The Other Half of the Benefit-Cost Debate

When it comes to costs and benefits, we at FAI tend to focus on benefits. The recent release of the Compartamos microfinance impact evaluation was thus a big event in our office. With our heads in the academic literature, we tend to write a lot about RCTs and other ways to measure benefits of interventions.

We’re contributing to a problem, though. There’s a big danger in conflating impact and value. We can’t say much about  the value of microfinance (or any other intervention) based on benefits alone. The most realistic proposition in favor of microfinance is that relatively small benefits are paired with relatively small costs, leading to a favorable cost-benefit ratio. That’s a hypothesis, of course, and it hinges on a careful reckoning of the cost data.

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Saving Chiapas, Saving Ourselves: How to avoid a repayment crisis in Mexico

My last two posts on the potential repayment crisis in Chiapas described the high risk of a crisis in Chiapas, Mexico, and its potentially devastating consequences to the microfinance sector around the world. But here is the good news: thus far there is no crisis, and one could still be avoided. 

I have argued before that development finance institutions and other funders could leverage Smart Certification to enforce client protection practices and thus reduce the risk of the kind of over-lending that's happening in Chiapas. However, that prescription alone would not work in Mexico, mainly because a large number of Mexican MFIs are independent of foreign funding, and there are many other lenders active in the same space, including consumer finance companies and large retailers that provide credit.

The answer to avoiding a repayment crisis in Mexico will thus require government action . . . 

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The Socio-Cultural Dimension of Microcredit

Much of the dialogue around microfinance suggests that the poor are universally credit constrained and that cash shortages drive a monolithic demand for credit. As such, microfinance is often treated as a technical, rational and linear process that is characterized by an “if-you-build-it-they-will-come” mindset. Too often overlooked are the contextually specific and nuanced processes that influence consumers’ demand for microcredit in a variety of social, moral, cultural, and political contexts.

A fascinating new paper, “Explaining Participation and Repayment in Microcredit Schemes in Rural Morocco: the Role of Social Norms and Actors,” from the Institute of Research for Development at the Sorbonne University explores exactly these dimensions of microfinance. Drawing upon evidence collected from rural Morocco, the team of authors explores the socio-cultural factors that influence a household’s use of microcredit services . . . 

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Savings Crisis in West Bengal

In the past few weeks, the local government of West Bengal has been embroiled in a financial and political crisis that has potentially large impacts on the state’s poor and its MFIs.  After discovering that the commercial entity the Saradha Group had duped thousands of investors through a real estate Ponzi scheme, the state minister launched a full investigation of over 70 other deposit-taking entities which are grouped under the category of “chit funds.”

A chit fund is a ROSCA-meets-the-auction block style of Indian savings scheme in which subscribers pool money every month and then try to outbid each other to get the entire pot.  The difference between the lowest bid and what is left in the pool is distributed among members.  In West Bengal, chit funds are particularly important due to the high demand for products that accommodate small savings.  According to Abhijit Banerjee and Maitreesh Ghatak, West Bengal’s share of population was approximately 7.5% in 2011, its state domestic product was 6.7% of India’s GDP, but its share of bank deposits was 22%.  Many of the state’s poor cannot afford to open a bank account and those who can face plummeting interest rates.  Chit funds can offer an alternative to traditional savings and credit lines for the unbanked . . . 

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Impact Evaluation of Compartamos Released

The long-awaited impact study of Compartamos, led by Manuela Angelucci of the University of Michigan and Dean Karlan and Johnathan Zinman of IPA, has finally been published. The research team used a randomized trial to test the impact of loans offered at 110% APR by Compartamos, the largest microlender in Mexico. After three years of data collection on a variety of factors, the results were generally positive with no evidence that the loans caused harm or significant negative effects.  Researchers found that loan recipients grew their business revenues and expenses, were happier, more trusting, had greater household decision power, and were better able to manage liquidity and risk.  However, there was little evidence that loans had an impact on building wealth like household income, business profits, or consumption.

One of the more interesting conclusions from the paper is as follows . . . 

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Reliability of Self-Reported Data - Diaries and Alternative Methodologies

In last week’s blog post, I suggested that self-reported data should be supplemented with objective sources of information from independent third-party entities. Sometimes, however, independent data sources simply aren’t available and researchers have no choice but to base their analysis on self-reported data. Under these circumstances, some data collection methodologies might be more useful than others in ensuring that self-reported data are reliable. In this post, I discuss several studies of the potential of the diaries methodology and alternative strategies to capture accurate self-reported data.

Klaus Deininger, Calogero Carletto, Sara Savastano and James Muwonge examine the effect of personal diaries on the quality of self-reported agricultural data in their study, “Can Diaries Help in Improving Agricultural Production Statistics? Evidence from Uganda.” In Uganda, a large part of crop output consists of continually harvested crops such as cassava and banana. Since these crops are harvested over long periods of time, farmers who are asked to report harvest data may have trouble recalling events that happened several months earlier . . . 

