Last month brought a flurry of opinions on postal banking in response to a new proposal that the US Post Office offer financial services – including bill-pay, check cashing, even small loans – to the “financially underserved.” Reactions have ranged from enthusiastic to deeply skeptical. This post highlights two key questions that have been posed and synthesizes some of the answers offered up so far.
Would the underserved consumer actually benefit?
Some say yes. There’s evidence that the Postal Service’s financial products would be able to reach people who are “significantly poorer, older, less educated, and less likely to be employed” than those who bank at formal financial institutions according to CGAP, citing a 2013 Findex report which found that as much is true in other countries with postal banking . . . Read More
There's a new piece in Foreign Policy magazine which takes a tough look at Jeff Sachs and the Millenium Villages Project--not in regard to results or interventions, but in regard to evaluation. The project was always pitched as a demonstration of a "different" approach to ending poverty that could provide a blueprint for addressing poverty globally.
As the piece explains--citing FAI's founder Jonathan Morduch, FAI Affiliate Michael Clemens, Ted Miguel from UC-Berkeley and Nancy Birdsall from CGD, among others--that is no longer a realistic option. The project wasn't structured to allow for the kind of rigorous evaluation that would give it credibility as a demonstration or a justification for scale-up. While it seems there is now an effort to do more rigorous evaluation, for most aspects of the project it is simply too late to establish the comparisons and baselines necessary for credible claims of impact . . . Read More
You might think that the people who show up to a conference called Microfinance USA would know what the word microfinance means, but as journalist Adam Davidson pointed out during one of the plenary sessions at last week’s event, there is still a battle about what exactly is and isn’t microfinance. The context for that comment was an internationally focused panel discussion about the differences between commercial and not-for-profit lenders. Yet, it’s easy to imagine plenty of other divides. Is lending to small and medium enterprises microfinance? And where does microfinance stop and consumer finance begin?
The question isn’t trivial. Language not only expresses thought, but also shapes it—not to mention goals, definitions of success, and the boundaries of regulation. When Davidson made his comment, the members of the panel had plenty to say. One suggested that microfinance be rebranded. Compartamos co-founder Carlos Danel heartily disagreed. The chance to redefine the conversation, he argued, has passed.
That’s probably true—at least in the developing world . . . Read More
As a quick follow-up to Meredith's post, I wanted to add a few additional thoughts.
Meredith mentioned that "at IPA, we always strive to conduct research in a way that identifies not just whether an isolated solution works, but why it works, so that we gain information about what was causing the problem in the first place.' The majority of IPA's projects involve randomized evaluations in the developing world, and we have been able to replicate similar evaluations in various contexts in order to understand the local factors that play a role in a program's impact. While individual randomized evaluations may be criticized for their external validity, the replication approach helps to address that concern. Ultimately, numerous points of light shine through and we begin to develop a holistic perspective on things.
Which is not to say that randomized evaluations are the only way to go about things; but they play an integral part in the development of functional problem-solving systems. This is something that top-down development advocates would do well to take note of. For instance, development theorists are constantly on the lookout for the "right" institutions. As Banerjee (2008) observes, the institutionalist literature is still unclear as to what sort of institutions need to be encouraged, with few reliable policy prescriptions having emerged. If you subscribe to the thinking of seminal institutionalist thinker Douglass North, institutional change is overwhelmingly an incremental one. Alternatively, you could subscribe to the original Shock Doctrine that advocated inter alia rapid, wholesale change.
Although I don't quite subscribe to all the rhetoric of shock doctrine critics, I think there is enough reason to believe that institutional change should be an incremental process; after all, when we barely know what institutions truly work, how could we advocate system-wide changes? Read More
Innovations and financial services for the poor
David Cracknell of MicroSave wondered if there have been significant changes in how people manage their money over time, and made specific references to the impact of the Mzansi accounts in South Africa. Daryl Collins noted that Portfolios researchers revisited the original South African diary households in 2009, five years after the first financial diaries on these households, to see how they might have changed their financial behavior in light of both Mzansi and the broader Financial Sector Charter that required financial services to become physically closer to poor households. Daryl provided some of their key findings, including:
• A 22% increase in take up of new banking services – most were new accounts opened by people who already had accounts, but in rural areas, the number of unbanked adults was driven down from 42% of the sample to 21%.
