What’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 MoreIt's been over two years since the start of the great India insolvency. Four years since the Bosnia blight and No Pago Nicaragua. And nearly six years since the Morocco microfinance meltdown. . . .
At this point, it's reasonable to say that the first global crisis in microfinance has passed. Life is on the mend. . . .
In a recent email, Alok Prasad, head of the Microfinance Institutions Network in India (MFIN) described its most recent quarterly report as "green shoots in evidence." The numbers certainly bear him out. Elsewhere, investors speak of tightening their exposure to countries with overheating markets, pay attention to issues of overindebtedness, and are wary of the sort of runaway growth that was being posted by Indian MFIs back in 2008-10. . . .
Development of sector-level infrastructure is likewise moving apace, with ever increasing credit bureau coverage of microfinance clients and increasing implementation of client protection practices . . . . . .
Read MoreHundreds of millions of people in the developing world work in microenterprises. These businesses tend to be very small, often employing only a single operator, and they tend to have difficulty growing. Yet growing evidence suggests that such businesses could increase profits by increasing investment – a number of recent studies find that the marginal return to capital among small firms in developing countries tends to be very high (i.e. de Mel et al. 2008). If returns to capital are high, why don’t microenterprises borrow, invest and grow rapidly? . . .
The obvious answer is that these firms don’t have access to credit. But while credit constraints are likely part of the explanation for the puzzle, accumulating evidence suggests that it’s not just credit that limits investment . . . . . .
Read MoreWhat’s next in financial access in 2013? Bindu Ananth and Deepti George say a focus on measuring and improving quality. . . .
It has been over four years since we started KGFS, an attempt to provide a complete suite of financial services to financially excluded low-income households in India. Our journey began in the village of Karambayyam in Thanjavur, Tamil Nadu. In that village of 3200 households that has no other formal financial institution, the KGFS branch and its three wealth managers have enrolled 2030 households and created a customised financial well-being report for each of them. Following up on these reports has resulted in the sale of 4966 insurance policies, 300 pension policies and credit disbursements of USD 2mn with no losses for this single branch. Mid-line results from an impact evaluation being conducted by Rohini Pande and Erica Field suggest that the presence of a KGFS branch has a significant impact on reducing the stock of informal, expensive debt. Over the last four years, we have built five independently managed KGFS institutions in five distinct regions of the country. These institutions together comprise a total network of 170 branches and are now serving about 300,000 households. The first of these institutions, with 68 branches in Thanjavur district of Tamil Nadu, turned profitable within four years of inception . . . . . .
Read MoreOne of the big changes observed in discussions over microfinance in the past few years has been increasing emphasis on discussing microfinance, rather than just microcredit. In practice this has meant a lot of discussion about microsavings, with advocates pointing to studies showing greater impacts from offering savings accounts than from offering loans. . . .
But finance is about much more than just savings and loans. As emphasized in Portfolios of the Poor, one of the issues with living on $2 a day is that incomes for the poor are incredibly volatile, so that the $2 a day average masks days of nothing and days of higher incomes. Building up precautionary savings offers one way to help smooth these shocks, while credit provides another. But some of the shocks experienced by the poor are large enough when they occur that they wipe out savings and leave people in a position where they will struggle to either obtain loans or be able to repay them straight away . . . . . .
Read MoreThe microfinance space has never been a dull place. As the tumult of the last few years—debates about effectiveness, industry crises and crashes in several countries—seemingly dies down, it’s a good time to speculate about what’s next. It seems clear that “business as usual” in terms of rapid growth and expansion paired with unvarnished enthusiasm and uncritical praise is not what’s next. . . .
So what is? . . .
Over the next few weeks we’ll be running a series of blog posts from folks at FAI and around the financial access world offering their takes on what’s next. Some are calls to action, others are predictions, and others pose the important questions we need to answer now. If you’d like to contribute, send us a tweet @financialaccess. . . .
Herewith are my thoughts on “What’s Next?” . . . . . .
Read MoreAbout 2.5 billion adults, just over half the world’s adult population, lack bank accounts. If we are to realize the goal of extending banking and other financial services to this vast “unbanked” population, we need to consider not only such product innovations as microfinance and mobile banking but also issues of data accuracy, impact assessment, risk mitigation, technology adaptation, financial literacy, and local context. In Banking the World, a new collection of research papers edited by Robert Cull, Asli Demirgüç-Kunt, and Jonathan Morduch, experts take up these topics . . . . . .
Read MoreA few weeks ago I wrote that a transition to electronic payments will not be a boon to poor households unless the financial systems that undergird payments become more focused on serving poor households. It’s vitally important to think of the value and benefits of electronic payments within a system. . . .
