We do our best (not always successfully) to keep up with new research relevant to finance, poverty and development. Today, I’ll be sharing highlights from some new papers by FAI affiliate Sendhil Mullainathan.
In “Behavioral Design: A New Approach to Development Policy,” Mullainathan andSaugato Datta advocate for employing a behaviorally-informed economic perspective to design development policies and programs. Since behavioral economics helps us understand why people behave as they do, analyzing development policies through a behavioral lens allows us to make better policy diagnoses, which in turn lead to better-designed policies.
Mullainathan and Datta outline three ways in which behavioral economics can improve program design. First, it can change how we diagnose problems . . .
Read MoreIn the last week, two significant deals in the world of microfinance investment have been announced. First, Bamboo Finance announced that it was acquiring "a controlling interest" in Accion Investments, a $105 million for-profit investment fund started by Accion. In context, Bamboo Finance had $195 million of assets under management. Yesterday, Microvest GMG Asset Management announced they had taken on MinLam Microfinance Fund, a $47 million debt fund making loans in local currencies. Microvest GMG currently has $245 million of assets under management.
While these transactions likely have a variety of motivations, it's impossible not to wonder if we are seeing the beginning of a wave of consolidation driven by the souring of public sentiment on microfinance . . .
Read MoreIf there’s one issue that’s most difficult for microfinance practitioners to explain to the lay public, it’s high interest rates. As Elisabeth Rhyne describes it, at some point the numbers get so high that people become outraged and stop listening altogether. Most recently, the issue was put back in the public eye through Hugh Sinclair’s Confessions of a Microfinance Heretic and the media coverage it has spurred.
With few exceptions, his critique that microfinance investors are investing in MFIs charging exhorbitant interest rates has gone largely unanswered. That’s not a tenable position for the long-term. For a socially responsible fund, the case ought to be simple – if you have investments that you’d rather not have to publicly support and explain, then either those investments don't belong in your portfolio or you should learn how to explain those investments . . .
Read MoreAfter nearly 30 years of the microcredit movement, we've finally started seeing rigorous impact evaluations in the last few years. Randomized control trials of some variant of microcredit have been conducted in India, Morocco, Mongolia and the Philippines. Each of these trials adds to the evidence, but each is in a specific context, with differences in contracts, eligibility, loan size and structure, and most importantly among the borrowers. That’s why it’s still exciting to see new trials which provide evidence in a different context.
“Microfinance at the Margin: Experimental Evidence from Bosnia and Herzegovina,”a new working paper presented at the 2012 Innovations for Poverty Action (IPA) Conference, gives us yet another different context to examine how households use microcredit and its impact on their lives. The authors of the study – Britta Augsburg, Ralph De Haas, Heike Harmgart and Costas Meghir – look at a group of randomly-selected loan applicants who normally would have been rejected during the loan screening process, in many cases because they lacked the necessary collateral to secure a loan . . .
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 MoreIntuitively, insurance should be highly appealing to poor households for two reasons—they face a lot of risks, and have few resources to effectively deal with negative shocks. But microinsurance hasn’t taken off. That leads to two main questions: Does microinsurance provide the benefits that we theoretically think it does? And if so, how do we overcome the barriers that are preventing people from buying insurance? Of course, the answer to the second is quite dependent on the answer to the first.
A new paper by Cole, Giné and Vickery presented at Innovations for Poverty Action’s recent Impact and Policy Conference in Bangkok tries to uncover some answers on the real world impact of microinsurance not just in terms of protection from an actual shock. One possible benefit of microinsurance is that it allows poor households to make different choices because they have to worry less about the impact of a shock . . .
