This is a guest post from Aparna Dalal, independent consultant and former FAI Director of Special Projects.
If you are studying or working in the field of microinsurance, the annual International Microinsurance Conference, jointly hosted by the Munich Re Foundation and theMicroinsurance Network, is the place to be. The 6th installment of the conference was held in Manila last week. This was the third conference I’ve attended, and in many ways, the most interesting one. While challenges remain, various organizations are successfully implementing innovative products and processes. Below are four areas of development that I found particularly interesting . . . .
Read MoreThis is the third post in our Microfinance 101 blog series. The purpose of the series is to help non-practitioners and people in general who are interested in microfinance to understand various aspects of the field. This blog deals with microinsurance.
Microinsurance is a financial tool that helps poor households mitigate risk and plan for the future. It enables them to cope with unpredictable and irregular incomes, while also preparing them for financial emergencies that threaten their livelihood. One of the major problems faced by poor households is that due to low and unpredictable incomes, they lack a financial cushion. Living so close to the margin means that it doesn’t take much to push them over the line from poverty to destitution. When you live on less than $1 or $2 a day, an unexpected trip to the doctor or a bad harvest can quickly become a catastrophe. Microinsurance offers a way for poor households to manage risk and deal with the ups and downs of life.
So why doesn’t everyone use microinsurance?
Read MoreWe're tweeting a chapter-by-chapter review of SKS founder Vikram Akula's new book A Fistful of Rice: My Unexpected Quest to End Poverty Through Profitability. Follow us on Twitter for the bottom line on each chapter.
Read MoreThe microfinance situation in South India has put the industry into crisis management mode. David Roodman offers today's update.
Last week, I spoke to one of the most respected analysts of microfinance in India, and he argued that the sector was now "too big to fail". Roodman cites Daniel Rozas who warns that we ought to at least think about what failure might look like.
All of this has brought up the specter of the US subprime meltdown. Misaligned incentives?
Read MoreThe Bill and Melinda Gates Foundation has been at the forefront of the pack in pushing for better access to savings accounts for poor households. A new paper from Jake Kendall helps us understand why access to better ways to save is such an integral part of financial access and building financial security. He lays out the challenges faced in establishing the 'impact' on households of increased access to savings instruments and then hypothesizes about the impacts that one might expect from improved access to savings instruments. These include the creation of useful amounts of cash, as a hedge against unforeseen disasters and as a useful buffer to help smooth daily consumption expenditures. He highlights the pros and cons of formal versus informal savings tools, comparing them along the dimensions of privacy, accessibility, reliability and the risks and costs of each. The note describes experiments undertaken by other researchers to investigate the impact of different types of savings products among individuals and the impacts on women in particular . . .
Read MoreWelcome to Microfinance 101 at the FAI!
If you're interested in microfinance, but don't necessarily want to learn about graphs, differential equations and statistical techniques then you have come to the right place. We will regularly be posting blogs that explain the core principles of microfinance.
This week's blog is a basic introduction to the subject of microsavings.
When we think about poor people and the role that microfinance plays in their lives we tend to think of microcredit, or small loans. But there’s another financial service that is as equally important to the poor: savings. You might be surprised that people living on $1 or $2 a day are able to save, but they can, and they do . . . .
Read MoreIt may seem callous to segment people living on under $2 a day—there’s no doubt these people are poor—but its an important thing to do. The daily realities of life for someone living on less than a dollar a day are quite different from someone earning $1.75 a day. Income also doesn’t capture the whole picture. Assets, in the shape of anything from furniture to jewelry to land to livestock, or the lack thereof play a big role in the daily quality of life of people living under the $2/day threshold. That’s why within the microfinance community there is a distinction between the poor and the ultrapoor. While there are many different definitions that vary by country and culture, you can think of the ultrapoor as women-headed households (often widows) with little or no land or livestock who earn under a $1 a day. Microcredit has never been a good product for the ultrapoor, who unlike those slightly higher up the ladder are close to living hand-to-mouth.
BRAC, an NGO commendable for its commitment to monitoring, evaluation and research, created a program to target the ultrapoor with the hope of helping them “graduate” into microfinance clients. The BRAC ultrapoor program involved, among other efforts, transferring assets (such as livestock), cash transfers, education (such as health/hygiene, animal husbandry, financial literacy) and assistance with building savings. The results of BRAC’s ultrapoor program have been promising, prompting the replication of the basic model in 10 different contexts, with assistance from CGAP and the Ford Foundation.
Results of evaluations from two of those replications in India (programs run by Bandhan and SKS Foundation) were presented at the conference. Both of the programs were explicitly modeled on the BRAC program.
Both programs showed encouraging gains for the beneficiaries . . .
Read MoreWe featured the perspectives of some of the conference organizers on Day 1’ s highlights. Here are some additional perspectives on Day 2:
Jonathan Morduch, Financial Access Initiative
1. As Rich Rosenberg pointed out there is good reason to be concerned that over-indebtedness is a real problem. At this point, though, we don’ t have a good definition of how much debt is too much for different clients, much less data. As a result, we're flying blind. I think Rich’ s presentation could be a Nouriel Roubini moment for microfinance.
