microcredit. Both services aim to
improve human capital, but the channel for doing so differs. Business services
primarily attempt to improve business management. Technical assistance instead
aims to change production methods for goods and services directly. Both of them
increase human capital, which should improve the effectiveness of microcredit if
human and financial capital function as complementary inputs to the production
function. In this case, the marginal returns to capital, and thus the effectiveness
of microcredit, depend positively on access to human capital (Armendáriz and
Morduch 2010; Lucas 1990).

Until now we have highlighted the positive aspects of the microfinance-plus strat-
egy. However, we also find it relevant to discuss some challenges associated with this
strategy and the potential costs that it may represent for clients. The first challenge is
related to the costs derived from offering non-financial services, including increased
administrative and operating costs, new staff members and logistic expenses. In
some cases, these costs may be covered by external donors or non-governmental
organizations, but it may also be that MFIs decide to absorb these costs themselves,
to charge them to clients or to share them. A second challenge associated with the
plus strategy is the lower uptake rate from clients. For example, the average partici-
pation rate in business trainings from around 20 programs is 65 percent (McKenzie
and Woodruff 2014). This problem is persistent even for those MFIs whose services
are mandatory. Solving this problem might be difficult since there is a great variety
of reasons why people do not take up the services; they can be either internal (for
example, lack of interest) or external (for example, a husband does not let his wife
join) reasons. The third challenge is regarding the tradeoffs involved in the design
(content, length, provider and location) of non-financial services. For instance, the
shorter the training, the lower the dropout rate; but, the shorter the training, the
lower amount of knowledge that end users receive. The fourth challenge is associ-
ated with the relevance of the services for clients. They must find non-financial
services interesting and useful to solve social, managerial or production problems.
Nonetheless, for some MFIs, the pool of clients is so heterogeneous that it might be
difficult to adapt their services to the needs of the majority.

Receiving non-financial services might be an additional burden for end users, which
can obscure the potential impacts. Specifically, it might represent an opportunity
cost of time. Attending training, for instance, implies spending time that could be
devoted to business, family or other duties. Non-financial services may also rep-
resent a direct financial cost for the clients. It might be the case that MFIs, in par-
ticular those offering mandatory services for borrowers, increase the interest rate

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 MICROFINANCE-PLUS: A REVIEW AND AVENUES FOR RESEARCH 115

of loans to cover the cost of such services. Additionally, clients may be confronted
with hidden transaction costs in receiving the services, such as transportation costs
to attend training in the MFI branch.

Effects of non-financial services

Table 9.1 summarizes the prior research and classifies it by service objective and
delivery form. It presents an overview of the studies’ designs, including the study
population, country, method, control and treatment groups and outcomes. In the
following sections, we discuss the main results of these studies, grouped by service
objective. Broadly, we note that most studies conclude that non-financial services
(for example, business training) increase knowledge, whereas the results for other
outcomes, such as behavior and business outcomes, are more mixed. While the
precise reasons for these mixed results are not clear, it seems that studies showing
less or non-significant impacts are those which suffer from methodological prob-
lems (McKenzie and Woodruff 2014), for instance, small sample size combined
with low-intensity programs or short evaluation periods.

Social services
Most studies evaluating the effects of MFI social services focus on health education.
In Benin, Karlan et al. (2017) find positive effects of health training on MFI clients’
knowledge about malaria, HIV, and AIDS; however, they do not find any improve-
ments in their health-related behaviors. In contrast, De La Cruz et al. (2009) in
Ghana and Pronyk et al. (2006, 2008) in South Africa identify behavioral changes
pertaining to malaria and HIV, respectively, when a health intervention combines
with microcredit. Also in South Africa, Kim et al. (2009) show that providing micro-
credit alone and health training both enhance the economic well-being of women,
but only the combined services evoke positive effects in terms of HIV risk behavior,
female empowerment, and partner violence. They conclude that microcredit is
more effective when provided together with health training rather than alone.