• Higher saving as a percent of monthly income (i.e., the amount put aside from monthly income): about 19% of income in 2004 compared with 27% of income in 2009 (perhaps reflecting a real median increase in income per capita of 8%).
• Comparisons between 2004 and 2009 of the same sample of households showed: Much higher use of bank accounts, much higher accumulation of savings in bank accounts, and slightly higher balances held in bank accounts.
Daryl concluded that this data suggests that we must expect that often changes in financial behavior come in shifts in the financial portfolio and not a wholesale abandonment of a particular device or practice, and this is likely to happen fairly slowly over time, and directed readers to the www.finmark.org.za website for more information on the study. Read More
Mechanisms to Manage Money – continued Read More
• During the course of the research, it was seen that higher dependence on informal means was seen more in urban settings than rural in spite of higher and more regular incomes due to factors like mobility of clients, lack of secure tenure etc. The challenge is to figure out how to mitigate these risks so as to ensure supply of formal financial services to these customers.
• Informal mechanisms though used widely have a risk of monetary loss associated with them and in the past experience; the losses as a percentage of savings have been significantly high.
• Chris Linder wondered about the non-financial methods the poor use to manage risk and queried as to whether there were ways in which MFIs could package non-financial risk mitigation services to the clients along with financial services. Peter cited the experience of construction savings banks in Europe and mentioned that formal financial intermediaries may indeed have a role in providing linkages between the financial and non- financial sector.
• The presence of MFIs in the geographies studied varied widely. In South Africa they were absent, in India the presence was limited and in Bangladesh they were present in most of the respondent households. Even where they were present, they were seen as one among the many options available to clients rather than as ‘The’ financial service provider.
• Some respondents mentioned Post Office savings schemes as a formal savings option available to the poor. But as evidenced by the diary households, this option was suited to relatively better off clients than the poor though the accessibility was quite good especially in rural areas. The constraint was the lack of flexibility in the product and the inability to leverage it for short-term credit requirements.
Mechanisms to Manage Money
We started off the discussion by noting that in all three countries where the research for the book was done, the households interviewed were using a mix of formal, semiformal and informal tools and both saving and borrowing so as to manage their cash flows – though there were regional differences in the amount of usage of each depending on specific characteristics of the market. Anup Singh then shared his experience from the Philippines of the poor using multiple mechanisms to manage their money and remarked that these tools are used by them for “ensuring continuity (of business and life) and for hedging risks.”
Larry Reed directed the discussion to the relative merits of formal, semi-formal and informal financial tools. The forum noted that though there were several shortcomings in informal tools, they had a lot of insights to offer the formal sector and that the formal sector could improve upon product offerings of the informal sector.
Peter van Djik queried whether borrowings and savings are considered indistinguishable by the clients . . . Read More
If you only read one critique of the recent microfinance impact "statement," it should be Chris Dunford’s over at Freedom from Hunger. We’ve taken the liberty of excerpting our favorite parts for you and explaining why exactly we agree.
First, Chris says of Freedom From Hunger’s own experience with serious impact research: “The results…have validated some of our claims and failed to validate others. We are challenged to embrace the revealed weaknesses and to reflect with our practitioner partners and take action collectively to make important improvements in our products and services.”
We wholeheartedly agree that taking evaluation more seriously can help MFIs improve what they’re doing. We’ve pointed to BASIX as another good example of an organization that has used evaluations as a powerful force for constructive change in the way it offers financial services to the poor.
“The recent research studies in India and the Philippines seem to conform to best practices of credible impact research, so let’s accept the results for what they are, which are mostly positive and realistic.”
Yes. Microfinance is not the answer to ending poverty as we know it—nor should it be . . . Read More