2. There are a lot of puzzling things about the behavior of borrowers and how their businesses do or don’t grow . . .
Read MoreIndia is the biggest, fastest-growing microfinance market anywhere. And it's at risk of hitting a bad crisis. This will be surprising if you haven't been paying attention to the global press for the past 3 weeks. The last big microfinance news from India centered on the millions of dollars earned by investors following the SKS IPO. Vinod Khosla made the front of The New York Times for his $100 million plus pay-day.
Just a few weeks ago, most of the who's who of microfinance in India got together for a conference in Mumbai. The agenda gives no sense of what the rest of October would bring.
But a spate of suicides by microfinance customers, in response to alleged harassment by microfinance loan collectors, has turned attention back to conditions in villages -- and it's not all pretty. Regulators are now rushing to clamp down on microfinance institutions.
Shloka Nath has the best piece I've read, online today in Forbes India . . .
Read MoreNew data shows M-PESA is now reaching most of the poor, unbanked, and rural populations in Kenya – and measurably improving their lives.
M-PESA is a mobile-phone based electronic payment and store of value system which in just over three years has managed to acquire 57% of the Kenyan adult population as customers, and who between them do more money transfers domestically than Western Union does globally. Though money transfer services and savings accounts are nothing new, M-PESA’s real innovation is that customers can deposit and withdraw cash at any of 20,000 stores – that’s 20 times the number of bank branches in the country!
Many in the field of financial inclusion believe M-PESA has potential as a development tool because it significantly lowers transactions costs for intra-family remittances, commerce, utility bill payments and government welfare transfers and because it has the same functionality as a basic bank account, giving it great potential to expand financial inclusion . . .
Read MoreCredit risk is a reality for banks around the world. It is even a fairly predictable reality, if sometimes ignored (Exhibit A: Present dynamics in the US). Banks often know what percentage of their loan portfolio is at risk and they price that risk through higher interest rates for riskier clients, among other ways. Microfinance institutions (MFIs) do not have the same luxuries. They lack the information about their clients necessary to differentiate, they already get enough flak about their “high” interest rates, and they are constantly fighting to keep operations costs low, a difficult task if you increase complexity. It’s no wonder, then, that low client default rates have become a kind of holy grail for microfinance providers. When you feel powerless to change so much of what you do, its useful at least to have a clear measure of commercial success.
And yet, could the rigidity of the typical micro-credit product be partially responsible for the fact that access to credit has limited, if any, income effects for micro-entrepreneurs?
Read MoreAnother great summary blog on last week's Microfinance Impact & Innovation Conference by Laura Starita over at Philanthropy Action:
What We Don't Know About Microfinance
by Laura Starita
Both days one and two of the conference were largely dedicated to communicating the results of recent impact studies—i.e. what we “know” in microfinance. Yet the first session of Day 2 took a step back to discuss what we don’t know, but should. Panel participants were Chris Dunford from Freedom from Hunger, Rich Rosenberg from CGAP and Abhijit Banerjee from JPAL.
Chris Dunford spoke first, giving a thoughtful presentation that effectively amounted to a distillation of the disadvantages of RCTs for practitioners. He called for a broader focus on evaluation and not just impact studies. Evaluation, in his mind, is the practice of answering definitional questions (What do we mean by microfinance?); value questions (Are the poor overindebted? Are interest rates too high?) and decision making questions (Why don’t policy makers and donors consider the results of RCTs when making funding decisions?) as well as impact questions (Does microfinance improve the lives of the poor?).
Read MoreChris Dunford from Freedom from Hunger opened, arguing that as well as continuing to churn out the impact studies, we also need to be thinking about how we measure and evaluate the quality of delivery. A good intervention might just be delivered badly, especially if it is an innovative intervention which is new to the implementer. We also need to think harder about using qualitative data.
Richard Rosenberg of CGAP made the case for focusing on the potential losers from microfinance. We know that there can be heterogeneous impacts. What if a positive impact on average masks some serious negative consequences for a few? Is this acceptable? We need to learn more about over-indebtedness.
Abhijit Banerjee (MIT) posed the puzzle:
Why is there low borrowing and low business growth when we find that the returns to capital are so high? Perhaps the most persuasive argument is for non-linearitiesin business growth. There may be high returns to capital at the margin, but they could drop dramatically as firm gets even a little bigger. Alternatively, already overworked individuals simply might not want to spend even more time building a business.
David Roodman emphasized the importance of qualitative research and how much we have learnt from Portfolios of the Poor. He also noted the limitations of only measuring one to two year impact. Imagine if we had done an RCTon home mortgages in the US in 2002/2003 and found great short-term impacts. That would not tell the whole story.
