Measuring (and Missing) Financial Inclusion

The fastest growing part of the financial inclusion movement isn’t a product or even a standard, it’s data and measurement. And if there’s something experts are increasingly agreeing on, it’s that it is illusory to try to define financial inclusion in any precise, universal way. John Gitau says he’s confused, and so am I. How do you measure financial inclusion?

It’s true that you might not be able to measure financial inclusion itself, but you can still measure things that indicate either actual, or the potential for, progress. Such indicatorsare what we can measure, and they are very useful as long we don’t confuse them with actual measurement of financial inclusion.

There are two broad types of indicators which can be applied to fuzzy concepts like our cherished financial inclusion . . . 

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Beyond Business: Rethinking Microfinance

In just 30 years, the microfinance movement has reached 200 million people who had been deemed "unbankable." That's a stunning success. But the narrative that drove this success has implicitly shut the vast majority of the unbanked out of the system. That's why it's time to change the story, and our minds, on how microfinance works, argue FAI's Jonathan Morduch and Timothy Ogden in Foreign Policy. They suggest that the fundamental need of poor households is tools to smooth out volatile and uncertain cash flows, not credit for business investment . . . 

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Financing Seasonal Migration: A New Use for Microcredit?

In many places, agriculture is highly seasonal. That presents difficulties for subsistence farmers who have to stretch incomes year-round. If farmers (or family members) could migrate during the off-season to areas where wage labor is available, they could substantially smooth their annual income and consumption. Indeed, this is what happens in many places. But even where seasonal migration does happen, many people don't migrate even when it seems it would be advantageous to do so. Why?  

In recent work, Bryan, Chowdhury and Mobarak study the role of risk aversion in preventing households from migrating. You can see a presentation of this work here.

While migrating from poorer areas to wealthier ones, particularly from rural to urban locations, can provide access to more and (much, much) better-paying wage labor, it comes at a significant cost . . . 

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Worse than AP: The Damage of a Repayment Crisis in Chiapas

A month ago I wrote a post singling out the Mexican state of Chiapas as a potential site of a coming repayment crisis. No, this is not a follow-up announcing that it has begun, nor am I rooting for one to start. In my next post, I will review the options that the Mexican microfinance sector has to avoid it, and what the global microfinance community can do to help. But for now, let’s dig a bit deeper into what a Chiapas crisis might mean, and why I continue to focus on Mexico, as opposed to the broader issue of excessive credit and over-indebtedness.

Let’s be blunt: not all countries are created equal. Some remember my warning three years ago about the danger of a credit crisis in Andhra Pradesh. Back then I compared a possible crisis in India to the crisis in Bolivia a decade before: "India is no Bolivia – if the bubble bursts there, the entire global microfinance sector will find itself reeling." Well, Mexico is no India . . . 

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Reliability of Self-Reported Data – Recall Bias

In a recent post, Tim Ogden and I discussed the importance of having solid, reliable data on which to base program evaluations and policy decisions. The Journal of Development Economics explored this theme in last year’s Symposium on Measurement and Survey Design which featured more than a dozen papers on improving data quality in development research (Hat tip to Berk Ozler of the World Bank’s Development Impact blog for pointing us to it).

An important discussion at the symposium was the extent to which self-reported data can be considered accurate and reliable. Because study participants are usually asked to report information after significant time has elapsed, self-reported data are often subject to recall bias and can be inaccurate or misleading. This post is the first in a three-part series that will explore the reliability of self-reported data through a discussion of papers featured at the symposium . . . 

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The mobile money revolution has been greeted with great excitement in some circles for the potential it holds to increase financial access for the world’s poorest. Women may especially benefit from expanding financial inclusion through mobile financial services (MFS). Women not only handle a lot of cash to provide for household needs in many societies, but they may be explicitly or implicitly discouraged from using bank branches.  A new report (sponsored by Visa and the GSMA mWomen  Programme) by FAI affiliate Daryl Collins explores just this theme. In “Unlocking the Potential: Women and Mobile Financial Services in Emerging Markets,”  Collins and her coauthors explore the untapped potential of woman as a strategic consumer base for MFS providers.

A summary of the report’s conclusions . . . 

