In just 30 years, the microfinance movement has reached 200 million people who had been deemed "unbankable." That's a stunning success. But the narrative that drove this success has implicitly shut the vast majority of the unbanked out of the system. That's why it's time to change the story, and our minds, on how microfinance works, argue FAI's Jonathan Morduch and Timothy Ogden in Foreign Policy. They suggest that the fundamental need of poor households is tools to smooth out volatile and uncertain cash flows, not credit for business investment . . . . . .
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A Revolution at Home
From 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 MoreGender and Mobile Money
The mobile money revolution has been greeted with great excitement in some circles for the potential it holds to increase financial access for the world’s poorest. Women may especially benefit from expanding financial inclusion through mobile financial services (MFS). Women not only handle a lot of cash to provide for household needs in many societies, but they may be explicitly or implicitly discouraged from using bank branches. A new report (sponsored by Visa and the GSMA mWomenProgramme) by FAI affiliate Daryl Collins explores just this theme. In “Unlocking the Potential: Women and Mobile Financial Services in Emerging Markets,” Collins and her coauthors explore the untapped potential of woman as a strategic consumer base for MFS providers. . . .
A summary of the report’s conclusions . . . . . .
Read MoreUpdate: Another paper on microinsurance and why insuring against risk matters
We wrote a post a few months ago about a paper that looks at how microinsurance affects decision-making. Specifically, the paper analyzed whether insuring farmers in Andhra Pradesh, India, against rainfall-related risks (too much or too little) affected their investment and production decisions. Another recent paper by Karlan, Osei, Osei-Akoto & Udry uses a similar approach and found similar results in northern Ghana. . . .
In this experiment, farmers in northern Ghana were randomly assigned to receive cash grants, subsidized rainfall index insurance or simply offered the option to purchase insurance at actuarially fair rates. As in the Andhra Pradesh study, the authors find strong responses to investment to the subsidized rainfall insurance. When provided with insurance against one of the main risks they face, farmers find the resources to increase expenditures on their farms. Interestingly, they only found small effects of cash grants. . . .
Karlan, et. al. also discuss the demand for rainfall insurance. They point out that take-up rates on rainfall insurance are low, which seems counterintuitive given that we know risk discourages investment, and investment often has large returns. To understand the demand for rainfall insurance, we have to keep in mind the various factors that drive demand. Of course, price is important but trust and experience matter as well. Demand is sensitive to whether farmers trust that payouts will be made. They found that demand for insurance increased after a farmer or someone in his network received a payout. . . .
The study provides additional evidence that households are managing their finances by avoiding risks. In other words, they are smoothing their income by avoiding investments that could pay off but could go very sour. Reducing this risk-avoiding income smoothing through insurance seems to work well—if households can be convinced that the risk of the insurance (that an unfamiliar and relatively expensive product is reliable and worth the short-term cash cost) is less than the risk of the status quo. . . .
What's Next? Connecting Finance and Health
Focusing on financial access can sometimes obscure the rationale for doing so. We don’t really care about access to finance for its own sake. The point of providing quality financial services to poor households is to give them an easier, more stable path to prosperity. But what are the pitfalls and slippery spots on that path that we hope to ameliorate? . . .
It seems that financing health care is one of the biggest obstacles that poor households face. Take Joseph, a farmer from the Kenyan Rift Valley Province. When his three-year old daughter inhaled a piece of corn she began struggling to breathe. Joseph had no cash at the time, so he waited before visiting a doctor, hoping she would get better. But after three days, symptoms became so serious that Joseph had to take his daughter to the hospital for emergency care. The only way Joseph could accumulate the sums necessary to pay the bill was to sell his land. When I met him two years later, it seemed unlikely that Joseph would ever be able to buy it back. Selling the land had pushed the household into extreme poverty . . . . . .
Read MoreWhat’s next for KGFS?
What’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 MoreBanking the World: Empirical Foundations of Financial Inclusion
About 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 MoreMarketing Matters: Increasing Microinsurance Coverage Beyond Lowering Prices
Poor households in developing countries face large and varied risks. Many agriculture-dependent households, for example, are at risk of drought- or flood-induced crop failures or livestock deaths. The death of a family member often implies having to fund expensive burial ceremonies, and if the deceased was the household’s primary earner, replacing her/his stream of income is an even bigger problem. A short “Client Math” survey by the Microinsurance Learning and Knowledge (MILK) project of Compartamos borrowers in Mexico, for instance, shows that funeral costs alone (including the costs of the funeral itself as well as connected costs such as food and drink, but excluding lost wages) typically amount to half of a family’s annual income (my calculations from data described in Poulton and Magnoni 2012). Similar figures have been reported from around the world. . . .
Poor families have imperfect tools to manage these risks. They rely on self-insurance, traditional risk-sharing arrangements, informal insurance networks, and/or credit and savings. These strategies, however, are inflexible and/or expensive, and do not provide enough protection . . . . . .
Read MoreFingerprinting Microcredit Borrowers Gets the Spotlight
A 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 MoreA recipe for expanding financial access through regulatory reform
With the global financial crisis still rippling across front pages of newspapers around the world, it may not seem like the moment to further open the doors to the financial system. But this gets it backward. As experts focus on shoring up financial regulation, this is precisely the moment to simultaneously craft a new financial framework that expands access to the billions of people who are currently unserved... . . .
Read MoreWhat to Protect?
FAI Director Sendhil Mullainathan appeared as a witness in the recent U.S. Senate Banking Committee meeting “Creating a Consumer Financial Protection Agency: A Cornerstone of America’s New Economic Foundation.” You can watch the hearing here... . . .
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