Another group of studies evaluates health training that focuses on maternal and
child health and family planning. Smith (2002) in Ecuador and Honduras and Flax
et al. (2014) in Nigeria find positive effects on breastfeeding practices. In Peru,
Hamad et al. (2011) find that health education enhances knowledge about child
health but does not change behavior or child health outcomes. Finally, Desai and
Tarozzi (2011) evaluate the effect of a family planning program, microcredit and
their combination in Ethiopia, yet they find no significant impacts of any of these
interventions on women’s contraceptive behavior.

Business services
Three studies evaluate the effects of business training combined with additional
financial capital (grants or larger loans). Although Giné and Mansuri (2014)

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 Table 9.1 Study design of evaluation on non-financial services

116
Study Study population Country Method Control groups Treatment groups Family of outcomes

Social services: social training

De La Cruz et Women of fertile Ghana Randomization (C) No intervention (T1) Microcredit 1 Malaria knowledge and
al. (2009)  age (15–49) with a Malaria education behavior
child , 5 (T2) Microcredit 1

M4714-HUDON_9781788114219_t.indd 116
Diarrhea education
Desai and Women of fertile Ethiopia Randomization (C) No intervention (T1) Microcredit Contraceptive use
 Tarozzi age (15–49) (T2) Family planning
(2011) program
(T3) Microcredit 1
 Family planning
program
Flax et al. Female MFI clients Nigeria Randomization (C) No intervention (T) Breastfeeding Breastfeeding intentions,
(2014) learning sessions  knowledge, and
­practices
Hamad et al. MFI clients Peru Randomization (C) No intervention (T) Health education Knowledge of child health
(2011)  issues and child health
status
Karlan et al. MFI clients Benin Randomization (C1) Mixed groups (T1) Mixed groups Health knowledge, health
(2017) with no intervention  with health  behavior, empower-
­training ment, social capital
(C2) Female groups (T2) Female groups
with no intervention  with health
­training
Kim et al. Women South Africa Randomization (C) No intervention (T1) Microcredit Economic well-being,
(2009) (T2) Microcredit 1  empowerment, intimate
Health training partner violence, HIV
risk behavior

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 Pronyk et al. Women South Africa Randomization (C) No intervention (T) Microcredit 1 2006: Intimate partner
 (2006, Health training  violence 2008: HIV risk
2008) behavior
Smith (2002) Female MFI clients Ecuador and Quasi- (C) No intervention (T) Health education Expenditures, child
 of fertile age (15– Honduras  experimental  diarrhea incidence,
49) with and with- design breastfeeding behavior,

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out children , 2 maternal health
Business services: business training
Berge et al. MFI clients Tanzania Randomization (C) No intervention (T1) Business training Business outcomes,
(2015) (T2) Grant  practices and knowl-
(T3) Business training edge, non-cognitive
1 Grant abilities, and household
dynamics
Bruhn and Zia MFI clients Bosnia and Randomization (C) No intervention (T) Business & Business outcomes,
(2013) Herzegovina  Financial literacy  business and financial
training knowledge, financial
perception, business
entry and survival,
­institutional outcomes
De Mel et al. Existing and potential Sri Lanka Randomization (C) No intervention (T1) Business training Business outcomes, knowl
(2014)  female microentre- (T2) Business training  edge, practices and
preneurs 1 Grant ownership, wage work,
total work income
Drexler et al. MFI clients Dominican Randomization (C) No intervention (T1) Standard Business outcomes,
(2014) Republic  accounting ­training  business practices,
(T2) Rule-of-thumb ­institutional outcomes
training

117

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 Table 9.1 (continued)

118
Study Study population Country Method Control groups Treatment groups Family of outcomes

Business services: business training

Giné and MFI clients Pakistan Randomization (C) No intervention (T1) Business training Business, individual, and
 Mansuri (T2) Lottery of 7× household outcomes
(2014) larger loans

