Researchers and financial analysts will spend years trying to understand exactly what happened on Wall Street over the past four weeks. No one was prepared for the rapid expansion of an economic crisis on such a massive scale. At the Financial Access Initiative offices in New York, however, we have been tracking a different expansion of the global financial system—one that is fueled by the possibility of financial empowerment instead of by risk and irresponsible lending. This transformation is not the one happening a mile away from us on Wall Street, but the one taking place in villages and towns around the world. It involves the spread of simple, basic banking services to low-income households—the so-called “unbanked.” It entails the building of “inclusive financial sectors” as imagined by Nobel Peace Prize winner Muhammad Yunus and visionaries like him.
Microfinance is seen as a bright light in a bleak financial landscape and has made great strides in increasing financial access for poor households around the world. Just last month at the Clinton Global Initiative here in New York, it was warmly embraced by Bill Clinton and Bill Gates alike. But while billions of dollars are being poured into microfinance by banks, foundations and other investors, billions of people remain underserved. As the field of microfinance matures and attention surrounding it increases, so does the need for more and better research on the effects of microfinance and the conditions that determine its impact.
The Financial Access Initiative was launched to address this need for more and better research on financial access for the poor. Our goal is to frame key questions about the financial lives of the poor, test innovative solutions that can expand financial access through field research in a range of countries, and to generate and communicate the evidence we uncover so it can inform policy decisions that further financial access.
Over the past two years our research has uncovered new ways of thinking and has challenged traditional ideas about microfinance. For example, a study from the Philippines shows that the group lending model popularized by Muhammad Yunus may no longer be the best way to provide loans to the poor: our research shows that individual lending has been found to be just as effective in leading to high repayment rates. Along these lines, MFIs and banks are experimenting increasingly with small loans to individuals, disbursed against smaller land parcels, deposits or liquid assets, or even against strong credit records already established. A forthcoming book, Portfolios of the Poor, allows us to look in great detail at the cash-flows of borrowers and the individual lending arrangements of the informal sector, to see in practice how individual lending can often be as effective as group lending.
Other research from South Africa sheds light on the debate about microloans for consumption purposes. Findings support what we saw in Portfolios of the Poor—that consumer loans can have welfare improvements: in the 6-12 months after receiving a loan, marginal borrowers were 11% more likely to keep their jobs, 7% less likely to fall below the poverty line, and 6% less likely to experience severe hunger in their household. In addition, our research shows no significant evidence that consumer borrowing leads to debt traps. These findings are provocative because current theory suggests that no welfare benefits would be achieved by such an experiment.
While we are far from being able to substantiate broad generalizations about the effects of microfinance, we are gathering a solid body of primary evidence that demonstrates which interventions work and don’t work in different economic and geographic situations, and what the impacts of these interventions are. We see our research as a platform on which to frame a larger debate about the expansion of financial access, and this blog as a way to start conversations about critical issues facing regulators, government officials, practitioners, donors and others who make important decisions that affect financial access.