In 2009, the results from two microcredit impact studies in Hyderabad, India, and Manila, the Philippines were released to mixed responses (Banerjee, Duflo, Glennerster, and Kinnan 2010; Karlan and Zinman 2011). Some media declared microfinance a failure (Bennett 2009). Many in the microfinance community dismissed these randomized studies as too limited to be a true reflection of the entire sector .
December 2011
By Jonathan Bauchet, Cristobal Marshall, Laura Starita, and Anna Yalouris
Latest Findings from Randomized Evaluations of Microfinance
In 2009, the results from two microcredit impact studies in Hyderabad, India, and Manila, the Philippines were released to mixed responses (Banerjee, Duflo, Glennerster, and Kinnan 2010; Karlan and Zinman 2011). Some media declared microfinance a failure (Bennett 2009). Many in the microfinance community dismissed these randomized studies as too limited to be a true reflection of the entire sector.
The original promise of microcredit was to reduce poverty by fostering self-employment in low-income communities, an idea first promoted at mass scale in Bangladesh (Yunus 1999). But critics of Muhammad Yunus and the Bangladesh microcredit model argue that supporting larger businesses (small and medium enterprises or SMEs) may instead create more and better jobs for poor individuals (e.g., Karnani 2007, Dichter 2006). That’s only possible, however, if those larger enterprises employ poor workers in large numbers. We argue that that can’t be assumed.
November 2011
By Jonathan Bauchet and Jonathan Morduch
Is Micro Too Small? Microcredit vs. SME Finance
The original promise of microcredit was to reduce poverty by fostering self-employment in low-income communities, an idea first promoted at mass scale in Bangladesh (Yunus 1999). But critics of Muhammad Yunus and the Bangladesh microcredit model argue that supporting larger businesses (small and medium enterprises or SMEs) may instead create more and better jobs for poor individuals (e.g., Karnani 2007, Dichter 2006). That’s only possible, however, if those larger enterprises employ poor workers in large numbers. We argue that that can’t be assumed.
Low-income households are often trapped in a "debt-cycle": They borrow to cover necessary expenses, repay the loan with their subsequent income, then borrow again because they have nothing remaining after repayment. Inconsistent income and seasonality, especially for farmers, makes borrowing attractive at the time of necessity.
Low-income households are often trapped in a "debt-cycle": They borrow to cover necessary expenses, repay the loan with their subsequent income, then borrow again because they have nothing remaining after repayment. Inconsistent income and seasonality, especially for farmers, makes borrowing attractive at the time of necessity. However, the associated interest costs may stifle the chances for the borrower to accumulate savings. Piyush Tantia from ideas42 discusses the case study, "Turning Interest into Savings," which describes the design, implementation and results of piloting a debt-to-savings product in India.
When the Gates Foundation started a programme to expand global ‘financial services for the poor’ (FSP), many in the field, myself included, saw this as an important complement to the foundation’s work in health and education.1 The evidence is piling up that the world’s poor face the twin problems of low incomes and difficulty managing their incomes without bank accounts or insurance. Finance, in this view, allows people to invest in the future and – importantly – to marshal resources to meet needs today. Access to finance, then, is a key tool for improving the lives of the poor. The Gates Foundation’s impact on finance for the poor has been most strongly felt in re-balancing attention between credit and savings.
September 2011
By Jonathan Morduch
From Credit to Savings
When the Gates Foundation started a programme to expand global ‘financial services for the poor’ (FSP), many in the field, myself included, saw this as an important complement to the foundation’s work in health and education.1 The evidence is piling up that the world’s poor face the twin problems of low incomes and difficulty managing their incomes without bank accounts or insurance. Finance, in this view, allows people to invest in the future and – importantly – to marshal resources to meet needs today. Access to finance, then, is a key tool for improving the lives of the poor. The Gates Foundation’s impact on finance for the poor has been most strongly felt in re-balancing attention between credit and savings.
Commitment devices facilitate self-control by allowing the customer to set aside future money and prohibiting withdrawal from these funds for a set period spending; this allows them to circumvent the temptation to spend money immediately.
