Although micro-credit has been perceived as effective in reducing poverty, in reality, its impact has been modest. One reason could be that most microloans extended to the poor are term loans, which are not well-suited for borrowers with variable or risky income streams, for example, traders needing working capital for purchasing inventory, or farmers who earn lump-sum income after harvest. While the Indian government has been encouraging banks to provide credit in the form of over-draft, term loans continue to remain the predominant credit product. . . .
In 2013, the Rural Financial Institutions Programme represented by GIZ and the National Bank for Agriculture and Rural Development (NABARD), partnered with Mann Deshi Mahila Bank to launch a new overdraft facility serviced through banking agents to traders and farmers selling groceries in rural markets in Maharashtra, India. . . .
Read MoreThis week, The Wall Street Journal featured a pair of articles on current issues in microfinance. The first highlights the varied strategies governments across Asia are employing to promote financial inclusion, including mobile technologies and India's policy of universal bank accounts. However, some are concerned about the $80 overdraft feature of these accounts, and liken the potential risk of indebtedness to the past failures of microfinance. FAI's Executive Director Jonathan Morduch notes that indeed, microfinance's impact on poverty alleviation to date has been "disappointing" . . . . . .
Read MoreDespite the long-awaited publication of six impact evaluations of microcredit, there are still many questions to be answered. But I worry about whether we will ever get answers. I don’t think that anyone involved in the impact evaluations would consider them to be the “final word” but that may be, de facto, what they are. . . .
Why?
Back in 2011 the Development Impact blog published a survey of young academics which listed microfinance as the “least under-researched” topic in development. In other words, up-and-coming researchers were saying that enough work had been done on microfinance. You can be sure that ambitious economists looking to make their mark are not going to direct their limited energies toward a topic they think is well-covered. Indeed, while I haven’t done a thorough analysis of this, my impression is that there have been a declining number of papers devoted to credit in the last few years at NEUDC, one of the best places to see new academic work. Whether or not the impact studies are the final word on microcredit, they may be the final word in academic interest . . . . . .
Read MoreOne of the most promising innovations in the digital payments space has been on the delivery of government benefits through electronic payments systems in developing countries. Now, an impact evaluation of digitization of government payments in India by Karthik Muralidharan (UCSD), Paul Niehaus (UCSD) and Sandip Sukhtankar (Dartmouth) finds encouraging results. . . .
In one of the largest randomized impact evaluations to date – covering 19 million people – Muralidharan and colleagues study the recent rollout of the “Smartcards” project in the state of Andhra Pradesh in India. The Smartcards project introduced biometrically-authenticated electronic benefit transfers into two large Indian social welfare programs: the well-known National Rural Employment Guarantee Scheme (NREGS) and the Social Security Pensions (SSP). The research team worked with the government to implement a randomization of the order in which districts received the program, allowing for a rigorous evaluation of program impacts half way through the implementation . . . . . .
Read MoreImagine you enter a shoe store that is having a sale – buy any pair of shoes, get a second pair for free. Sounds like a great deal, right? Now imagine that same store had an offer to take 50% off any two pairs of shoes. Even though you are spending the exact same amount for the same two products, perhaps you react differently to the two offers. Perhaps there is something about removing “free” from the offer that might make you feel like you’re not getting as good of a deal. And how would you pay for these shoes – with cash? Credit card? Mobile wallet balance? Does it even matter? Research shows that people perceive $1 in mobile money differently than $1 in cash, and that these different perceptions DO influence spending habits. . . .
The process of mentally separating different forms of money and assigning value to them, keeping track of potential costs and benefits to transactions, and categorizing expenses into buckets like “food” and “healthcare” is called mental accounting . . . . . .
Read MoreThis 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 . . . . . .
Read MoreThe 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 . . . . . .
Read MoreThere's a new piece in Foreign Policy magazine which takes a tough look at Jeff Sachs and the Millenium Villages Project--not in regard to results or interventions, but in regard to evaluation. The project was always pitched as a demonstration of a "different" approach to ending poverty that could provide a blueprint for addressing poverty globally. . . .
As the piece explains--citing FAI's founder Jonathan Morduch, FAI Affiliate Michael Clemens, Ted Miguel from UC-Berkeley and Nancy Birdsall from CGD, among others--that is no longer a realistic option. The project wasn't structured to allow for the kind of rigorous evaluation that would give it credibility as a demonstration or a justification for scale-up. While it seems there is now an effort to do more rigorous evaluation, for most aspects of the project it is simply too late to establish the comparisons and baselines necessary for credible claims of impact . . . . . .
