Viewing all posts with tag: Credit  

"Microcredit for Americans" - Is it all about the Score?

Buried 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 . . .  . . .

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A Milestone in the Great Debate over a Microcredit Impact Study

This summer the Journal of Development Studies accepted a manuscript by Jonathan Morduch and myself laying out our critique of an influential microcredit study from the 1990s by Mark Pitt of Brown University and Shahidur Khandker of the World Bank. Our article should appear in the journal this year or next. The acceptance is milestone for Jonathan and me, for it represents a ratification of our work, and is very long in coming. . . .

It was 15 years ago that Jonathan first laid out his doubts about Pitt and Khandker (P&K). Pitt retorted the next year. And there the dispute rested, never adjudicated by journals, until I entered the picture 6 years ago by writing a program that, for the first time, allowed an exact replication of P&K’s math. . . .

Jonathan and I have played a sort of doubles match with Mark and Shahid . . .  . . .

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New Paper on Impact of Savings Groups on Poor African Women

Self-funded groups are an increasingly common way of delivering microfinance services. In India, for example, self-help groups increased their membership dramatically in Andhra Pradesh after the microfinance crisis of 2009-2010. In Africa, several international NGOs are promoting village savings and loans associations (VSLAs) as member-driven, local institutions. . . .

Can these groups “replace” traditional microfinance, in the sense that they do not need the intervention of loan officers or professional managers? An interesting paper contributes to answering this question . . .  . . .

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Asset Transfers for (Pre-) Entrepreneurs: Evidence from Chile

The original theory of microcredit was that it offered the opportunity for poor households to create profitable microenterprises. But there were always households left behind—those that were too poor to create a microenterprise or plausibly repay even the very small loans on offer. . . .

One attempt to address these households, usually called the “ultra poor,” was to create an asset transfer and training program that would allow them to “graduate” into standard microcredit. BRAC’s Targeting the Ultra Poor program is perhaps the best known of these. Evaluations of TUP-style programs have been mixed – with some showing no effect and others strong effects. It seems that a major factor is local labor markets—when ultra poor households have good wage labor alternatives, asset transfers do not help much. When local labor markets are thin or non-existent, asset transfers can make a big difference . . .  . . .

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From Responsible Finance to Suitable Finance: Financial Engineering for Low-Income Households

This post is written by Bindu Ananth and Amit Shah. Bindu Ananth is President of the IFMR Trust and Amit Shah is Head of  Business Intelligence at IFMR Rural Finance. They co-edited the recently published book “Financial Engineering for Low-Income Households.” . . .

Five years ago when we set up the KGFS model of financial institutions in remote-rural India, we wanted to make a fundamental shift in the way financial services were offered to households. We wanted the organising principle to be suitability, i.e., how do we make sure that every single customer receives the portfolio of financial services that is most suitable given her needs and preferences? This is essentially what wealth managers are supposed to do for ultra-rich individuals but we wanted to do it for clients with a mean income of USD 1000 per year through staff with twelve years of formal education . . .  . . .

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New Research from the American Economic Review

The American Economic Association (AEA) recently released the Papers and Proceedings issue of its journal American Economic Review, which presents selected papers from the AEA's annual meeting. The AER is one of the premier economics journals and has very broad coverage. For instance, you can learn everything you never knew you wanted to know about income and church attendance in nineteenth century Prussia. Happily, this volume also includes a number of papers relating to mobile money, credit, savings, and insurance. . . .

Mobile Money . . .

In their study, William Jack, Adam Ray, and Tavneet Suri investigate how households using M-PESA interact with and exploit their informal networks when making transactions. The authors find M-PESA users have more remittance activity, make transfers over distances greater than 100 km, and have more reciprocal transactions than non-users. . . .

While Jack et al. looked at volume of transactions, David Weil and Isaac Mbiti used aggregate data in their research on the velocity of mobile money. One of the more intriguing findings is that withdrawals are made frequently and in small amounts, even though users can reduce fees if they group withdrawals. As the use of mobile money grows in other countries (M-PESA recently launched in India, for instance) it will be interesting to see how similar these (and previous) findings are in different cultural contexts. . . .

Gender and Finance . . .

Using data from over 30,000 firms in 90 developing countries, Elizabeth Asiedu, Isaac Kalonda-Kanyama, Leonce Ndikumana, and Akwasi Nti-Adde analyze whether gender is a determinant in financing constraints and access to credit for firms. They find that indeed, female-owned firms are more likely to be financially constrained than male-owned counterparts but only in the sub-Saharan African region. There is no gender gap in other regions but small firms are more likely to be financially constrained than larger firms, and foreign-owned firms are less likely to be constrained than domestically owned firms. . . .

