Last week I caught up with David Roodman who was on his way to an NYU screening of The Micro Debt, a documentary on microfinance by Tom Heinemann. Heinemann sent me the DVD a while ago, but I hadn't watched it yet so I tagged along. . . .
Heinemann is a muckraker, a trouble-maker, a Danish Michael Moore -- especially in the scenes where his camera crew tries to corner Muhammad Yunus (unsuccessfully) at an industrial fair in Spain. . . .
The film is an unrelenting indictment of the microfinance sector, the Nobel Committee, and Yunus. Heinemann distorts and sensationalizes, and he does a grave disservice to Grameen Bank and Yunus. In a now-resolved matter, Heinemann accuses Yunus of massive financial improprieties involving a $100 million tax dodge. Worse, the film pins a series of borrower suicides on alleged strong-arm tactics of Grameen Bank . . . . . .
Read MoreLast week, FAI asked: Does financial access--evaluated in typical settings with a long enough time horizon to see change--substantially improve the well-being of customers? Today, the series continues to probe for insights into the questions we need to ask in order to make informed decisions on how to improve financial access. . . .
Question 2: How much does consumption smoothing contribute to the welfare of families? . . .
There are clear theoretical linkages between consumption smoothing, financial access, and improved wellbeing. Modern economics is built around the premise that households seek to maximize utility, not income. A core economic task of a household, rich or poor, is matching the availability of resources with the timing of consumption needs. This task is especially burdensome for poor households who have to piece together uneven cash flows using a handful of imperfect financial tools. A key role of access to predictable, reliable and convenient financial services is thus be to smooth consumption . . . . . .
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. Today, FAI is launching 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. These questions will be available as a framing note at the end of the series on the FAI site and later as part of a collection of studies to be published in a forthcoming book. . . .
Question 1: Does financial access--evaluated in typical settings with a long enough time horizon to see change--substantially improve the well-being of customers? . . .
The most fundamental, unresolved question concerns impact. Does expanding financial access really make a notable difference to families and communities? And, if so, how and when? . . .
Read MoreI’m just beginning a year of much-awaited research time in Tokyo. I was planning to take a few weeks to settle in and lie low, but my eye was caught by an ambitious, bursting-at-the-seams new study, supported by Britain’s DFID and completed by independent researchers (Duvendack, Palmer-Jones, Copestake, Hooper, Loke, and Rao). The topic is one that I’ve written about often: “What is the evidence of the impact of microfinance on the well-being of poor people?” . . .
Here are some thoughts, written during an early-morning round of jet lag. . . .
The DFID study is a sprawl (17 appendices), obviously a major effort, and filled with technical observations. But I fear that it also will add confusion to a conversation that’s already muddled. . . .
The biggest confusion focuses on the essential difference between
• Proving that something doesn’t work and
• Not being able to prove that it works. . . .
In the first case, you’re able to rigorously show that the intervention makes no difference . . . . . .
Read MoreThe idea behind APR – annualized percentage rates – is to put different interest rates into comparable terms. Some loans are for 2 months, say, and some for 2 years, so to compare them, it can be helpful to ask: “what would the rate be if the loan was for a year?” . . .
Comparing apples to apples makes sense. Or at least that’s the financial industry/expert consensus. . . .
Arjan Schutte is managing partner of Core Innovation Capital, a venture capital fund that invests in innovative financial technology aimed at the underbanked in the U.S. Arjan argues that APRs are misleading when it comes to short-term loans. Arjan points out that Americans took out $40 billion in pay-day loans last year (not including all the other types of short-term credit such as overdraft, pawn, etc.). Most of these loans are very short term, usually for emergency liquidity and a quick infusion of cash to meet short term needs. In that case, borrowers are thinking more about the dollar cost of the transaction than about the interest rate . . . . . .
