A recent Newsweek article praises the role of microcredit in disaster recovery. The piece singles out Fonkoze, the leading microfinance institution in Haiti, for their ability to get cash to its clients while bigger banks remained paralyzed. The article suggests that a new role for microfinance is to help economies respond to shattering tragedies like the Haitian earthquake.
The sentiment points to a larger insight: Microfinance can do more to help families respond to emergencies in general. Sometimes those emergencies arrive as a national crisis that affects hundreds of thousands of people. But more often, they are local. Sometimes the emergency is felt just by a single family in a community. It could be an illness that keeps a husband from working and putting food on the table because he can’t pay for medical treatment. Or it could be a bad harvest that means there’s no money to pay for children’s school fees. Research from financial diaries in India and Bangladesh shows that nearly half of the families surveyed reported a serious injury or illness in the past year. And in South Africa over 80% of families reported needing to pay for a funeral in the past year.
While the narrative of microfinance as small business finance still has currency, that’s too narrow a vision. We blogged recently about how Fonkoze recapitalized nearly 14,000 loans in the wake of the 2008 hurricane. It’s exactly this kind of flexibility that poor households need when faced with emergencies. Grameen Bank has built more flexibility into its notoriously standardized products. But why aren’t more institutions designing products flexible enough to work better with poor households’ uneven cash flows?
Read MoreThe blog over at the European Bank for Reconstruction and Development (EBRD)recently featured a post by Senior Economist Ralph De Haas, who describes a randomized evaluation of microfinance in Mongolia that recently completed fieldwork. Although analysis is ongoing, with full results expected in July of this year, data from the baseline is already providing interesting insights. Dr. De Haas points out three particularly interesting stats:
1. Almost half of the women in the study, who were identified to participate specifically because they were in need of access to finance, already had loans at the time of baseline. (46%)
2. Most women have long term debts-the majority of loans reported had been taken out in 2007-2008.
3. The majority of this debt (70-80%) was reported to have been spent on consumption, not business activities.
Read MoreIn this excellent post, Kate McKee highlights the intensive financial life of Hiram, a smart Kenyan entrepreneur with a thriving car rental business. Because one single institution cannot meet all his financial needs, Hiram has to patch together services from five different institutions.
He has five financial accounts, each for a specific purpose –
1. Loan from an MFI
2. Loan from another MFI
3. Business account at a large international bank only to cash checks
4. Savings account at another bank to deposit cash
5. Mobile account (M-PESA) to allow him to receive electronic payments and reduce the amount of cash he needs to carry around.
The evidence is mounting that poor households rely upon an array of surprisingly complex financial tools, and lead active financial lives because they are poor, not in spite of it. They create “portfolios” that leverage both informal networks and formal institutions to address their immediate and long-term needs . . .
Read MoreFunds investing in MFIs, commonly known as microfinance investment vehicles or MIVs, have grown dramatically in both number and size over the past several years. CGAP and Symbiotics report that there were 103 MIVs active in 2008, up from only 23 in 2000, and despite constraints imposed by the financial crisis their total assets grew by 31% in 2008.
At a recent panel discussion hosted by the Microfinance Club of New York, panelists offered their perspectives. One of the more provocative ideas concerned the fact that MIV investment is highly concentrated: one estimate is that only 250 of the roughly 10,000 microfinance institutions worldwide are “investable.” They are the large commercial micro lenders created primarily by downscaling banks and by the formalization of NGO lenders.
But another path to commercial scale is consolidation. In other words, if mergers and acquisitions increased in the microfinance sector, more existing institutions could become eligible for commercial investment. Commercialization is a well-documented trend in microfinance, and consolidation can’t be far behind. It could offer benefits to both institutions and borrowers.
Still, it raises one immediate concern. Microfinance institutions structured as NGOs tend to be smaller and more reliant on subsidized funding, but their average loan sizes are smaller. Usually, average loan size is interpreted as a proxy for the poverty level of customers, so if non-commercial micro lenders become scarce the supply of loans for poorer customers might dry up.
Read MoreThe recent tragedy in Haiti serves as a stark reminder of just how vulnerable the poor are in the face of emergencies. When crises hit, households often turn to family and friends for help, and the news stories from Haiti are full of inspiring stories of charity. But the news reports also bring home the fact that in large-scale disasters, like the earthquake in Haiti, it’s hard to rely on acquaintances, neighbors, friends, and family members. No one has much to spare.
There’s hope that microfinance institutions can help provide a path towards recovery and reconstruction, despite the devastation.
Fonkoze is the largest microfinance institution in Haiti and one of the most admired in the hemisphere. Following the earthquake, the organization’s response was immediate. Within a matter of days, all 41 of its branches in Haiti were operational, providing the opportunity for customers to make withdrawals and receive transfers from friends and family members abroad. Fonkoze also developed a Relief and Rehabilitation Fund, which will be used for a range of purposes including: “providing relief to staff members, opening an emergency operations center, delivering remittances, acquiring equipment and facilities, and assisting clients who have lost their business and homes.”
This is not the first time that Fonkoze has faced disaster . . .
Read MoreThe post was originally published as a guest post on the CGAP Microfinance Blog.
There’s a lot of debate about how best to regulate microfinance. Regulators face the tricky job of safeguarding the stability of the financial sector while simultaneously providing flexibility for institutions focused on the unbanked. Global evidence shows that even well-intentioned regulation and supervision can hamper the ability of institutions to reach poorer populations.
We don’t need more “best practices”. We need ways to think about tough and imperfect tradeoffs. At the Financial Access Initiative, we’ve been wrestling with how best to help policymakers navigate these decisions. We turned to regulatory expert David Porteous to lead the effort. In a new series of Policy Framing Notes, he sums up the tradeoffs that policymakers face, outlining the “regulator’s dilemma”.
The first Policy Framing Note in the series looks at the tradeoffs regulators encounter in trying to encourage healthy forms of competition. Porteous’s focus is on “access enhancing” competition—competition that balances the interests of the individuals (microcredit borrowers, in this case), the institutions that serve them, and society as a whole.
Part of the regulator’s dilemma is that encouraging competition can increase the pressure on microfinance institutions
Read MoreIn 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.
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