August 2011
By FAI, ideas42 at Harvard University, and Institute for Financial Management & Research
Turning Interest Into Savings
Commitment devices facilitate self-control by allowing the customer to set aside future money and prohibiting withdrawal from these funds for a set period spending ; this allows them to circumvent the temptation to spend money immediately.
Roughly half the adults in the world, about 2.5 billion people, have no bank account nor even access to a ―semi-formal‖ financial service like microcredit. But what if they did? Muhammad Yunus, the 2006 Nobel Peace Prize winner and founder of Bangladesh’s Grameen Bank, argues that this lack of financial access means that the poor, especially poor women, can’t obtain the tiny loans (known as microcredit) that they need to build their businesses and get on a path out of poverty. The idea has taken hold: in 2009 Grameen Bank served 8 million customers (the average loan balance was just $127). World-wide, microcredit advocates claim over 190 million customers.
May 2011
By Jonathan Morduch
Why Finance Matters
Roughly half the adults in the world, about 2.5 billion people, have no bank account nor even access to a ―semi-formal‖ financial service like microcredit. But what if they did? Muhammad Yunus, the 2006 Nobel Peace Prize winner and founder of Bangladesh’s Grameen Bank, argues that this lack of financial access means that the poor, especially poor women, can’t obtain the tiny loans (known as microcredit) that they need to build their businesses and get on a path out of poverty. The idea has taken hold: in 2009 Grameen Bank served 8 million customers (the average loan balance was just $127). World-wide, microcredit advocates claim over 190 million customers.
Using the Financial Diaries Approach
Using the Financial Diaries Approach
U.S. Financial Diaries Project Launch
U.S. Financial Diaries Project Launch
Is credit a human right? Muhammad Yunus, the most visible leader of a global movement to provide microcredit to world's poor, says it should be. NYU's John Gershman and FAI's Jonathan Morduch disagree.
Is credit a human right? Muhammad Yunus, the most visible leader of a global movement to provide microcredit to world's poor, says it should be. NYU's John Gershman and FAI's Jonathan Morduch disagree. In their new paper, Credit is Not a Right, they ask whether a rights-based approach to microcredit will in fact be effective in making quality, affordable credit more available to poor families -- and, more importantly, whether it is a constructive step in terms of the broader goal of global poverty reduction. Jonathan Morduch argues his case in this video.
In 1990, Carlos Danel and Carlos Labarthe co-founded Compartamos-which means "let's share" in Spanish-to provide poor residents (mainly rural women) of Mexico with access to economic opportunities. At its inception Compartamos was a nonprofit organization serving mainly indigenous, rural women in some of the poorest regions in Mexico.
In 1990, Carlos Danel and Carlos Labarthe co-founded Compartamos—which means "let's share" in Spanish—to provide poor residents (mainly rural women) of Mexico with access to economic opportunities. At its inception Compartamos was a nonprofit organization serving mainly indigenous, rural women in some of the poorest regions in Mexico. The company has since evolved into a commercial bank. While some are critical of the company for what they believe is its emphasis on profits over social returns, our research into microfinance and social investment provides a more nuanced response to the criticism. Nonetheless, there's no denying Compartamos' impact on the region. It is currently one of the largest microcredit institutions in all of Latin America. Most of its more than 600,000 clients live in rural areas of Mexico.
We caught up with Carlos Danel in New York, when he was in town for a conference to ask him about some of the most critical questions facing the microfinance industry.
In 1990, Carlos Danel and Carlos Labarthe co-founded Compartamos-which means "let's share" in Spanish-to provide poor residents (mainly rural women) of Mexico with access to economic opportunities. At its inception Compartamos was a nonprofit organization serving mainly indigenous, rural women in some of the poorest regions in Mexico.