Moving from the macro to the micro level, Carolina Castilla and Thomas Walker investigate gendered dynamics of intra-household financial decisions in their paper. In a field experiment in Southern Ghana, researchers conducted public and private lotteries with cash and in-kind prizes to observe the effects of these windfalls on household allocations. They found “husbands' public windfalls increase investment in assets and social capital, while there is no such effect when wives win. Private windfalls of both spouses are committed to cash (wives) or in-kind gifts (husband) which are either difficult to monitor or to reverse if discovered by the other spouse.” . . .

Risk . . .

We return to Kenya with Michael Kremer, Jean Lee, Jonathan Robinson, and Olga Rostapshova in their study on behavioral biases and firm behavior. Among a sample of Kenyan shopkeepers, those with lower math skills were less accepting of small-scale risk and were also less likely to have larger inventories than those with higher scores. There are some interesting observations in the paper on the connection between loss aversion and microfinance, suggesting that small business owners are less likely to access microcredit if risk averse and social safety nets could possibly help increase investment in these enterprises. . . .

Similarly, Ahmed Mushfiq Mobarak and Mark R. Rosenzweig look at risk in the context of the Indian insurance market, specifically rainfall insurance. Their findings show that when insured farmers took greater risks, wage levels increased but so did the volatility of labor demand, creating a threat to landless workers. When offered the choice, landless workers also purchased insurance when contracts were offered to farmers. . . .

Savings

Lastly, Suresh de Mel, Craig McIntosh, and Christopher Woodruff report the findings of their field experiment in rural Sri Lanka that tested the efficacy of various methods of collecting deposits in formal bank accounts. Although their research shows frequent, face-to-face collection increases aggregate household savings, collections using community lock boxes affected the number of transactions but not the overall level of savings. . . .

Vulnerability: The 2013 Microcredit Summit Campaign Report

In 2011, microfinance providers reached fewer total people than they did in 2010, as well as fewer people living in extreme poverty, according to the 2013 State of the Campaign Report, which is released annually by the Microcredit Summit Campaign. Entitled “Vulnerability,” the report presents some stark findings. This is the first time the number of microfinance clients has decreased since the Campaign began its conducting research on the industry in 1998. This overall decrease occurred despite an expansion of 1.4 million more clients in sub-Saharan Africa. Most of this reduction occurred in India, and was in part due to the microfinance crisis that began in Andhra Pradesh in late 2010. . . .

There are a number of reasons for the slowdown. Microfinance institutions (MFIs) are more likely to go to markets that have already proven to be successful. Reaching poorer and more remote clients is generally more difficult and costly for organizations. Additionally, data limitations make it hard to know when local markets are saturated. Maturing markets, the global economic crisis, investor wariness, and donor fatigue also contributed to the slowdown . . .  . . .

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The Death and Life of Cash

Cash is all the rage in development circles right now—whether it’s trying to drastically reduce the use of cash by the poor or drastically increase the use of cash by development agencies (both public and private). There isn’t an actual conflict here. In the first case, the idea is to reduce the use of the physical artifact of cash; the latter is all about increasing the direct transfer of money to the poor. So the two efforts are actually complementary: reducing the use of physical cash makes transferring money cheaper and more feasible. . . .

The cost and risk of transporting, transferring and tracking physical cash has always been one of the major objections to cash transfer programs. Another is the idea that poor households won’t use cash well. At various times and places you can find someone arguing that the poor lack the training, education, sophistication, access to quality goods and services, impulse control, security, or moral sensibility to make cash transfers a good use of funds. . . .

That position has always had little evidence on its side . . .  . . .

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The Other Half of the Benefit-Cost Debate

When 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. . . .

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Saving Chiapas, Saving Ourselves: How to avoid a repayment crisis in Mexico

My last two posts on the potential repayment crisis in Chiapas described the high risk of a crisis in Chiapas, Mexico, and its potentially devastating consequences to the microfinance sector around the world. But here is the good news: thus far there is no crisis, and one could still be avoided.  . . .

I have argued before that development finance institutions and other funders could leverage Smart Certification to enforce client protection practices and thus reduce the risk of the kind of over-lending that's happening in Chiapas. However, that prescription alone would not work in Mexico, mainly because a large number of Mexican MFIs are independent of foreign funding, and there are many other lenders active in the same space, including consumer finance companies and large retailers that provide credit. . . .

The answer to avoiding a repayment crisis in Mexico will thus require government action . . .  . . .

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The Socio-Cultural Dimension of Microcredit

Much of the dialogue around microfinance suggests that the poor are universally credit constrained and that cash shortages drive a monolithic demand for credit. As such, microfinance is often treated as a technical, rational and linear process that is characterized by an “if-you-build-it-they-will-come” mindset. Too often overlooked are the contextually specific and nuanced processes that influence consumers’ demand for microcredit in a variety of social, moral, cultural, and political contexts. . . .

A fascinating new paper, “Explaining Participation and Repayment in Microcredit Schemes in Rural Morocco: the Role of Social Norms and Actors,” from the Institute of Research for Development at the Sorbonne University explores exactly these dimensions of microfinance. Drawing upon evidence collected from rural Morocco, the team of authors explores the socio-cultural factors that influence a household’s use of microcredit services . . .  . . .

