Jake Kendall: The Year in Microfinance

What has been the biggest event in the financial inclusion space over the last year? 

The shift in the field’s thinking to recognize the poor’s deep need for payments capabilities on par with other financial needs.

A year or two ago, had you polled the financial inclusion field and asked whether they thought that a person to person money transfer service (like M-PESA) would have a significant welfare benefit for poor households, on par with credit, savings or insurance, the majority would have said “no.” Most would have said that a mobile money type service is important for the potential to enable the other financial services, and may be somewhat useful to the extent it lowers the cost of moving money around, but would have said it’s not likely to be all that effective in improving household welfare in meaningful ways.

If you asked the same question today, many whom I have spoken to would now say that improving the poor’s access to money transfer is impactful, and might even be as impactful as many of the existing savings, credit, and insurance options available from the microfinance sector. This is a profound shift in thinking to see payments go from simply an enabling infrastructure for other services to a service that is believed to be impactful in its own right. 

How did this shift in mindset come about? One factor was the ongoing discussion around recent RCT evidence on the impact of credit, summed up in this Economist article. The debates around the Andhra Pradesh crisis may have played a part to. The lack of evidence for dramatic positive benefits from microcredit and the possibility that credit could even harm clients has caused many in the field to reevaluate what they believe about impact. 

In parallel, there have been a number of new pieces of data documenting the poor’s current money movement habits which show that their existing options are quite bad (see my summary in this CGAP blog post). The poor’s need to move money spans everything from microenterprises wishing to pay their suppliers (see my post on SME usage here) to the simple act of paying bills, to the most well-known use-case which is the need to send money to distant family and friends (i.e. domestic or international remittances). The research and data show most money sending options are expensive, slow, and unreliable, but despite this, lots of poor people move money through informal channels and there has been high demand for mobile money services in places like Tanzania, Uganda, and Pakistan where providers have begun to solve some of the distribution issues.

Clearly the most important cause of the shift in thinking were the results published this year by Bill Jack and Tavneet Suri (2011) who used the role out of the M-PESA product in Kenya as a natural experiment to test the welfare impacts of mobile money. They found that M-PESA users were able to fully absorb large negative income shocks (such as job loss, livestock death, harvest or business failure, or poor health) without any reduction in household income whereas statistically comparable non-users saw consumption fall on average 7 percent. The key mechanism driving these impacts appears to be a big uptick in risk-sharing across households.1When faced with a shock, households with access to M-PESA:  (i) are more likely to receive a remittance; (ii) receive remittances more frequently; (iii) receive a larger total amount of transfers; and (iv) receive funds from more senders and from senders who are located further away. 

Jack and Suri’s work shows how a better way of sending money can expand and empower informal financial relationships and improve household’s welfare. Add to this the other benefits that better payment options bring, including that they connect the poor to wider markets for goods and services, empower enterprise and formal financial markets (see my posts on this here and here), and increase the ability of the public sector to target aid to the poor (see a paper some of our team co-authored on this topic here). Going forward, I see the financial inclusion field taking the poor’s need to for payments services much more seriously than it has previously. 

Jake Kendall is a Program Officer in the Financial Services for the Poor initiative at the Bill & Melinda Gates Foundation. FAI invited Mr. Kendall to offer his insights and reflections on the important events, opportunities and challenges facing microfinance this past year. This post is part of an ongoing series featuring Elisabeth Rhyne, Susan Davis, Mary Ellen Iskenderian and others still to come on "The Year in Microfinance." These contributions will be posted weekly on the FAI site into the New Year. FAI also invites you to participate by telling us your own thoughts and opinions about the year in microfinance via comments.