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In the second session, Erica Field took a look at small business loans in the US, and how they differ fromtraditional microcredit loans. Loans in the US are typically more flexible with grace periods, which increases business growth but also default. An experiment with microcredit clients found that offering grace periods made them behave more like small businesses in the US – there was more investment and business growth, but at the cost of more default.
Does financial education work?
Read MoreHighlights of the first day according to the leaders of the sponsors of the conference:
Dean Karlan, Innovations for Poverty Action:
1) The results presented from the ultra-poor programs of SKS and BRAC were very exciting. They show that you can have an impact on the poorest of the poor.
2) The results of the studies on savings and insurance were also very encouraging. These programs continue to show that they can have measurable positive impact in a very short time frame.
3) The studies of the impact of credit continue to show that there are benefits but they are harder to find and weaker.
Read MoreThe emerging answer seems to be similar to the answer to the question: "Does Aid Work?" It depends.
We just finished up the first panel session at Microfinance Impact 2010, moderated by Jonathan Morduch, and with presentations by Dean Karlan (Yale and IPA), Abhijit Banerjee (MIT), Esther Duflo (MIT), Carlos Danel (Compartamos Banco) and Tanguy Bernard (Agence Française de Développement).
Dean Karlan began by setting the scene, describing the remarkable “audacious to humble” transformation of claims about microcredit. From the magic bullet for fighting poverty, to merely lifting millions from poverty, to raising consumption, to just helping the poor cope, to not doing any of that but allowing for greater freedom and empowerment.
Why do we care about measuring impact? For three reasons . . .
Read MorePeople often find it hard to save money, the poor no less than the better off. Human nature plays its role, of course: it is hard to save for some intangible future when our wants in the present are so concrete. But the poor also lack convenient and inexpensive mechanisms to save. So what could happen if we remove those barriers?
“There are two interrelated challenges in getting viable savings services to the poor,” says Jake Kendall, microfinance program officer at the Bill & Melinda Gates Foundation. “The first is that the poor live too far away from bank branches, and the second is that their deposit levels are too small to make it cost-effective for banks to serve them. So our guiding light has been to promote business models that simultaneously extend geographic outreach and dramatically lower the cost of dealing with the poor. To date, mobile applications have promisingly done both those things.”
Read MoreQuestions of fairness and consumer protection in finance do not always have clear answers. The consumer’s perspectives on transparency, fair treatment and rights are at least as important (and much less well-understood) as the provider’s, and yet banks need to cover costs and achieve repayment if they are going to build sustainable businesses. How can the needs of both sides be balanced? Is it realistic to expect MFIs and their associations to protect clients, or is outside “enforcement” needed, whether through regulation or investor pressure?
“We are preoccupied, and understandably so, with expanding access to finance, but if we want to be driving to long term benefits we need to focus on quality as well,” says Kate McKee of the Consultative Group to Assist the Poor. “Do the clients know what they are getting? Is the product designed in a way that it is sensitive to their particular circumstances? Is it good value for money?"
Read MoreFor those of you who followed the story of Hamid and Khadeja, the Bangladeshi couple introduced in Chapter 1 of "Portfolios of the Poor", we have an update on them from Stuart Rutherford’s recent visit to Bangladesh. We are excited to learn the couple is healthy and their household finances appear to have become further diversified and formalized.
The family is very much together and still living in Dhaka but in better housing. The second son is now eight, in school and well. Hamid seems to have put his poor health behind him and is still driving an auto-rickshaw (natural-gas powered these days). His income is up, as is Khadeja's. It is Khadeja who has changed the most: she is much more
self-confident and is running a very busy one-woman sari-selling business. Between them they now earn about 14,000 taka a month ($199 USD) – considerably more than in 2000 and 2005. At market rates the four of them are now earning per capita $1.68 a day, or $4.28 PPP . . . .
Read MoreWe're live-blogging the Innovations for Poverty Action/Financial Access Initiative Microfinance Conference 2008.
Ever since micro-credit entered the popular imagination as a “silver bullet” poverty intervention, there have been lots of assumptions about what it accomplishes for the poor: Micro-loans alleviate poverty; They allow poor people (especially women) to start businesses and become financially self-sufficient; They correlate with increased spending on education for children and health care, etc.
The reality is that there has not yet been a controlled trial on the impact of the standard microfinance product – a small loan given to a group of women who meet together weekly for repayment. Put another way, all of the above-mentioned “received facts” about what is accomplished by giving people access to small lines of credit have been based on anecdote. The reality is that no one knows what impact, if any, micro-credit has on the lives of the poor . . .
Read MoreThe vast majority of microfinance programs -- particularly group lending efforts -- explicitly target women. This focus grew in part out of the belief, supported by some research, that women are more likely to invest in the household as a whole, particularly in the children. Given that, what can we do to improve women’s financial self-sufficiency, either through employment, entrepreneurial success or thoughtful risk management tools?
Barbara Magnoni, President of EA Consultants, a development consultancy that advises on microfinance product design, thinks we could start by taking a more differentiated view of men and women as microfinance customers . . .
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