Read MoreWhy are piggy banks in the shape of a pig? I had been certain that piggy banks were simply a decorative representation of the fact that keeping a pig (or any livestock) is an informal way to save—“deposits” paid into the pig by feeding and housing it can be “withdrawn” once the pig is sold. A bit of research informed me, however, that the etymologists have the economists beat on this one. The name derives from the old English word for the ceramic once commonly used to make household containers, “pygg.” Saving in these “pygg banks” became popular, and potters began to create savings boxes in the shape of the animal.[i]
Linguistic origins of the piggy bank aside, I have been thinking about livestock-as-savings after happening upon a book chapter by economists Christopher Barrett, Marc Bellemare, and Sharon Osterloh . . .
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 MoreDavid Roodman’s conversation with Jonathan Morduch is coming up tomorrow. If you haven’t read David’s book yet, you should. But we can be realists. You probably don’t have time to buy and read the whole book in the next 36 hours. So, here’s a quick cheat sheet of some highlights from David’s blog over the past few years. Reading these posts will get you up to speed (but you should still read the book!).
Perhaps David’s most famous post is an October 2009 post titled “Kiva is Not Quite What it Seems,” about the online microlender, Kiva. The post kicked off a wide-ranging debate about the role of transparency in the framing of NGOs’ operations and ultimately changed the way the organization presents itself. In the post Roodman explained there was significant divergence between Kiva’s rhetoric and marketing and how it actually did its work . . .
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 MoreI attended the Better than Cash Alliance launch this week at the Ford Foundation. The alliance’s goal is to accelerate the transition from cash to electronic payments in developing countries. For a good overview of the process, benefits and challenges of the transition, see this white paper from Bankable Frontier Associates (which is one of our partners in the US Financial Diaries project). For an in-depth discussion of the alliance, see David Roodman’s post.
At the launch, and in general when people talk about moving to electronic payments from cash, some of the key benefits cited are transparency and transaction records. But on my way back to the office from the event I had an unpleasant experience that reminded me that while these benefits are possible with electronic payments, they are by no means guaranteed . . .
Read MoreIn Due Diligence, David Roodman confronts important questions about the impact of microfinance and discusses how governments, foundations, and investors can best support financial services for the poor. In particular, Roodman argues for the need to deemphasize microcredit in favor of other financial services.
To learn more about Due Diligence and Roodman’s perspectives on microfinance, please join us on October 3rd for a conversation with David Roodman and Jonathan Morduch (RSVP). You can also listen to previous conversations with Timothy Ogden and Jonathan Morduch on the state of microfinance today.
In case you haven’t had time to read the book before the event, here’s a cheat sheet of sorts . . .
Read MoreA few weeks ago M-CRIL, an Indian microfinance ratings firm, published a white paper on India's evolving microfinance regulations. The overall message is that while the proposed regulatory framework is improving, it still needs work. One particular point caught my eye:
"The prevailing pricing regime – average cost of funds plus a margin cap – penalizes those MFIs that incur a high cost due to their commitment to responsible finance as well as those who are innovative in raising funds at low cost. Those that do both suffer a double 'whammy'."
While there is widespread agreement around the world that people should be protected from usurious interest rates on loans, there is little consensus on how to determine, and enforce, a cap on interest rates charged to the poor. The debate is as hot in the US (where it's fought over credit card and payday lending rates) as it is in India, Nicaragua and Bangladesh . . .
Read MoreI have written before how tiny Zidisha Microfinance is challenging long-held assumptions by leveraging internet social media and mobile payments like M-PESA to lend to clients without the help of loan officers or local staff. Since then, Zidisha has grown from tiny to small, with a portfolio now at $200,000, over 430 active borrowers, and 1400+ lenders. Its operations remain solid, with PAR30 at a respectable 6.6%1 (check out its stats for more).