Read MoreHow do you entice low-income families to save? One of the great innovations at Bank Rakyat Indonesia (BRI) was to give people a chance to win prizes if they held savings in the bank's SIMPEDES account. Getting lottery coupons proved far more popular than getting interest. The idea flew in the face of the traditional view that families are always risk averse. The SIMPEDES success helped show that families could be averse to the risk of big losses—but simultaneously risk-loving over small bets. BRI implemented the idea in 1984, and it's now morphed into a tenet of behavioral economics . . . . .
Read MoreThere’s a lot of excitement about mobile banking. So much excitement that it’s easy to forget that mobile phones can be used for other purposes—like contacting people. That might be corrected by a new paper on using text messages to remind people to repay loans. The study is by Ximena Cadena, a research analyst at Ideas42, and Antoinette Schoar, a professor at MIT’s Sloane School. It follows on a recent study by Dean Karlan, Margaret McConnell, and Sendhil Mullainathan that shows that savings rates rise when people are sent text messages simply reminding them to save. Cadena and Schoar instead remind people to pay their monthly loan installments. . . .
What makes their study especially interesting is that they compare the impact of a monthly text message reminder (timed to be received just before installments are due) to other kinds of interventions. One alternative is getting a hefty cash bonus for repaying on time. Another is a reduction in the interest rate of their next loan . . . . . .
Read MoreThis week the Microfinance USA 2011 conference took place in downtown Manhattan. It was buzzing – not thanks to the old guard like me, but because so many younger people are doing so much interesting work. There were lots of sessions running in parallel, and I couldn’t see more than a fraction, so here are 5 highly-selective take-aways. . . .
1. Folks working on the international side and the domestic side have more to share with each other than ever. Why? The international side has moved beyond the focus on Grameen Bank-style micro-credit to support micro-enterprise. Even Grameen Bank has moved beyond that (most notably, they’ve become a deposit institution big-time: the last figures I saw showed them taking in $1.47 in savings for every $1 they lent). That puts focus on a wide range of new financial ideas, from mobile telephone banking to insurance. The U.S. side is also engaged in new uses of technology and ideas that are more about banking than traditional microfinance (credit scoring, debit cards, etc.) Maybe the most interesting thing about the conference was how little it actually had to do with traditional microfinance – and that turns out to open up lots of wide-ranging conversations . . . . . .
Read MoreWe've been reading a new summary of the literature on microcredit impacts. The paperreviews technical issues using technical language, so it's not the paper I'd read first as an introduction unless you're doing a PhD in Economics or something similar. . . .
The paper covers terrain familar from The Economics of Microfinance, 2nd edition, but offers an independent review (with a couple of helpful summary tables at the end). The paper comes to similar conclusions as Armendariz-Morduch, so there will be no surprises if you've read the book. If you haven't read the book, the paper offers a smart synthesis. . . .
Here's my summary of the state of play: After 30 years of microcredit and the rise of randomized trials, we still don't have an impact evaluation that is ideal yet, but we're getting closer. One big lesson on which we can all agree (or should all agree) is that flawed evaluations can be seriously misleading (due to self-selection, attrition, and non-comparable control groups). So getting the details right matters . . . . . .
Read MoreMuhammad Yunus has sparked a new round of debate. In a January 15, 2011 New York Times opinion piece, "Sacrificing Microcredit for Megaprofits," the Nobel Peace Prize winner and founder of the Grameen Bank assails microfinance institutions seeking profit, likening them to the moneylenders he had meant to stamp out. Going a step further, Yunus calls for stricter government regulation to cap interest rates and protect the poor. . . .
Yunus’s arguments take a swipe at mainstream orthodoxy within microfinance. Dogma these days holds that interest rate caps should be resisted, and profit should be pursued in the bid to attract outside investors . . . . . .
Read MoreTen years ago, “The Microfinance Schism” was published in World Development(vol. 28, no. 4, 2000). I had become frustrated sitting in meeting after meeting, especially in Washington, with people talking past each other. Some took the view that microfinance should be first and foremost a social intervention. Others argued that it should be profit-driven. Many argued that you could achieve both goals without making trade-offs. No one had good evidence, and few had a strong conceptual frame. . . .