A couple of recent news stories highlight what a financial system enabled by electronic payments can do, even without the active cooperation of traditional banks. . . .
In the last two months, both Amazon and Google have launched programs to extend credit to small business customers. Amazon is making loans available to people who sell through the company’s website to finance larger inventories heading in to the Christmas shopping season. . . . . . .
Read MoreIn the last week, two significant deals in the world of microfinance investment have been announced. First, Bamboo Finance announced that it was acquiring "a controlling interest" in Accion Investments, a $105 million for-profit investment fund started by Accion. In context, Bamboo Finance had $195 million of assets under management. Yesterday, Microvest GMG Asset Management announced they had taken on MinLam Microfinance Fund, a $47 million debt fund making loans in local currencies. Microvest GMG currently has $245 million of assets under management. . . .
While these transactions likely have a variety of motivations, it's impossible not to wonder if we are seeing the beginning of a wave of consolidation driven by the souring of public sentiment on microfinance . . . . . .
Read MoreIf there’s one issue that’s most difficult for microfinance practitioners to explain to the lay public, it’s high interest rates. As Elisabeth Rhyne describes it, at some point the numbers get so high that people become outraged and stop listening altogether. Most recently, the issue was put back in the public eye through Hugh Sinclair’s Confessions of a Microfinance Heretic and the media coverage it has spurred. . . .
With few exceptions, his critique that microfinance investors are investing in MFIs charging exhorbitant interest rates has gone largely unanswered. That’s not a tenable position for the long-term. For a socially responsible fund, the case ought to be simple – if you have investments that you’d rather not have to publicly support and explain, then either those investments don't belong in your portfolio or you should learn how to explain those investments . . . . . .
Read MoreAfter nearly 30 years of the microcredit movement, we've finally started seeing rigorous impact evaluations in the last few years. Randomized control trials of some variant of microcredit have been conducted in India, Morocco, Mongolia and the Philippines. Each of these trials adds to the evidence, but each is in a specific context, with differences in contracts, eligibility, loan size and structure, and most importantly among the borrowers. That’s why it’s still exciting to see new trials which provide evidence in a different context. . . .
“Microfinance at the Margin: Experimental Evidence from Bosnia and Herzegovina,”a new working paper presented at the 2012 Innovations for Poverty Action (IPA) Conference, gives us yet another different context to examine how households use microcredit and its impact on their lives. The authors of the study – Britta Augsburg, Ralph De Haas, Heike Harmgart and Costas Meghir – look at a group of randomly-selected loan applicants who normally would have been rejected during the loan screening process, in many cases because they lacked the necessary collateral to secure a loan . . . . . .
Read MoreIn microfinance circles, people tend to be fond of asking the question, “Does microfinance work?” Over the last decade, countless studies have attempted to answer this question by studying the net impact of microcredit on the lives of borrowers. Yet, these impact studies don’t necessarily tell us much about the nuances of how organization-level factors might influence the final impact of microcredit. NYU Economist Hunt Alcott and FAI Affiliate Sendhil Mullainathan have a recent paper that notes that the MFIs that participate in rigorous impact evaluation aren’t like MFIs in general. But there is a very important deeper level of analysis that is important. Little attention has been paid to how individual groups and actors shape the nature of microfinance services – that is, how the behaviors of funders, bank executives, and front-line loan officers might fundamentally alter the delivery and outcome of microlending. . . .
Here at FAI, we’re not just interested in financial products but in how systems and people interact to make the right (or wrong) products available (or unavailable). For example, why do loan officers behave as they do? What incentives affect a loan officer’s job performance and how? How does the relationship between the loan officer and the client influence the borrowing and repayment process? . . .
Read MoreA very interesting microfinance experiment is in the new issue of the American Economic Review, one of the premier journals in the field (Published, but gated, version here. Ungated version here). The paper is by FAI Affiliate Xavi Giné, Jessica Goldberg (see her recommended reading on savings here), and Dean Yang. It's not often that microfinance makes the pages of AER; it's a testament to the work that Xavi, Jessica and Dean did to set up this experiment and their careful analysis of the data. . . .
In brief, the experiment tested the effects of fingerprinting borrowers from a microcredit program in rural Malawi. I had the opportunity to interview Xavi and Dean (separately) for my upcoming book on economic field experiments and we talked about this work. I’ll let them explain the project and its implications in their own words . . . . . .
Read MoreDavid Roodman’s conversation with Jonathan Morduch is coming up tomorrow. If you haven’t read David’s book yet, you should. But we can be realists. You probably don’t have time to buy and read the whole book in the next 36 hours. So, here’s a quick cheat sheet of some highlights from David’s blog over the past few years. Reading these posts will get you up to speed (but you should still read the book!). . . .