In 1990, Carlos Danel and Carlos Labarthe co-founded Compartamos—which means "let's share" in Spanish—to provide poor residents (mainly rural women) of Mexico with access to economic opportunities. At its inception Compartamos was a nonprofit organization serving mainly indigenous, rural women in some of the poorest regions in Mexico. The company has since evolved into a commercial bank. While some are critical of the company for what they believe is its emphasis on profits over social returns, our research into microfinance and social investment http://financialaccess.org/node/3706 provides a more nuanced response to the criticism. Nonetheless, there's no denying Compartamos' impact on the region. It is currently one of the largest microcredit institutions in all of Latin America. Most of its more than 600,000 clients live in rural areas of Mexico.
We caught up with Carlos Danel in New York, when he was in town for a conference to ask him about some of the most critical questions facing the microfinance industry.
"Best practice" in microfinance holds that interest rates should be set at profit-making levels, based on the belief that even poor customers favor access to finance over low fees. Despite this core belief, little direct evidence exists on the price elasticity of credit demand in poor communities. We examine increases in the interest rate on microfinance loans in the slums of Dhaka, Bangladesh. Using unanticipated between-branch variation in prices, we estimate interest elasticities from -0.73 to -1.04, with our preferred estimate being at the upper end of this range. Interest income earned from most borrowers fell, but interest income earned from the largest customers increased, generating overall profitability at the branch level.
May 2011
By Rajeev Dehejia, Heather Montgomery, and Jonathan Morduch
Do Interest Rates Matter? Credit Demand in the Dhaka Slums
"Best practice" in microfinance holds that interest rates should be set at profit-making levels, based on the belief that even poor customers favor access to finance over low fees. Despite this core belief, little direct evidence exists on the price elasticity of credit demand in poor communities. We examine increases in the interest rate on microfinance loans in the slums of Dhaka, Bangladesh. Using unanticipated between-branch variation in prices, we estimate interest elasticities from -0.73 to -1.04, with our preferred estimate being at the upper end of this range. Interest income earned from most borrowers fell, but interest income earned from the largest customers increased, generating overall profitability at the branch level.
FAI Insights: The Financial Access Initiative's Jonathan Morduch explains the motivation for his most recent research report with Jonathan Conning on "Microfinance & Social Investment." This is part 1 of a two-part video series.
FAI Insights: The Financial Access Initiative's Jonathan Morduch explains the motivation for his most recent research report with Jonathan Conning on "Microfinance & Social Investment." This is part 1 of a two-part video series.
FAI Insights: Jonathan Morduch explains the research agenda for his new study with Jonathan Conning on "Microfinance & Social Investment." This is part 2 of a two-part video series on the subject.
FAI Insights: Jonathan Morduch explains the research agenda for his new study with Jonathan Conning on "Microfinance & Social Investment." This is part 2 of a two-part video series on the subject.
The notion of “credit as a human right” flows from the argument that if we are concerned with universal access to food, shelter, and health, then we must be committed to providing access to the tools that are most likely to deliver those basic elements of life. For the sake of argument (and there is, of course, argument), we will follow Article 25(1) of the Universal Declara- tion of Human Rights, adopted by the United Nations in December 1948, and begin with the idea that access to food, shelter, and health constitute basic human rights. Yunus can then be interpreted as saying: access to credit is so powerful in reducing poverty, that access to credit should be a right itself.
April 2011
By John Gershman and Jonathan Morduch
Credit is Not a Right
The notion of “credit as a human right” flows from the argument that if we are concerned with universal access to food, shelter, and health, then we must be committed to providing access to the tools that are most likely to deliver those basic elements of life. For the sake of argument (and there is, of course, argument), we will follow Article 25(1) of the Universal Declara- tion of Human Rights, adopted by the United Nations in December 1948, and begin with the idea that access to food, shelter, and health constitute basic human rights. Yunus can then be interpreted as saying: access to credit is so powerful in reducing poverty, that access to credit should be a right itself.
Impact evaluations try to measure the change in a participant’s life that occurred because of an intervention. The “intervention” could be a policy, a project, an insurance product, or a specific feature of a product. For instance, the intervention could relate to a particular product feature, such as the extent of coverage, a change of pricing structure, or variations in the distribution channel.