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Update: Another paper on microinsurance and why insuring against risk matters

We wrote a post a few months ago about a paper  that looks at how microinsurance affects decision-making. Specifically, the paper analyzed whether insuring farmers in Andhra Pradesh, India, against rainfall-related risks (too much or too little) affected their investment and production decisions. Another recent paper by Karlan, Osei, Osei-Akoto & Udry uses a similar approach and found similar results in northern Ghana.

In this experiment, farmers in northern Ghana were randomly assigned to receive cash grants, subsidized rainfall index insurance or simply offered the option to purchase insurance at actuarially fair rates. As in the Andhra Pradesh study, the authors find strong responses to investment to the subsidized rainfall insurance. When provided with insurance against one of  the main risks they face, farmers find the resources to increase expenditures on their farms. Interestingly, they only found small effects of cash grants.

Karlan, et. al. also discuss the demand for rainfall insurance. They point out that take-up rates on rainfall insurance are low, which seems counterintuitive given that we know risk discourages investment, and investment often has large returns. To understand the demand for rainfall insurance, we have to keep in mind the various factors that drive demand. Of course, price is important but trust and experience matter as well. Demand is sensitive to whether farmers trust that payouts will be made. They found that demand for insurance increased after a farmer or someone in his network received a payout.

The study provides additional evidence that households are managing their finances by avoiding risks. In other words, they are smoothing their income by avoiding investments that could pay off but could go very sour. Reducing this risk-avoiding income smoothing through insurance seems to work well—if households can be convinced that the risk of the insurance (that an unfamiliar and relatively expensive product is reliable and worth the short-term cash cost) is less than the risk of the status quo.

New Paper Highlight - More Benefits of Mobile Money: Lowering the Cost of Remittances

One way to cope with an emergency is to borrow money from family and friends. But that typically doesn’t work when a disaster strikes a whole area. Sending and receiving money over larger distances, when transferring cash from person-to-person is impractical or impossible, can be very expensive. There are a litany of costs, from communications, to finding and traveling to agents, to the actual financial cost of the transfer. And don’t forget the cost of delay—in an emergency, delays in receiving needed funds can have big consequences.

One way mobile payments could have substantial short-term benefits for poor households is by speeding up and lowering the cost of emergency transfers and remittances. A new paper by William Jack and Tavneet Suri provides evidence that mobile payments are doing just that . . . 

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What's Next? External Validity

What’s next? Jonathan Morduch says: Making RCTs more useful.

When you’re thirsty, that first gulp of water is really satisfying. But after months of just drinking water, you’ll likely start hoping for more from your beverages.

I think that’s where we are with RCTs of microfinance.

The first microfinance RCTs were refreshing. They quenched a thirst for any credible, rigorous evidence on microcredit impacts. No one was particularly hankering for data specifically on microfinance in Manila, Hyderabad, Morocco, or Bosnia. But that’s what we got. It didn’t particularly matter where the studies were from, or what the particular financial methodology was, or who exactly the customers were. Especially since the results were not only credible but surprising and provocative. Researchers were opportunistic choosing sites and partners , and who can blame them?

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What's Next: Another Repayment Crisis?

It's been over two years since the start of the great India insolvency.  Four years since the Bosnia blight and No Pago Nicaragua.  And nearly six years since the Morocco microfinance meltdown. 

At this point, it's reasonable to say that the first global crisis in microfinance has passed.  Life is on the mend. 

In a recent email, Alok Prasad, head of the Microfinance Institutions Network in India (MFIN) described its most recent quarterly report as "green shoots in evidence."  The numbers certainly bear him out. Elsewhere, investors speak of tightening their exposure to countries with overheating markets, pay attention to issues of overindebtedness, and are wary of the sort of runaway growth that was being posted by Indian MFIs back in 2008-10.

Development of sector-level infrastructure is likewise moving apace, with ever increasing credit bureau coverage of microfinance clients and increasing implementation of client protection practices . . . 

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What’s Next? Understanding—and Improving—Microenterprise Performance

Hundreds of millions of people in the developing world work in microenterprises. These businesses tend to be very small, often employing only a single operator, and they tend to have difficulty growing. Yet growing evidence suggests that such businesses could increase profits by increasing investment – a number of recent studies find that the marginal return to capital among small firms in developing countries tends to be very high (i.e. de Mel et al. 2008). If returns to capital are high, why don’t microenterprises borrow, invest and grow rapidly?