Perhaps David’s most famous post is an October 2009 post titled “Kiva is Not Quite What it Seems,” about the online microlender, Kiva. The post kicked off a wide-ranging debate about the role of transparency in the framing of NGOs’ operations and ultimately changed the way the organization presents itself. In the post Roodman explained there was significant divergence between Kiva’s rhetoric and marketing and how it actually did its work . . . . . .
Read MoreIn Due Diligence, David Roodman confronts important questions about the impact of microfinance and discusses how governments, foundations, and investors can best support financial services for the poor. In particular, Roodman argues for the need to deemphasize microcredit in favor of other financial services. . . .
To learn more about Due Diligence and Roodman’s perspectives on microfinance, please join us on October 3rd for a conversation with David Roodman and Jonathan Morduch (RSVP). You can also listen to previous conversations with Timothy Ogden and Jonathan Morduch on the state of microfinance today. . . .
In case you haven’t had time to read the book before the event, here’s a cheat sheet of sorts . . . . . .
Read MoreA few weeks ago M-CRIL, an Indian microfinance ratings firm, published a white paper on India's evolving microfinance regulations. The overall message is that while the proposed regulatory framework is improving, it still needs work. One particular point caught my eye: . . .
"The prevailing pricing regime – average cost of funds plus a margin cap – penalizes those MFIs that incur a high cost due to their commitment to responsible finance as well as those who are innovative in raising funds at low cost. Those that do both suffer a double 'whammy'." . . .
While there is widespread agreement around the world that people should be protected from usurious interest rates on loans, there is little consensus on how to determine, and enforce, a cap on interest rates charged to the poor. The debate is as hot in the US (where it's fought over credit card and payday lending rates) as it is in India, Nicaragua and Bangladesh . . . . . .
Read MoreI have written before how tiny Zidisha Microfinance is challenging long-held assumptions by leveraging internet social media and mobile payments like M-PESA to lend to clients without the help of loan officers or local staff. Since then, Zidisha has grown from tiny to small, with a portfolio now at $200,000, over 430 active borrowers, and 1400+ lenders. Its operations remain solid, with PAR30 at a respectable 6.6%1 (check out its stats for more). . . .
I've been advising Zidisha since before its launch in 2010, and with that had the opportunity to watch the evolution of the platform's innovations. One feature, introduced in August 2011, allows borrowers to request to reschedule their loans, regardless of whether they are delinquent or not. Zidisha's online borrower portal provides two rescheduling options: adding a grace period of up to 2 months, but leaving the repayment amounts unchanged, or re-amortizing the loan over a longer period (up to 24 months) to lower the payment amount (Figure 1). The interest rate of the loan is applied over the longer period and repayment schedule is recalculated accordingly. Aside from these rules enforced through the website, there is no involvement or approval on the part of Zidisha – once a borrower submits the online request, his new repayment schedule becomes effective immediately . . . . . .
Read MoreI recently welcomed the news of a new national-level microfinance bill in India. I believe the Indian microfinance sector is witnessing a movement towards greater regulatory clarity following the turmoil of the Andhra Pradesh crisis. The Microfinance Institutions (Development and Regulation) Bill 2012 introduced in the Parliament on the 22nd of May comes with modifications to the earlier Bill introduced in 2007. The industry, too, has broadly welcomed the Bill as a much better version of the 2007 Bill, which lapsed on account of the dissolution of the Lok Sabha (the lower house of India’s Parliament). . . .
The introduction of this Bill brings a much needed strengthening of the regulatory framework and consumer protection norms of the microfinance industry in India. Regulation of financial services is necessary to protect current and future clients, but it must also be undertaken with care in order to maintain access to those services . . . . . .
Read MoreIt’s the microfinance bête noire. The great unspeakable. The furtive shadow slinking down the narrow alleys of poverty. Yes, the consumer loan. Has microfinance really come to this, we ask? Helping the poor buy a TV? Charging 40% interest for the couch to go in front of that TV? And what about family celebrations, festivals, dowries? Is that really what microcredit is for? . . .
Consumption lending has been creeping out from the shadows for some time, but mostly for “good” consumption like school fees, urgent medical care, or basic needs like food during those difficult periods when income is scarce. Still, for many of us the TV-on-credit notion that represents what is so easy to think of as “bad” consumption remains too painful an idea to swallow. . . .
But how to draw the line? If not the TV, then what about a microwave? A motorbike? Plumbing in the home? . . .
Read MoreThe 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 . . . . . .
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