April 2011
By Aparna Dalal, Jonathan Bauchet, and Jonathan Morduch
Evaluation Fundamentals: A Framing Note
Impact evaluations try to measure the change in a participant’s life that occurred because of an intervention. The “intervention” could be a policy, a project, an insurance product, or a specific feature of a product. For instance, the intervention could relate to a particular product feature, such as the extent of coverage, a change of pricing structure, or variations in the distribution channel. . .
This paper puts a corporate finance lens on microfinance. Microfinance aims to democratize global financial markets through new contracts, organizations, and technology. We explain the roles that government agencies and socially-minded investors play in supporting the entry and expansion of private intermediaries in the sector, and we disentangle debates about competing social and commercial firm goals. We frame the analysis with theory that explains why microfinance institutions serving lower-income communities charge high interest rates, face high costs, monitor customers relatively intensively, and have limited ability to lever assets. The analysis blurs traditional dividing lines between non-profits and for-profits and places focus on the relationship between target market, ownership rights and access to external capital.
April 2011
By Jonathan Conning and Jonathan Morduch
Microfinance and Social Investment
This paper puts a corporate finance lens on microfinance. Microfinance aims to democratize global financial markets through new contracts, organizations, and technology. We explain the roles that government agencies and socially-minded investors play in supporting the entry and expansion of private intermediaries in the sector, and we disentangle debates about competing social and commercial firm goals. We frame the analysis with theory that explains why microfinance institutions serving lower-income communities charge high interest rates, face high costs, monitor customers relatively intensively, and have limited ability to lever assets. The analysis blurs traditional dividing lines between non-profits and for-profits and places focus on the relationship between target market, ownership rights and access to external capital.
Emergencies can derail families and prevent them from getting ahead. This study describes the design, implementation, and results of a pilot emergency (“hand”) loan product in India. The product achieved its original intent, but the pilot encountered considerable institutional and execution challenges. The experience generated lessons for future product innovation.
March 2011
By FAI, ideas42 at Harvard University, and International Finance Corporation at the World Bank
Emergency (Hand) Loan
Emergencies can derail families and prevent them from getting ahead. This study describes the design, implementation, and results of a pilot emergency (“hand”) loan product in India. The product achieved its original intent, but the pilot encountered considerable institutional and execution challenges. The experience generated lessons for future product innovation.
Michael Clemens, Senior Fellow at the Center for Global Development (CGD) and visiting scholar at the Financial Access Initiative and at NYU-Wagner and the NYU Dept. of Economics (Spring 2011), talks about the findings from his research into the UN Millennium Villages.
Michael Clemens, Senior Fellow at the Center for Global Development (CGD) and visiting scholar at the Financial Access Initiative and at NYU-Wagner and the NYU Dept. of Economics (Spring 2011), talks about the findings from his research into the UN Millennium Villages.
Jonathan Morduch talks to FAB's Bhagwan Chowdhry.
Jonathan Morduch talks to FAB's Bhagwan Chowdhry.
We use experimental measures of time discounting and risk aversion for villagers in south India to highlight behavioral features of microcredit, a financial tool designed to reduce poverty and fix credit market imperfections. The evidence suggests that microcredit contracts may do more than reduce moral hazard and adverse selection by imposing new forms of discipline on borrowers. We find that, conditional on borrowing from any source, women with present-biased preferences are more likely than others to borrow through microcredit institutions. Another particular contribution of microcredit may thus be to provide helpful structure for borrowers seeking self-discipline.
February 2011
By Michal Bauer, Julie Chytilová, and Jonathan Morduch
Behavioral Foundations of Microcredit: Experimental and Survey Evidence From Rural India
We use experimental measures of time discounting and risk aversion for villagers in south India to highlight behavioral features of microcredit, a financial tool designed to reduce poverty and fix credit market imperfections. The evidence suggests that microcredit contracts may do more than reduce moral hazard and adverse selection by imposing new forms of discipline on borrowers. We find that, conditional on borrowing from any source, women with present-biased preferences are more likely than others to borrow through microcredit institutions. Another particular contribution of microcredit may thus be to provide helpful structure for borrowers seeking self-discipline.
