Timothy Ogden: The Year in Financial Access

Since the assignment for a round-up of the year from my perspective was broad, I’m going to take full advantage, stretching this to financial access from microfinance and adding a few things which have a somewhat tenuous connection to this year. I’ve tried to mainly stick with writing about events, rather than events themselves (no doubt revealing my personal biases), but a few events snuck through.

1.    Due Diligence: Could anything other than David Roodman’s multi-year, incredibly thorough and supremely careful public examination of microfinance top this list? While he began writing before 2011 and the book won’t be published for another month or so (though you can order it at a 25% discount now), this is unquestionably the writing that happened this year that will be remembered and referred to longest. Due Diligence is already part of the canon in the field. Like Portfolios of the Poor, I don’t think anyone who hasn’t read Due Diligence can legitimately claim a serious interest in microfinance. 

2.    U.S. Financial Diaries: speaking of Portfolios of the Poor, this year saw the launch of U.S. Financial Diaries project which is bringing the financial diaries approach that shed such light on the financial lives of the poor in developing countries to the US. It’s shameful that such work to understand how the poor manage their financial lives hasn’t already been done. Thankfully this year that tragic gap in our knowledge began to be closed. I fully expect the results to be as eye-opening and paradigm shifting as the work that led to Portfolios of the Poor.

3.    Entrepreneurial Finance Lab moves beyond pilot phase: another important beginning this year is the announcement by Standard Bank (of South Africa) that its pilot test of the EFL methodology for making small business loans was so successful that it is expanding the program across Africa. Standard says it expects to make $60 billion of loans using the methodology over the next…This is a huge step forward for financial access for the “missing middle” of businesses in the developing world, businesses whose access to credit has long been constrained for lack of low-cost and reliable methods of making loan decisions. 

4.    How are borrowers in Andhra Pradesh coping?: I’m still aghast at how little coverage coming out of the AP crisis has focused on how borrowers are coping with the dramatic decrease in the availability of microcredit. I expected MFIs, at least, to be pushing this story relentlessly. If microcredit is such an important tool for borrowers to manage their financial lives, how are they managing without it? It seems to me we could learn a great deal about customer needs and improved products from carefully studying how households are re-ordering their financial lives. Unfortunately the vast majority of the coverage has been about the impact on the MFIs, not on their clients. The one major exception that I know of is this report from MicroSave that surveyed 76 groups of borrowers and found, unsurprisingly that many were turning to moneylenders and daily finance corporations (which, for instance, make loans against gold jewelry). I hope more reports of this type will be forthcoming soon. 

5.    Moving beyond the M-Pesa hype: MicroSave is also the source of another important study released this year, this one on the use of M-Pesa. Similar to the study in Andhra Pradesh, this one is focused on how customers of M-Pesa are using the system. Paired with a report from Microfinance Opportunities that uses the financial diaries approach to track transaction into and out of M-Pesa, this year we got a very good picture of how M-Pesa is actually being used from a financial access standpoint. While there has been a great deal of excitement of the potential of mobile banking to provide financial access and the rapid adoption of M-Pesa, moving from mobile transactions to a full set of mobile financial services is a big step. These reports show that few, if any, are taking that step—and a lot more work is needed. I’ll be blogging these reports in more detail soon.

6.    Microcredit research goes out with a bang?: In 2010 the narrative about microcredit began to change with the release of several high quality impact studies and the beginning of the crisis in AP. In 2011, we got a comprehensive report on microfinance impact studies completed as of the end of 2010 from CGAP, IPA, J-PAL and FAI that broadens the view considerably, taking a look at not just impact but product design and alternative products (such as savings and insurance). But the biggest bang on the research front in 2011 was over a research paper more than a decade old: Mark Pitt and Shahidur Khanker’s 1998 study that claimed a significant positive impact of microcredit on poverty. Jonathan Morduch and David Roodman had tried and failed to replicate Pitt and Khandker several years ago, calling into question the validity of the original research on which so many claims for microcredit’s impact had been based. Pitt finally responded this year pointing to errors in Morduch and Roodman’s attempt at replication (and his response spurred a significant debate led by Martin Ravallion of the World Bank about research methods and dissemination approaches). That response allowed Jonathan and David to more closely examine the original Pitt and Khandker study and find additional problems, the most significant of which is that the entire Pitt and Khandker result is due to 16 borrowers (out of more than 5000) who did extremely well. With that clarification, the Pitt and Khandker finding lines up well with the current crop of studies of the impact of microcredit on poverty. But this skirmish which resolves the question of how to interpret the first serious attempt to define the impact of microcredit may be one of the last. 

This summer, Berk Ozler and David McKenzie of the World Bank posted the results of a survey they conducted of assistant professors of economics. One result was that these young professors feel that microfinance has achieved more than its fair share of attention in recent research on development economics. That suggests that the number of studies on microcredit to debate may well decline precipitously soon (though another microcredit impact study conducted in Mongolia has just been released and finds a significant and positive increase in consumption and the creation of microenterprises).

Timothy Ogden is an executive partner at Sona Partners, the editor in chief of Philanthropy Action, and co-author of Toyota Under Fire. FAI invited Mr. Ogden 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 Susan Davis, Mary Ellen Iskenderian, Jake Kendall, Elisabeth Rhyne, 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.