The obvious answer is that these firms don’t have access to credit. But while credit constraints are likely part of the explanation for the puzzle, accumulating evidence suggests that it’s not just credit that limits investment . . . 

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What's Next? Connecting Finance and Health

Focusing on financial access can sometimes obscure the rationale for doing so.  We don’t really care about access to finance for its own sake. The point of providing quality financial services to poor households is to give them an easier, more stable path to prosperity. But what are the pitfalls and slippery spots on that path that we hope to ameliorate?

It seems that financing health care is one of the biggest obstacles that poor households face. Take Joseph, a farmer from the Kenyan Rift Valley Province. When his three-year old daughter inhaled a piece of corn she began struggling to breathe. Joseph had no cash at the time, so he waited before visiting a doctor, hoping she would get better.  But after three days, symptoms became so serious that Joseph had to take his daughter to the hospital for emergency care. The only way Joseph could accumulate the sums necessary to pay the bill was to sell his land. When I met him two years later, it seemed unlikely that Joseph would ever be able to buy it back. Selling the land had pushed the household into extreme poverty . . . 

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What’s next for KGFS?

What’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 . . . 

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Barriers and Constraints to Risk Management and Savings

Whether the result of variable incomes, liquidity constraints or reduced access to formal financial services, poor households face unique financial constraints that undermine their ability to effectively guard against risk and accumulate meaningful savings. There’s been a lot of research into these questions in the last few years. Two important papers, “Barriers to Household Risk Management: Evidence from India” and “Savings Constraints and Microenterprise Development: Evidence from a Field Experiment in Kenya,” circulating for a few years have finally been published this month in the American Economic Journal: Applied Economics. Now that they’re “official” it’s worth revisiting them . . . 

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What’s Next? Chris Dunford on Proving the Consumption Smoothing Benefits of Microfinance

A new theory of change is emerging for microfinance. People from poor households tap microfinance services to smooth consumption and build assets to protect against risks ahead of time and cope with shocks and economic stress events after they occur—leading to widespread poverty alleviation but not widespread poverty reduction.

This is the narrative coming out of the financial diaries reviewed by Portfolios of the Poor and the research summarized in Poor Economics and Due Diligence. More or less independently, perhaps in spite of that research, the microfinance industry has been adjusting toward supporting resilience strategies of the poor as it has become more sensitive to client demand – by moving toward a mix of loan, saving and other services and greater flexibility and choice to accommodate the use of microfinance for supporting diverse household needs rather than focusing just on the needs of micro entrepreneurs . . . 

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What's Next: Five Factors – Beyond Mobile Money – that will make Financially-Inclusive G2P a Reality

What’s next? Jamie Zimmerman says it's the opportunity to make government-to-person payments a major vehicle of financial inclusion.

Mobile money and electronic payments have leaped to the fore of many financial access conversations.  Take the launch of the Better Than Cash Alliance (BTCA) and the recently released latest Bill & Melinda Gates Foundation (BMGF) strategy as prime examples. Some (Tim Ogden of FAI, Jesse Fripp of SBI and I for instance), have suggested tingeing the optimism over payments with  caution, citing several hurdles that we must still overcome, and questions we must answer, before payments can become a financial access success story . . . 

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A Call for Rigorous Data and Standardized Measures

Last 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?

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What’s Next? David Mckenzie on Risk Isn’t Just for Farmers, but isn’t all bad either

One of the big changes observed in discussions over microfinance in the past few years has been increasing emphasis on discussing microfinance, rather than just microcredit. In practice this has meant a lot of discussion about microsavings, with advocates pointing to studies showing greater impacts from offering savings accounts than from offering loans.

But finance is about much more than just savings and loans. As emphasized in Portfolios of the Poor, one of the issues with living on $2 a day is that incomes for the poor are incredibly volatile, so that the $2 a day average masks days of nothing and days of higher incomes. Building up precautionary savings offers one way to help smooth these shocks, while credit provides another. But some of the shocks experienced by the poor are large enough when they occur that they wipe out savings and leave people in a position where they will struggle to either obtain loans or be able to repay them straight away . . . 

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