I've been advising Zidisha since before its launch in 2010, and with that had the opportunity to watch the evolution of the platform's innovations. One feature, introduced in August 2011, allows borrowers to request to reschedule their loans, regardless of whether they are delinquent or not. Zidisha's online borrower portal provides two rescheduling options: adding a grace period of up to 2 months, but leaving the repayment amounts unchanged, or re-amortizing the loan over a longer period (up to 24 months) to lower the payment amount (Figure 1). The interest rate of the loan is applied over the longer period and repayment schedule is recalculated accordingly. Aside from these rules enforced through the website, there is no involvement or approval on the part of Zidisha – once a borrower submits the online request, his new repayment schedule becomes effective immediately . . .
Read MoreThe Curiosity rover’s Mars landing is only the most recent instance of the awe-inspiring advances made by the physical sciences. Our wonder at such achievements has even become codified in our language. “It’s not rocket science!” is the standard invocation to suggest a problem just requires common sense instead of the complex physics of, say, landing rovers on far-away planets. The phrase has been directed at everything from Social Security to healthcare, and yes, to poverty alleviation programs.
But, as I heard recently from researcher Duncan Watts, social science “is not rocket science—we’re actually pretty good at rocket science.” He proceeded to list a bunch of “hard” science things that humans have figured out quite well—vaccines for diseases, satellites in orbit, and any number of biological, chemical, and technological advances. The issues explored by “soft” science—how to get people vaccinated, prevent civil wars, and bring about gender equality—now that’s the hard stuff . . .
Read MoreRemittances represent an important source of income for millions of households around the world. The size of remittance flows, as compared to a country’s own domestic output, can reach numbers as high as 30% (that’s in Tajikistan, if you’re wondering.) This has led economists and policymakers alike to ask whether remittances can be relied upon to spur development. One way this might occur is if remittances are more likely to be spent on productive investments, increasing the domestic income-earning potential of households . . .
Read MoreIn 2005, a group of researchers at the University of Michigan set out to understand how people in low- and moderate-income households think about and use financial services. The Detroit Area Household Financial Services (DAHFS) study, headed by law professor and two-time Treasury official Michael Barr, included interviews with more than 1,000 randomly sampled residents of the Detroit metro area. No Slack: The Financial Lives of Low-Income Americans presents data and analysis from that study. Topics range from bank accounts to bankruptcy, from credit cards to tax refunds. Here are four brief—but important—take-aways.
1. Social ecosystem matters. In recent years, it’s become all the rage to add insights from psychology to economic models of how people make decisions—but social context matters, too . .
Read MoreI recently welcomed the news of a new national-level microfinance bill in India. I believe the Indian microfinance sector is witnessing a movement towards greater regulatory clarity following the turmoil of the Andhra Pradesh crisis. The Microfinance Institutions (Development and Regulation) Bill 2012 introduced in the Parliament on the 22nd of May comes with modifications to the earlier Bill introduced in 2007. The industry, too, has broadly welcomed the Bill as a much better version of the 2007 Bill, which lapsed on account of the dissolution of the Lok Sabha (the lower house of India’s Parliament).
The introduction of this Bill brings a much needed strengthening of the regulatory framework and consumer protection norms of the microfinance industry in India. Regulation of financial services is necessary to protect current and future clients, but it must also be undertaken with care in order to maintain access to those services . . .
Read MoreWe’ve become fans of talking about financial literacy here at the Financial Access Initiative, so I was excited to see the May issue of the American Economic Review with selected papers from the American Economic Association’s Annual Meeting. There are four papers that address financial-literacy questions. I’ll offer some big-picture thoughts further down, but first, the punch lines of the four papers . . .
Read MoreBringing the unbanked into the formal financial system requires innovation—but sometimes the innovation required is far from what we spend most of our time thinking about. A post at the New York Fed’s Liberty Street Economics blog details an important innovation required to bring women into bank branches at the turn of the 20th century: a private room for extracting cash from their stockings.
The post notes other important milestones in banking women—a long term process that began around the time of the U.S. Civil War when California established the financial independence of women regardless of marital status. Still, more than a century later, the “ridiculous” idea of women managing their own bank accounts was being used for easy laughs on television shows . . .
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