Part of our mission at FAI is to frame policy and regulatory issues by synthesizing evidence from existing research and generating new evidence where it's lacking.
Authors: Jean Lee (World Bank), Mahreen Mahmud (Oxford), Jonathan Morduch (NYU), Saravana Ravindran (UCLA), and Abu Shonchoy (Florida International U.). Click here for a PDF of this blog post. . . .
Within one week in March, the lockdowns ordered by South Asian governments to combat the COVID-19 pandemic dramatically reversed rural-to-urban migrant flows. Our team’s early analysis shows that migration patterns may help predict the location of COVID outbreaks. . . .
Read MoreWe were glad when Mark Zuckerberg picked Portfolios of the Poor: How the World’s Poor Live on $2 a Day as one of his 23 picks for his book club, the Year of Reading...[but] Maddie Crum of the Huffington Post points out that there’s just one thing wrong with Zuckerberg’s list. Where are all the women? . . .
Read MoreMost of NYU’s development economists are on leave this year (Raquel, Debraj, and Hunt: your colleagues miss you). The regular doctoral sequence and development seminar are on hold for the year. Students walk the halls unsure who to ask about the right way to parameterize intra-village treatment heterogeneity when doing power calculations. Bill Easterly and Yaw Nyarko are holding the fort, though, and they pulled off a standing-room-only annual Development Research Institute conference on Friday, November 15. It was a reminder of what makes NYU such an interesting place to study development. . . .
Takeaways: The history of European settlement made more difference than we thought to global patterns of growth (and still does) . . . . . .
Read MoreLast week was a big one for those hoping to reach “full financial inclusion” by 2020. The President of the World Bank has signed on to the cause, and the Center for Financial Inclusion just rallied the troops in London at the Financial Inclusion 2020 Global Forum. . . .
As with most really big global goals, success requires making strides in China. China is the last huge, untapped market for microfinance, but there are signs that that’s changing. The focus of microfinance in China is on credit, and the numbers of providers has been growing fast, with a big jump since 2010. At the end of 2010, the China Association of Microfinance had 2,614 formal members in 31 provinces and cities. The early members were mainly public-interest microfinance institutions focused on poverty reduction . . . . . .
Read MoreBuried at the bottom of Shaila Dewan's recent New York Times article on "Microcredit for Americans" is an idea that deserves much more attention: . . .
Grameen helps its clients in another way that many experts say is more important than increasing income — it establishes good credit scores. Many poverty alleviation groups have shifted their focus from saving to credit building, because people with poor or no credit must leave large deposits for basic needs like utilities, have trouble renting decent housing, pay much higher interest rates and have a harder time finding jobs. . . .
Nayrobi Gonzalez de Quiroz, 26, recently received her first Grameen loan but decided not to follow through with her plan to buy handbags for resale. After using about $200 to pay off a debt, she said, she decided it was safer to leave the money in the bank and make the payments from her earnings as a manicurist. . . .
“Here, you have to have good credit,” she said. “I have a young son and I have to think about his future. . . .
The choice by Nayrobi Gonzalez de Quiroz to not put her money in a business is familiar from other studies of how people use microcredit around the world, so it's not surprising to see it in the U.S. The more surprising idea is that microcredit may matter not because of anything having to do with any given loan and the possible returns on investment. The path of impact could run through impacts on credit scores. This is a phenomenon that is particular to the U.S. and other places where credit scores are part of the backbone of retail banking. One impact comes through the way that a better credit score makes access to banks easier, but credit scores are also used by employers in making hiring decisions, and landlords in making housing decisions. Having a better credit score is a big deal . . . . . .
Read MoreWhen it comes to costs and benefits, we at FAI tend to focus on benefits. The recent release of the Compartamos microfinance impact evaluation was thus a big event in our office. With our heads in the academic literature, we tend to write a lot about RCTs and other ways to measure benefits of interventions. . . .
We’re contributing to a problem, though. There’s a big danger in conflating impact and value. We can’t say much about the value of microfinance (or any other intervention) based on benefits alone. The most realistic proposition in favor of microfinance is that relatively small benefits are paired with relatively small costs, leading to a favorable cost-benefit ratio. That’s a hypothesis, of course, and it hinges on a careful reckoning of the cost data. . . .
Read MoreMuhammad Yunus spoke to an overflowing crowd at NYU on April 15, an event jointly sponsored by the Wagner School of Public Service, Stern School of Business, and Financial Access Initiative. . . .
Professor Yunus is known for fighting to improve the lives of millions of poor families around the world, the quest that was celebrated by the 2006 Nobel Peace Prize. These days there is a lot of talk about the impact of microcredit. But here was an opportunity to ask: what is the impact of Yunus? Given where we were, more specifically, how has Yunus changed the way we--economists, academics, policy makers and influencers--think about problems? . . .