Read MoreCash 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 . . . . . .
Read MoreA regular theme in our writing is about the need for the microfinance industry to learn from and adapt to the needs of poor households. A few weeks ago, a new paper appeared based on an interesting attempt to test whether MFIs are interested in generating and using rigorous evidence. The researchers sent emails to 1,419 MFIs inquiring about their interest in "a partnership to randomly evaluate their programs." There were three different emails sent however: 1) a neutral email, 2) an email that emphasized positive findings from other studies of microfinance, and 3) an email that emphasized "null" findings from other studies of microfinance. . . .
Unsurprisingly, the positive emails had double the response rate of the negative emails. The authors interpret this finding as evidence of confirmation bias among MFIs--they are only intereted in good news that backs up their existing beliefs, and less interested in learning how to improve . . . . . .
Read MoreFrom 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 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 MoreLast November, the Consumer Financial Protection Bureau’s Office of Financial Empowerment hosted a conference on “Empowering Low-Income and Economically Vulnerable Consumers: Making the Case through Access, Data and Scale.” A key highlight of the conference was a breakout session about the incentives and obstacles to collecting data in the field. Leading the session were representatives from LISC, NeighborWorks, CGAP and the University of North Carolina’s Center for Community Capital. Everyone agreed that we need more rigorous data. What was less clear was exactly how to get there. Two key questions emerged throughout the day:What outcomes are we measuring? And, how do we collect data? . . .
What outcomes are we measuring? . . .
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 MoreOn October 3rd, FAI will host a conversation with Jonathan Morduch and David Roodman, a senior fellow at the Center for Global Development (CGD). The conversation will focus on Roodman’s new book, Due Diligence, which has been widely praised (but you should also check out some of the critiques) for its detailed, evidence-based look at the state of microfinance today. . . .
Those familiar with Roodman from his work in microfinance may be unaware of his influential work in other areas of development. We thought we’d provide a quick overview to the other sides of David Roodman (though all of the sides feature an exceedingly careful attention to detail and data). . . .
In addition to his work on microfinance for CGD, David also manages the Commitment to Development Index . . . . . .
Read MoreIs there a sure-fire solution to eradicating global poverty? The experts generally fall into two camps: those who believe what is needed is more money in more places; and those who think that too much has already been spent too inefficiently and ineffectively, requiring a new and smarter approach to aid. Hence the Buddhist dilemma that Dean Karlan and Jacob Appel allude to in the introduction to their new book, More Than Good Intentions: How a New Economics Is Helping to Solve Global Poverty. Karlan, a development economist at Yale and co-founder of FAI, and Appel, a researcher at Innovations for Poverty Action, founded by Karlan, argue that there is a third way ---combining behavioral economics with rigorous evaluation. Their new book takes readers around the globe –where economic theory collides with real life – and offers a new way to understand what is working (and not working) in the fight to reduce poverty. FAI talks to Dean Karlan. . . .
Solving poverty—checking your preconceptions at the door . . . . . .
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 MoreFAI Insights: What is rigorous impact evaluation and why is it important? Michael Clemens, Senior Fellow at the Center for Global Development (CGD) and visiting scholar at the Financial Access Initiative and at New York Univesrsity (NYU) Wagner and the NYU Dept. of Economics (Spring 2011), talks about the findings from his research into the UN Millennium Villages . . . . . .
Read MoreA previous post introduced projects that focus on ultra-poor households, in Bangladesh and India. The post ended with a promise to share the results of the impact evaluation of the project implemented by SKS in Andhra Pradesh, India. The results I share here are preliminary. Additional data and finer analyses are on the way, but I wanted to deliver on that promise. . . .
In a nutshell, the Targeting the Ultra-Poor (TUP) projects being implemented around the world are an attempt to reach destitute households, who are often too poor to participate in microfinance, and help them create a sustainable livelihood based on a modest economic activity. Participants receive food, free health care, training, savings help, and assets (a cow, a few goats, working capital to start a small business) over a period of 18 to 24 months. The programs are not microfinance programs, both because of the population that they target and the activities that they include. Their main goal is to attack ultra-poverty holistically, although they also aim to help successful participants take advantage of microfinance . . . . . .
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