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Savings Crisis in West Bengal

In the past few weeks, the local government of West Bengal has been embroiled in a financial and political crisis that has potentially large impacts on the state’s poor and its MFIs.  After discovering that the commercial entity the Saradha Group had duped thousands of investors through a real estate Ponzi scheme, the state minister launched a full investigation of over 70 other deposit-taking entities which are grouped under the category of “chit funds.” . . .

A chit fund is a ROSCA-meets-the-auction block style of Indian savings scheme in which subscribers pool money every month and then try to outbid each other to get the entire pot.  The difference between the lowest bid and what is left in the pool is distributed among members.  In West Bengal, chit funds are particularly important due to the high demand for products that accommodate small savings.  According to Abhijit Banerjee and Maitreesh Ghatak, West Bengal’s share of population was approximately 7.5% in 2011, its state domestic product was 6.7% of India’s GDP, but its share of bank deposits was 22%.  Many of the state’s poor cannot afford to open a bank account and those who can face plummeting interest rates.  Chit funds can offer an alternative to traditional savings and credit lines for the unbanked . . .  . . .

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Impact Evaluation of Compartamos Released

The long-awaited impact study of Compartamos, led by Manuela Angelucci of the University of Michigan and Dean Karlan and Johnathan Zinman of IPA, has finally been published. The research team used a randomized trial to test the impact of loans offered at 110% APR by Compartamos, the largest microlender in Mexico. After three years of data collection on a variety of factors, the results were generally positive with no evidence that the loans caused harm or significant negative effects.  Researchers found that loan recipients grew their business revenues and expenses, were happier, more trusting, had greater household decision power, and were better able to manage liquidity and risk.  However, there was little evidence that loans had an impact on building wealth like household income, business profits, or consumption. . . .

One of the more interesting conclusions from the paper is as follows . . .  . . .

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"How Microfinance Really Works" - Jonathan Morduch in Milken Review

It's an important moment for the microfinance movement. At a time when real progress has been made in making financial services available to the poor, questions abound about the effectiveness of microfinance as a way of helping people escape from poverty. The priveleged position microfinance has enjoyed among poverty interventions and social investment is eroding. Charting the right path forward for microfinance--and effective investments in reducing poverty--requires a closer look at how microfinance really has worked . . .  . . .

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What is the Impact of Muhammad Yunus?

Muhammad 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? . . .

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Measuring (and Missing) Financial Inclusion

The fastest growing part of the financial inclusion movement isn’t a product or even a standard, it’s data and measurement. And if there’s something experts are increasingly agreeing on, it’s that it is illusory to try to define financial inclusion in any precise, universal way. John Gitau says he’s confused, and so am I. How do you measure financial inclusion? . . .

It’s true that you might not be able to measure financial inclusion itself, but you can still measure things that indicate either actual, or the potential for, progress. Such indicatorsare what we can measure, and they are very useful as long we don’t confuse them with actual measurement of financial inclusion. . . .

There are two broad types of indicators which can be applied to fuzzy concepts like our cherished financial inclusion . . .  . . .

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Beyond Business: Rethinking Microfinance

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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Financing Seasonal Migration: A New Use for Microcredit?

In many places, agriculture is highly seasonal. That presents difficulties for subsistence farmers who have to stretch incomes year-round. If farmers (or family members) could migrate during the off-season to areas where wage labor is available, they could substantially smooth their annual income and consumption. Indeed, this is what happens in many places. But even where seasonal migration does happen, many people don't migrate even when it seems it would be advantageous to do so. Why?   . . .

In recent work, Bryan, Chowdhury and Mobarak study the role of risk aversion in preventing households from migrating. You can see a presentation of this work here. . . .

While migrating from poorer areas to wealthier ones, particularly from rural to urban locations, can provide access to more and (much, much) better-paying wage labor, it comes at a significant cost . . .  . . .

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Worse than AP: The Damage of a Repayment Crisis in Chiapas

A month ago I wrote a post singling out the Mexican state of Chiapas as a potential site of a coming repayment crisis. No, this is not a follow-up announcing that it has begun, nor am I rooting for one to start. In my next post, I will review the options that the Mexican microfinance sector has to avoid it, and what the global microfinance community can do to help. But for now, let’s dig a bit deeper into what a Chiapas crisis might mean, and why I continue to focus on Mexico, as opposed to the broader issue of excessive credit and over-indebtedness. . . .

Let’s be blunt: not all countries are created equal. Some remember my warning three years ago about the danger of a credit crisis in Andhra Pradesh. Back then I compared a possible crisis in India to the crisis in Bolivia a decade before: "India is no Bolivia – if the bubble bursts there, the entire global microfinance sector will find itself reeling." Well, Mexico is no India . . .  . . .

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