There’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 . . .
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 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
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?
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