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Karlan and Female MFI clients Peru Randomization (C) No intervention (T) Entrepreneurship Business outcomes,
 Valdivia training  business skills and prac-
(2011) tices, household and
institutional outcomes
Sayinzoga et Credit & savings Rwanda Randomization (C) No intervention (T) Financial literacy Financial knowledge and
al. (2016)  cooperative training  behavior: savings, bor-
­members rowing, expenditures,
income, and business
start-up
Business services: individual business consulting
Karlan et al. Microentrepreneurs Ghana Randomization (C) No intervention (T1) Management Business literacy, business
(2012) (tailors) consulting services  practices, profitability,
(T2) Grant investments, savings
(T3) Management and loans
 consulting services
1 Grant
Combined services
Biosca et al. MFI clients Mexico Non- (C1) Clients willing (T1) Clients with Food, capabilities (health
 (2014b)  experimental  to receive health  health services  and education), and
(cross-sec- services & entrepre- & entrepreneur- asset (food basket and
tional double neurship training ship training (with non-food items) pov-
difference) access) erty status

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 (C2) Clients not (T2) Clients without

M4714-HUDON_9781788114219_t.indd 119
 willing to receive  health services
health services & & entrepreneur-
entrepreneurship ship training (with
training (not yet access)
access)
Bulte et al. MFI clients Vietnam Randomization (C) No intervention (T1) Gender & 2016: Female intra-­
 (2016, Business training  household bargaining
2017) (T2) Gender & power
Business t­ raining 2017: Agricultural and
1  business outcomes,
(T3) Husband knowledge, practices,
participation entry and exit
Valdivia Female Peru Randomization (C) No intervention (T1) Training (social, Business outcomes,
(2015) microentrepreneurs business, technical)  business practices, and
(T2) Training 1 participation in business
 Individual assis- associations
tance (social, busi-
ness, technical)

119

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 120 A RESEARCH AGENDA FOR FINANCIAL INCLUSION AND MICROFINANCE

find that the positive effects of business training on business knowledge, busi-
ness ­practices and household expenditures do not change due to the provision
of larger loans, Berge et al. (2015) and De Mel et al. (2014) indicate that business
training improves business performance if combined with a grant. Stronger effects
appear to arise for men than for women (Berge et al. 2015; Giné and Mansuri 2014)
and for potential female microentrepreneurs than for existing ones (De Mel et al.
2014).

Some studies also analyze the effects of financial training. Bruhn and Zia (2013)
find that financial and business training in Bosnia and Herzagovina enhances busi-
ness knowledge, business practices, loan terms and investments but not business
survival. Similarly, Sayinzoga et al. (2016) describe how financial literacy train-
ing for members of cooperatives in Rwanda improves their financial knowledge,
borrowing and savings behavior, and start-up likelihood, yet not their income in
the short run. As a unique feature, their study focuses on spillover effects, but
contrary to the theory of change, they fail to find any evidence for such effects.
Drexler et al. (2014) compare effects of standard accounting training with those of
a rule-of-thumb accounting approach (based on heuristics) and find that only the
latter improves business practices and business outcomes. This finding suggests
that simplified training may be more effective, especially for clients with lower ex
ante financial literacy.

Karlan and Valdivia (2011) also conclude that entrepreneurship training for
female Peruvian MFI clients improves their business knowledge, not their busi-
ness outcomes. In Mexico, Biosca et al. (2014b) find that entrepreneurship train-
ing combined with preventive health services reduces the probability that people
live below the poverty line, but only if they started in a relatively better position.
In several studies, Bulte et al. (2016, 2017) evaluate the joint effects of entrepre-
neurship and gender training for female MFI members in Vietnam, in terms of
their empowerment and economic outcomes. With a lab-in-the-field experiment,
Bulte et al. (2016) determine that the training improves women’s intra-household
bargaining power. Then Bulte et al. (2017) leverage three rounds of data col-
lected from a sample of approximately 4,000 women and focus on economic
outcomes. Their main conclusion is that the training had a strong, positive impact
on business knowledge and business practices. They also uncover some evidence
of positive effects on profits and business entry and exit. Finally, Bulte et al. (2018)
conduct a hiding game and derive some evidence that the training induced more
women to hide their income, especially if their husbands also participated in the
training.