It’s a debate that hasn’t gone away. In fact, the debate has become more rancorous, especially given the current tensions in South India following the SKS IPO. Muhammad Yunus and Vikram Akula are the current combatants.
“The Microfinance Schism” parsed the arguments and aimed to show the true nature of divides. Here’s the abstract . . .
Read MoreRich Rosenberg blogged yesterday about an Atlantic article that profiled John Ioannidis’s critique of medical research. The article reminded me of a meeting held in Washington a few years ago. Consumers and producers of microfinance impact studies were brought together to discuss the research agenda. One participant, who is not a researcher, concluded dolefully that microfinance research lags far behind medical research. . . .
My immediate thought was that that claim was probably false: not because microfinance research is so far ahead, but because much medical research seems full of problems. If you read beyond the newspaper headlines, it’s usual to see simple correlations between health conditions and a given diet/activity/lifestyle quickly – and falsely — assumed to be causally determined. Sample sizes are small. Lots of hypotheses get tested, but just a few get published. . . .
According to Ioannidis, it doesn’t get better when you scour the academic medical literature . . . . . .
Read MoreLast week I was a guest in Seattle at the Bill & Melinda Gates Foundation Global Savings Forum. The Forum brought together a diverse and thoughtful group of people working to push the global savings agenda. Stuart Rutherford and I had the chance to talk about lessons from the financial diaries and Portfolios of the Poor, and found that our job was made much easier given that several of speakers ahead of us on the agenda, includingMelinda Gates, had already done an excellent job of communicating important messages about how the poor live their financial lives. . . .
The big news out of the Forum was, of course, the Gates Foundation’s unveiling of their $500 million Global Savings Fund, a collection of grants to help create savings accounts for the poor. The grant builds on the argument that the poor can save, do save, and want to save – but they seek better ways to do so effectively.
During a break, I was talking to an academic friend who asked me – “Yes, but who would ever question that idea?” It was a reminder that it’s easy to forget how contentious the idea is that the poor can save . . . . . .
Read MoreThe microfinance situation in South India has put the industry into crisis management mode. David Roodman offers today's update. . . .
Last week, I spoke to one of the most respected analysts of microfinance in India, and he argued that the sector was now "too big to fail". Roodman cites Daniel Rozas who warns that we ought to at least think about what failure might look like. . . .
All of this has brought up the specter of the US subprime meltdown. Misaligned incentives? . . .
Read MoreIndia is the biggest, fastest-growing microfinance market anywhere. And it's at risk of hitting a bad crisis. This will be surprising if you haven't been paying attention to the global press for the past 3 weeks. The last big microfinance news from India centered on the millions of dollars earned by investors following the SKS IPO. Vinod Khosla made the front of The New York Times for his $100 million plus pay-day. . . .
Just a few weeks ago, most of the who's who of microfinance in India got together for a conference in Mumbai. The agenda gives no sense of what the rest of October would bring. . . .
But a spate of suicides by microfinance customers, in response to alleged harassment by microfinance loan collectors, has turned attention back to conditions in villages -- and it's not all pretty. Regulators are now rushing to clamp down on microfinance institutions. . . .
Shloka Nath has the best piece I've read, online today in Forbes India . . . . . .
Read MoreThat is indeed the question when regulators so often find themselves playing catch up – trying to figure out if and how something that’s already happening should be supervised. When it comes to prudential regulation – or, safeguarding deposits – the stakes are particularly high. . . .
In microfinance, most MFIs aren’t big enough to threaten the health of the financial systems they’re part of if they run into trouble. However, if prudential regulation of microfinance is inadequate – or when it fails – poor customers stand to lose their savings entirely. And the stakes really don’t get much higher than that. . . .
As with other forms of regulation, the basic dilemma is that regulators of microfinance want to ensure the health of financial institutions without creating undue burdens on the institutions, or on themselves. Striking the balance is tricky when experience with regulating financial access and evidence to support hypothetical costs and benefits are so thin. . . .