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Wagner’s Jonathan Morduch on Reimagining Banking for Half the World’s Adults

Half of the adults in the world are “unbanked” -- about 2.5 billion people. That’s the starting point of a new book, Banking the World: Empirical Foundations of Financial Inclusion, published by the MIT Press.

To reach those 2.5 billion people, NYU Wagner professor Jonathan Morduch argues that we need to think about banking in radically different ways. Promising solutions involve using new technologies like mobile phones, as well as re-imagined ideas like self-governing village-based saving groups. Understanding those possibilities is a focus of the The Financial Access Initiative, the NYU center Morduch founded with colleagues at Yale and Harvard. Morduch co-edited Banking the World . . . 

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Reliability of Self-Reported Data: Deliberate Misreporting

Program evaluations and policy proposals are only as good as the data upon which they are based. Although we all know this to be true, discussions about the reliability of data, especially self-reported data, have only recently emerged in the field of development economics. The other week, I highlighted two papers from the Journal of Development Economics’ Symposium on Measurement and Survey Design which discussed how recall bias might undermine the reliability of self-reported data. Even when recall bias is not at play though, self-reported data might be threatened by respondents’ desire to misreport their activities so as to portray their behaviors in a more positive light.

Sarah Baird and Berk Özler explore this phenomenon as it relates to education in their study, “Examining the Reliability of Self-Reported Data on School Participation.” Many Conditional Cash Transfer (CCT) programs are evaluated based on self-reported data about school enrollment and attendance rates. However, the desire to give socially desirable answers or the belief that program funding is linked to evaluation results might lead survey participants to over-report their level of school participation. Baird and Özler test the extent to which self-reported data of school enrollment rates can be considered reliable in CCT evaluations of this nature . . . 

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Payments, Cash and Geographic & Economic Mobility

Right now there is a lot of talk about allowing more geographic mobility to enable more economic mobility--in other words, easing immigration restrictions. There is powerful evidence that enabling more migration (internal and external) would be a powerful tool to fight global poverty.

But there is a different kind of geographic and economic mobility that is worth thinking about--the geographic and economic immobility of cash. 

A just-for-fun project to track the movement of specific dollar bills as they move from place to place and person to person has yielded very interesting data on this issue in the United States. Back in 1998 the Where's George project started encouraging people to log the geographic (by zip code) location of their cash before spending it . . . 

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A Must Read from Chris Dunford on Research-Practitioner Relationships

A regular theme in our writing is about the need for the microfinance industry to learn from and adapt to the needs of poor households. A few weeks ago, a new paper appeared based on an interesting attempt to test whether MFIs are interested in generating and using rigorous evidence. The researchers sent emails to 1,419 MFIs inquiring about their interest in "a partnership to randomly evaluate their programs." There were three different emails sent however: 1) a neutral email, 2) an email that emphasized positive findings from other studies of microfinance, and 3) an email that emphasized "null" findings from other studies of microfinance. 

Unsurprisingly, the positive emails had double the response rate of the negative emails. The authors interpret this finding as evidence of confirmation bias among MFIs--they are only intereted in good news that backs up their existing beliefs, and less interested in learning how to improve . . . 

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"How Microfinance Really Works" - Jonathan Morduch in Milken Review

It's an important moment for the microfinance movement. At a time when real progress has been made in making financial services available to the poor, questions abound about the effectiveness of microfinance as a way of helping people escape from poverty. The priveleged position microfinance has enjoyed among poverty interventions and social investment is eroding. Charting the right path forward for microfinance--and effective investments in reducing poverty--requires a closer look at how microfinance really has worked . . . 

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What is the Impact of Muhammad Yunus?

Muhammad Yunus spoke to an overflowing crowd at NYU on April 15, an event jointly sponsored by the Wagner School of Public Service, Stern School of Business, and Financial Access Initiative.

Professor Yunus is known for fighting to improve the lives of millions of poor families around the world, the quest that was celebrated by the 2006 Nobel Peace Prize. These days there is a lot of talk about the impact of microcredit. But here was an opportunity to ask: what is the impact of Yunus? Given where we were, more specifically, how has Yunus changed the way we--economists, academics, policy makers and influencers--think about problems?

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Yunus, Entrepreneurs, and Employees

We had the good fortune to host, with NYU Wagner and NYU Stern, a talk by Muhammad Yunus today at FAI. If you couldn't join us in the room or via the livestream, you can read the tweetstream from the talk by searching Twitter for #FAIYunus, and soon we'll post video of the event. 

In the meantime, I wanted to offer some quick thoughts about one of the main topics that Professor Yunus addressed: entrepreneurship. During his talk, Yunus mentioned his advice to the children of Grameen Bank borrowers who have completed school: don't be a job seeker, be a job maker. In other words, be an entrepreneur. During the question and answer session, a member of the audience asked Yunus, "[You] assume everyone is inherently entrepreneurial. What about people who are not?" Yunus' response was that people who are not entrepreneurial have simply not been given a chance to discover and develop that side of themselves . . . 

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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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