Read MoreFrom Dave Birch's review of Banking the World at The Enlightened Economist: . . .
My favourite quote from the book was that “remittances may promote idleness on the part of recipients.” As the father of a teenage son, I can attest to this . . . . . .
Read MoreWhat’s next? Jonathan Morduch says: Making RCTs more useful. . . .
When you’re thirsty, that first gulp of water is really satisfying. But after months of just drinking water, you’ll likely start hoping for more from your beverages. . . .
I think that’s where we are with RCTs of microfinance. . . .
The first microfinance RCTs were refreshing. They quenched a thirst for any credible, rigorous evidence on microcredit impacts. No one was particularly hankering for data specifically on microfinance in Manila, Hyderabad, Morocco, or Bosnia. But that’s what we got. It didn’t particularly matter where the studies were from, or what the particular financial methodology was, or who exactly the customers were. Especially since the results were not only credible but surprising and provocative. Researchers were opportunistic choosing sites and partners , and who can blame them? . . .
Read MoreAlbert Hirschman died on Monday. He was one of the most creative and broad-ranging development economists of the past fifty years. . . .
His early work at Harvard was fairly technical, but he’ll be remembered for his later explorations of ideology and the evolution of ideas. He is best known for asking why bad situations, especially in developing economies, and bad ideas, here in the US, persist. His later writing is intellectually lively, discursive and often rooted in historical examples. . . .
Exit, Voice, and Loyalty is his most famous book, and it deserves to be read much more widely . . . . . .
Read MoreThe Findex project helps to correct a long-standing imbalance in evidence on global finance: an abundance of data on the supply of financial services but curiously little that’s systematic and comparative about global demand. Together with the IMF’s Financial Access Survey, we’re finally getting a clear picture of the holes in global financial access. . . .
There’s a lot to celebrate now that the Findex is here. So much so that it’s striking that it took so long to create a constituency for the efforts. Stanley Fischer had initiated the push in 2004 as head of the Advisors Group for the UN Year of Microcredit, and I joined Princess Maxima of the Netherlands in pushing the agenda forward in advisory roles with the UN in 2005. But it was the Gates Foundation’s support of the World Bank research group in 2010 that ultimately got us here. . . .
The Findex headline turns out to replicate an earlier count of the global financial gap: half the world is unbanked, about 2.5 billion adults, the same bottom line that came from aggregating a range of independent surveys from ten years ago. But even if the headline is familiar, the Findex delivers rich details . . . . . .
Read MoreThere’s not enough academic research on the regulation of financial inclusion. Many of the questions might seem too applied for some researchminded economists, but that leaves regulators with few guideposts. It also seems short-sighted. . . .
Regulation is always a question of trade-offs between competing goals. Within microfinance, for example, there is evidence that the supervision and monitoring that is part of prudential regulation increases costs substantially for microfinance institutions. That, in turn, appears to push institutions to reduce outreach to their poorer customers and women (Cull, Demirgüç-Kunt, Morduch 2011). The alternative—less regulation in order to increase outreach—carries plenty of dangers. Those are difficult trade-offs to make and there is as yet not enough empirical evidence to describe optimal regulatory schemes for microfinance. . . .
Read MoreRegulators hope that expanding financial access will also provide greater stability to the overall financial system. This would occur as the market becomes larger and more diverse, and thus better able to withstand difficulties in any particular corner. The range of depositors would enlarge, as would the kinds of financial institutions in the market. Greater competition among providers would create pressure for quality competition. Regulators hope that expanding financial access will also provide greater stability to the overall financial system. This would occur as the market becomes larger and more diverse, and thus better able to withstand difficulties in any particular corner. . . .
That’s the rosy scenario. The financial crisis of 2007-8 in the United States is a contrasting reminder that expanding access and increasing stability do not necessarily go hand in hand. In the United States, the expansion of mortgage finance opened way for new home buyers to engage in speculative and ill-advised real estate investments, eventually fueling the drama behind the financial crisis (McLean and Nocera 2010). The financial
crisis was created by a range of forces—including fundamental structural inequalities exacerbated by poor oversight, misaligned incentives, and some measure of outright fraud—so generalization should proceed with caution (Rajan 2010). Still, the crisis underscores the larger point: Regulators need a deeper understanding of what can happen to the stability of financial systems when millions of new participants enter. Debates over the benefits and risks of commercialized microfinance as a gateway for financial access have raged since the early days of microfinance . . . . . .
The most basic question is the micro one: whether microfinance typically yields notable impacts on the lives of low-income families. The logical follow-on is, to the extent that micro impacts emerge, how do those impacts
add up? Is there a reasonable case that expanding microfinance can make a dent in regional or national economic growth rates? In national-level poverty rates? . . .