In his third Policy Framing Note for FAI, David Porteous sheds some light on why these challenges are so, well, challenging, and describes early experiences with prudential regulation of microfinance in India, Nigeria, the Philippines and Nigeria. . . .
According to the paper, there are two basic ways to integrate microfinance into regulatory frameworks. One is to amend existing regulations; the other is to write new laws that open special “windows” for microfinance. The window approach is appealing, since microfinance is a rather unique animal in the world of financial services . . . . . .
Read MoreThe premise of microfinance is that very small loans can make a big difference. The argument is that getting capital to cash-starved “micro-entrepreneurs” will go farther than getting capital to cash-starved small business owners. The premise is plausible, but the opposite is also plausible. Rather than going micro, bigger businesses may be able to generate better jobs and do so more efficiently. Those bigger businesses may be able to generate bigger impacts directly via job creation and indirectly through regional economic growth. . . .
Sometimes bigger might be better. The problem is we don’t have much good evidence to go by. . . .
That’s going to change. We’re already getting cautionary evidence on micro-enterprises. The big randomized control trials of the past year yield tepid conclusions – which is helping to open the door to thinking about interventions to support bigger businesses. In India, for example, a JPAL/IPA/FAI study finds that business owners who received microcredit did not report having more employees 12 to 18 months after receiving their loans. Karlan and Zinman (2010) take a look at microcredit in the Philippines. They find a surprising decline in the number of paid helpers in Filipino businesses that received a microcredit loan. The studies are described here . . . . . .
Read MoreThe Bill & Melinda Gates Foundation certainly thinks so. I’m going to be seeing for myself this week, when I join a foundation-sponsored visit to M-PESA, a rapidly-growing mobile payments service in Kenya. As Ignacio Mas and Daniel Radcliffe wrote as guest bloggers for us last week, at Gates they believe that M-PESA “is already demonstrating how m-payments can successfully expand the range of financial options available to poor households.” By all accounts, M-PESA has become a remarkably effective way to transfer money, but can it really deliver as a platform for full-service banking? . . .
The potential for mobile phones to solve the problem of infrastructure for expanding financial access in poor and remote areas is tremendous. As Ignacio and Dan point out, mobile phone penetration in Africa, which was a mere 3 percent in 2002, is expected to reach 72 percent by 2014 – this on a continent where roughly 20 percent of the population has a bank account (see our recent global count). That part’s clear – and exciting . . . . . .
Read MoreThe 2008 global financial crisis intensified conversations about consumer protection. The financial crisis showed us that overly-liberalized credit markets can lead to overlending by institutions and heavy debt burdens for borrowers. Not surprisingly, the buzz these days is about “responsible banking.” . . .
But self-regulation may not be enough—and may not be appropriate. After all, these are the same banks and institutions that created the original problems. Regulators are thus determining their next steps.
There are always trade-offs in designing regulations, though, and this isn’t the obvious time to be adding extra burdens for already-burdened regulators. Nor is it clear that imposing extra costs on financial institutions won’t affect their ability to serve poorer and under-served communities. Our evidence to date suggests the opposite. . . .
Read MoreLast week, a group of leading microfinance organizations came out with a joint statement on measuring the impact of microfinance. It had Accion and Grameen, Unitus and Finca, Opportunity International, and Women’s World Banking. It had a commendable call to be “reasonable and measured in our claims for what microfinance can accomplish.” It realistically characterized microfinance as “but one mechanism in the toolkit of global poverty alleviation.” . . .
But what this statement didn’t have was any real measure to back up its assertion that microfinance has a positive impact on poor customers. Instead it fell back on first-hand client accounts of microfinance in, as David Roodman wryly put it, what may be “the most filtered, unrepresentative collection of microfinance stories ever.” . . .
In addition to Roodman, Rich Rosenberg at CGAP has also done a nice job of critiquing the mixed messages and misunderstandings in the statement. . . .
The fact is that the next wave of impact evaluations are unlikely to show results that are radically different from the most recent studies from India and the Philippines. The industry advocates will have to face the music sooner or later . . . . . .
Read More