In Ghana, Karlan et al. (2012) consider individual management consulting, grants

and their combination, provided to local tailors. Those who receive consulting
services exhibit improved business knowledge and business practices; those who
receive grants increase their investments. However, the interventions all have nega-
tive effects on profits, and even the positive effects disappear after a year.

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 MICROFINANCE-PLUS: A REVIEW AND AVENUES FOR RESEARCH 121

Technical assistance
No quantitative studies exclusively analyze the effects of technical assistance or its
combination with microcredit. However, Caretta (2014) presents a case study about
the benefits of agricultural training for female members of Kenyan village savings-
and-loan programs. This training program promotes agroforestry, introduces new
agricultural practices (for example, use of improved seeds, intercropping, mulch-
ing), and promotes diversification beyond farming. It aims to enhance women’s
adaptive capacity (that is, ability to respond to climate change), to deal with the
challenges they face as the main food producers for household consumption and
sale. According to focus groups and interviews, Caretta (2014) discovers that the
training has improved women’s adaptive capacity, as well as their intra-household
bargaining power.

Another contribution comes from Valdivia (2015), who studies the joint effects of
several non-financial services, including technical assistance, but without disen-
tangling its individual effects. In this study, Peruvian institutions provide training
to female microentrepreneurs in three modules: social (personal growth), business
(managerial practices), and technical (safety and hygiene in production processes).
They offer another group of women the same training, along with individualized
services pertaining to each module. Valdivia (2015) identifies increases in sales,
revenues, and adoption of business practices only among the second group in the
short run, then for two groups in the medium term. Individualized services thus
may have an effect on business outcomes in the short term but not over longer
periods.

Avenues for further research

A troubling and substantial shortage of rigorous studies that analyze the impact of
microfinance-plus activities on end users is evident. The precise content (for exam-
ple, training modules, training intensity) reported by the small group of available
studies also differs so much that it is nearly impossible to draw general or overall
conclusions. Most existing studies suffer from small sample sizes (and thus power
problems), short impact evaluation periods, and enormous measurement issues
(McKenzie and Woodruff 2014). Therefore, we plead for more studies that address
these methodological problems.

Another important goal for further research should be to distinguish the effects of
financial services (for example, microcredit) and non-financial services (for exam-
ple, business training). Almost all existing studies consider their joint impacts,
which makes it difficult to determine whether the two broad classes of services
function as complements for each other. To disentangle these effects, researchers
must design their evaluation techniques explicitly to separate, and thus compare,
the impacts of financial and non-financial services and their combination. An
interesting example is available in Desai and Tarozzi (2011), who compare the

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 122 A RESEARCH AGENDA FOR FINANCIAL INCLUSION AND MICROFINANCE

individual effects of offering microcredit alone, family planning program alone and
the combined services together to women in Ethiopia.

We also highlight the need for studies evaluating the impact of technical assis-
tance. Technical assistance could be critical for reducing the incidence of poverty,
directly or in combination with microcredit, but no rigorous study has confirmed
its impact yet. Agrawala and Carraro (2010) predict a potential relationship among
microcredit, gender, and adaptive capacity to climate change, through technical
training and assistance, but they also note the lack of empirical evidence available
to confirm these links.

So far most of the existing microfinance-plus programs, and thus the impact evalu-
ations, focus on interventions that alleviate external constraints of the poor, such
as those relaxing financial and human capital constraints through microcredit
and training programs. However, there is an emerging literature in economics
exploring the role of internal constraints, such as hope and aspirations, in poverty
reduction (Duflo 2012; Lybbert and Wydick 2017b; Ray 2006). Sen (1999) argues
that internal constraints of the poor can deteriorate their own perception of agency
such that these are more binding than external constraints. Therefore, we end
this chapter by calling for microfinance-plus interventions which combine services
aiming to alleviate both external and internal constraints. Accordingly, we claim for
rigorous impact studies evaluating whether this bundle is effective, that is, whether
it increases the poverty-reducing effects on end users (refer to Lybbert and Wydick
(2017a) for a pioneer study).

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