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January 22, 2013

What's Next: Financial Access in 2013

By Timothy Ogden

Part of our series, What's Next in 2013?

The 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 (read: Bindu Ananth & Deepti George, Chris Dunford, David Mackenzie, Jamie Zimmerman and more) 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?”

What’s Next? Cracking Open Some Black Boxes

The term “black box” is most often used to refer to the data recorders used in airplanes which are used to attempt to determine the cause after an accident. But in economics and business, the term is often used to describe a situation or process that we don’t understand. We can see what goes in, and we can see what comes out, but we don’t know exactly what is happening between those two points. There are some important “black boxes” in the financial access world that are important for us to crack open if we are to create products that better serve the needs of poor households. For me, the three most important black boxes to crack open are:

1) The Management-Loan Officer-Client Black Box: If you do any reading at all in the business management literature, you’ll quickly stumble upon discussions of the principal-agent problem. The principal-agent problem is simply the question of how someone (the principal) gets someone else (the agent) to do what the principal wants them to do. In business management terms, it begins with how investors make sure that corporate executives act in the investors’ best interest (rather than in the interest of the executives). But it extends to how those executives get managers to act in the interest of the firm, rather than for personal gain; and how those managers get employees to do the same. In microcredit, this extends all the way to the borrower, who is using the MFIs money. A great deal of attention has been paid to how MFIs in general make sure that borrowers are doing what the MFIs want them to do (repay the loan). But to date, we’ve just assumed that MFI managers and loan officers are behaving exactly according to a script. We’ve assumed that loan officers are faithfully carrying out the policies of the MFI in regard to loan eligibility, loan terms and repayment enforcement.

Anyone who has worked in a large firm knows that is a dangerous assumption. Front line personnel will inevitably game the system to their best advantage. So will middle managers. So will executives. We got a hint of this in the Andhra Pradesh crisis, where some loan officers were apparently using loan collection tactics far more severe than official policy allowed (with or without the tacit approval of managers, we don't know). Underlying the criticism from MFIs of the proposed new Indian microfinance regulation on loan eligibility is the fact that MFI managers know there is no way they can enforce loan officer compliance with those regulations. Most microcredit evaluations assume that the product/contract that management says is being offered is in fact the one that loan officers are delivering in the field. We simply don’t know enough about what is happening inside the management-loan officer-client black box to feel safe with this assumption.

We have a little research around the edges of this question. For instance, Bertrand et. Al. look at how smiling faces and other “marketing” in advertisements are clearly as important as interest rates in driving take up but not on how actual loan officer demeanor affects borrowing; Schoar studies how loan officer-client relationships drive small business loan repayment but not on product selection or long-term effects; and our own Jonathan Bauchet has looked at how marketing affects microinsurance take-up.  But clearly we need a lot more.

2) What’s going on inside the minds of mobile money users?

In a forthcoming framing note, which I hope to have finished and posted shortly, Kerry Brennan and I look at the various studies of M-Pesa and savings. What we find is that the studies simply don’t match up. Some find extensive reports of using M-Pesa for savings, others find very, very low balances that don’t accumulate.

One possible explanation for the differing results is that we don’t have a clear sense of what people mean by “savings” and how they view virtual stores of value (like mobile money) versus cash. There is a general assumption that people in developed countries treat virtual money differently than cash. That’s one of the reasons so much personal financial advice includes the suggestion that you should pay with cash rather than using a debit card. But as I linked to recently, there is also evidence that even wealthy consumers in developed countries find sticking to a budget easier when they use cash.

The perspective of households on e-money versus cash is likely highly context dependent—how easy is it to get value into and out of the virtual system and into cash would likely play a large role among other factors. But ultimately, as there is a general push toward mobile money and away from cash, we still know very little about what is happening in the black box of users’ minds around the various technology-driven alternative stores of value.

3) What’s going on inside subsistence retail?

At least in urban contexts, a large number of poor households operate what I call subsistence retail microenterprises. These are microenterprises that sell undifferentiated goods at small profits (and usually no profit if the cost of labor is calculated in). Why is it, by the way, that “subsistence agriculture” is widely used and studied but subsistence retail is not?

Subsistence retail operations were part of the mythos of microcredit—borrowing would allow these microenterprises to expand, generate more profits and allow families to climb out of poverty. We now know that was in fact just a myth. Subsistence retail operations do not grow, provide highly volatile and uncertain incomes, and worst of all attempts to help them grow have, to date, proven largely futile. We know that there are some obvious things that could be done to increase profits at subsistence retail—see Drexler et al. on “rules of thumb” accounting, Robinson on managing change (literally) and Kremer et al on inventory management—but we still don’t have a good handle on what is happening in the black box of subsistence retail or how to effectively intervene to help subsistence retailers. David McKenzie, who has a post in our What’s Next series coming up, is doing important work in this area, but there is a lot of ground to cover if we’re going to crack open this black box. 

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