In a recent column, Nicolas Kristof of the New York Times advocated donating to BRAC, one of Bangladesh’s oldest microfinance organizations. But at a recent U.S. Committee on House Financial Services hearing, Damian von Stauffenberg, chairman of MicroRate, argued against putting donor money into the microfinance sector, saying that donations dilute the MFI’s entrepreneurial drive, lead to inefficiency and lower the quality of operations.
Von Stauffenberg’s fears aren’t unreasonable. Much of the excitement around microfinance stems from the possibility of achieving massive scale through highly efficient operations. And as microfinance moves toward a model of increasing commercialization and focus on sustainability, profitability has become one benchmark by which to measure institutions. But there is a time and a place for donor money, provided it comes in the form of “smart subsidies.”
The idea behind a smart subsidy is that subsidies are neither inherently useful nor inherently flawed. Rather, their effectiveness depends on how they are designed and deployed. There are several concrete ways in which subsidies can help increase the scale of microfinance, and open access to commercial funds and outreach.
First, they can help multiply scale by “crowding in” additional capital. . .
Read MorePulling off this securitization was no small feat. Two of the elements of this deal that make it so important are the experience and rigor of the participants. That experience translates into hard-thinking about the details of the contract. For that reason, it's especially worth drawing out the key details that make the deal work.
The fact that IFMR Capital is putting their some of their own money on the line is a big deal. It does two things. 1) It reduces risk for other investors directly by absorbing losses beyond the "first losses" absorbed by the microfinance institutions themselves. 2) It means that IFMR Capital should have an ongoing interest in trouble-shooting problems that might arise with the micro-lenders. If I were an investor, those 2 facts would help me sleep much better at night.
Alex at India Development Blog has a really nice post in which she addresses the concern that "Diversification doesn't help in the case of economy wide problems." She writes:
"It is certainly true that diversification doesn't help in situations where the entire economy is affected. However, given the short tenure of these loans it would require a sudden large shock to the economy to lead to high defaults . . ."
Read MoreWhat do you think would make you more likely to save—being paid a higher interest rate or the social pressure of making a public commitment to save more and then having your peers monitor your progress? A new paper from Felipe Kast and Dina Pomeranz (hat tip to the CMF folks for blogging it first) finds that while both strategies help to increase savings, the peer commitment mechanism comes out on top...
Read MoreJonathan Morduch discusses the challenges of living on $2 a day with Geoff Dabelko of the Woodrow Wilson Center.
Read MoreHave the lessons from the financial crisis been fully absorbed by the microfinance sector?
IFMR Capital recently announced its first multi-originator securitization, the first such securitization in microfinance (that I know of). As compared to previous securitization transactions, which involved loans from only one microfinance institution, this transaction combined 42,000 loans from four microfinance institutions. This securitization was highly rated by Crisil, one of India's leading ratings firms for microfinance...
Read MoreChris Blattman did a nice job of highlighting some of the more interesting presentations from AEA. I would add two more...
Read MoreIn catching up on my blog reading after the holidays, I lingered over Rich Rosenberg’s post on whether microcredit is squeezing out moneylenders. In it, he refers to a Wall Street Journal article on the rapid expansion of moneylending in India, and returns to the nagging question of whether this new availability of credit is leading to overindebtedness...
Read MoreIn his useful assessment of microinsurance schemes, Paul Mosley proposes the idea of “quasi-insurance” – the provision of risk-protection through non-insurance routes such as loans and savings in markets where microinsurance is lacking or insufficient. Mosley purports that “in every case where a choice has to be made concerning choice of risk management strategies it is desirable to assess whether such non-insurance options may offer a lower-cost or more effective method of protective the poor than microinsurance.”
Read MoreWhat do we do now that two impact studies from the Philippines and India say that microfinance isn’t such a big deal after all? The Microfinance Working Group at Columbia took on this question in a panel on “Taking stock of microfinance: Does it really help the poor.” An ambitious topic to cover in one hour, but the panelists did a commendable job...
Read MoreResearch on charitable giving by IPA President Dean Karlan and Research Affiliate John List is mentioned in Ian Ayres' review of the new Superfreakonomics...
Read MoreIt’s no secret few MFIs have had much success mobilizing the “poorest of the poor” into their programs. This failure has remained a persistent irritant in an otherwise phenomenally successful industry.
Microfinance advocates have generally taken one of two approaches to the problem...
Read MoreA recent article by Daniel Rozas pondered the existence of a microfinance bubble in South India. Rozas crunched the numbers and concluded that, in some areas, microfinance borrowing has overreached capacity. Rozas’s doesn’t have data on household finances, so he’s extrapolated from regional aggregates. The story is worrying, but he doesn’t nail it.
Read MoreThe organizers of this year’s 5th International Microinsurance Conference, held last week in Dakar, wisely included “Providing health insurance to the poor” as one of the main themes. Health events - whether they are unanticipated emergencies, or even foreseeable events like giving birth - are among the main financing challenges for poor households. When you’re living on $1 or $2 a day, better health financing mechanisms have the potential to make a huge difference. Too often, they’re literally life and death issues.
Read MoreFAI just published a new paper that reveals that 2.5 billion adults worldwide do not have a savings or credit account with either a traditional (regulated bank) or alternative financial institution (such as a microfinance institution). And nearly 90% of the financially unserved (2.2 billion) live in Asia, Africa, the Middle East and Latin America.
Read MoreIt’s been great to see business school faculty take an interest in microfinance. Gabriel Natividad of the strategy group at the Stern School of Business at NYU just published an interesting new paper that links asymmetric information, third-party credit ratings, the price of credit and the operations of microfinance institutions (MFIs). Empirical evidence on information problems lags behind theory and practice, so the paper’s especially welcome...
Read MoreMeet Jacques. He’s the Kiva Coordinator at WAGES, a microfinance institution (MFI) based in Togo, West Africa. Every day, a loan officer hand-delivers a stack of borrower information forms and a USB chip full of photos. Jacques has trained the officers how to fill out the forms, use digital cameras, and get borrowers to smile and display their merchandise proudly for pictures.
Jacques formats the pictures, writes the information into paragraphs, and uploads everything to Kiva’s website...
Read MoreWith the global financial crisis still rippling across front pages of newspapers around the world, it may not seem like the moment to further open the doors to the financial system. But this gets it backward. As experts focus on shoring up financial regulation, this is precisely the moment to simultaneously craft a new financial framework that expands access to the billions of people who are currently unserved...
Read MoreLast year's financial crisis caused many people to lose their already tenuous faith in financial institutions and the role they play in supporting the various functions of an economy.
This view of finance in the life of an economy is paradoxical to the one we hold about finance in the lives of low income households. The microfinance industry, and our work here at FAI, rests on the belief that access to well-designed financial services is critical for the economic and social development of poor families...
Read MoreEverywhere in the world, people both rich and poor struggle to save and invest for tomorrow rather than splurging on the things they want today. From text messaging reminders, to providing piggy banks, to giving away little motivational presents, IPA investigates ways to help people meet their financial goals and avoid temptation. However, Research Affiliates Abhijit Banerjee and Sendhil Mullainathan have a new paper that suggests we may need to rethink the economics and psychology of temptation.
Read MoreIt is a difficult and not particularly fruitful debate when different sectors important to economic development are pitted against one another in the quest for donor attention. Lasting development progress usually encompasses many areas, and debates that fail to recognize this are often just distracting. Some of the more interesting (and no less heated) debates are waged once a specific sector of focus or growth constraint has been identified.
For example, once we have decided that education is crucial, how do we act upon this decision?
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