There are two complementary research strategies. One is cross-country research, which tends to show positive correlations between financial expansion and the reduction of inequality (Demirgüç-Kunt and Levine 2009 provide an overview). The work doesn’t connect the dots from microfinance explicitly, but it does help frame issues. The second approach connects the dots by imposing structure on the relationships. A good example is the general equilibrium analysis of Buera, Kaboski, and Shin (2011). They find that increasing financial access leads to macro impacts, but the magnitudes are small . . . . . .
Read MoreHigh quality evidence on the state of financial access around the world is advancing rapidly. A happy consequence of increasing knowledge is the ability to better recognize what we don’t yet know. That's why FAI launched a series on the ten questions, some micro, some macro, that need answers if we are to make informed decisions on how to improve financial access.This is the seventh installment of the 10 Research Questions on Improving Financial Access series. . . .
Question 7: Can the expansion of microfinance add up to macro impacts? . . .
The most basic question is the micro one: whether microfinance typically yields notable impacts on the lives of low-income families. The logical follow-on is, to the extent that micro impacts emerge, how do those impacts add up? Is there a reasonable case that expanding microfinance can make a dent in regional or national economic growth rates? In national-level poverty rates? . . .
Read MoreThe evidence on financial education has, to date, not been encouraging. As Cole and Zia write in Chapter 14, being financially literate clearly helps, but the value of financial education is a different question. We know the desired outcome (literacy) but not a reliable way to get there enough of the time, nor is it clear that literacy is enough. Behavioral economics teaches us that consumers also need ways to implement ideas, especially when temptations and distractions are difficult to keep at bay. . . .
Intuition that improved financial decision making through training would have powerful effects is strong, and there’s some evidence in that line (e.g., Karlan and Valdivia 2011). So where exactly are existing financial literacy programs going off track? Is it curriculum? Is it delivery? Is it context? . . .
Read MoreIn developed economies, households often use both savings and borrowings to produce large amounts of capital to buy fixed assets like houses and vehicles. House buyers, for example, make a down-payment from their savings and borrow the rest. Saving and borrowing are thus complements in this context. . . .
Behavioral economics provides another mechanism through which saving and borrowing act as complements: for households that are loathe to draw down their hard-earned savings, the ability to borrow–and thus to leave their stash of savings untouched—can function as a helpful way to maintain accumulations. Were households more confident in themselves, or if they had better mechanisms to achieve discipline, “borrowing to save” would be less useful, but in an imperfect world it can be the best of an array of imperfect strategies (Morduch 2010). . . .
In other contexts, borrowing and saving are depicted as alternative activities . . . . . .
Read MoreCredit is just one useful financial service, but credit has been the first focus of microfinance institutions because there’s a business model that makes lending possible, not because it is necessarily most important for customers. Customers pay handsomely for access to credit. Regulations also often make it much easier to lend than to take deposits (since the risk rests with the lender). . . .
Saving programs have emerged, and some advocates now claim that deposit services deserve claim to being the most fundamental need for poor families – and for the poorest specifically. But the picture developed by Collins et al (2009) pushes against that view. We argue that a range of financial devices are sought and used together, with different degrees of substitution and complementarity. None have clear primacy . . . . . .
Read MoreIf micro-businesses tend to stay micro, perhaps there are better options? Critics of the hoopla around microcredit suggest that job creation is better done by larger enterprises (e.g., Karnani 2007). The rush to support small and medium enterprises (SMEs) has been given attention by the G-20 countries and is tied in part to the idea that SMEs can contribute to the goal of poverty reduction by employing low-skilled workers. But can they? It’s an empirical question which has been met with little evidence so far. . . .
Bauchet and Morduch investigate data on the employees of SMEs supported by BRAC Bank in Bangladesh. Their conclusion is that these employees are far more educated and skilled than microcredit borrowers; in line with this, SME employees come from households that are considerably less poor on average. And they tend to be men, while microcredit borrowers in Bangladesh are mainly women. In sum, the two groups – SME employees and microcredit borrowers – look very different in the Bangladesh surveys. Will these kinds of results hold up elsewhere, particularly in Latin America and Eastern Europe where the gender and education profiles of microcredit borrowers is different from that in South Asia? . . .
Read MoreIn the large microfinance markets of Asia, a common but seldom-discussed observation is that the microenterprises nominally tied to microcredit borrowing rarely grow substantially, especially after the first few years. There are many possible reasons to explain this, including borrowers’ simple lack of imagination, lack of management capacity, low profitability at scale, limited ability to hire trusted workers, risk aversion, lack of access to sufficient capital for productive growth investments, poor policy environments, and insufficient access to larger markets. . . .
What role do financial institutions play? Making microcredit loans more flexible may help – though microfinance institutions worry that being more flexible may increase risk and costs. The lack of growth may also be due to competing household needs like childcare. Even if financial access makes a big impact at first, the long-run impact hinges on the extent of continuing gains . . .
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