Microfinance's Critical Questions with Carlos Danel

In 1990, Carlos Danel and Carlos Labarthe co-founded Compartamos—which means "let's share" in Spanish—to provide poor residents of Mexico with access to economic opportunities. At its inception Compartamos was a nonprofit organization serving mainly indigenous rural women in some of the poorest regions in Mexico. The company has since evolved into a commercial bank. While some are critical of the company for what they believe is its emphasis on profits over social returns, our research into microfinance and social investment provides a  more nuanced response to the criticism. Nonetheless, there’s no denying Compartamos’ impact on the region. It is currently one of the largest microcredit institutions in all of Latin America with more than 600,000 clients . . . 

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Week of May 12, 2011

Product Design for the Poor: Emergency (Hand) Loan

A growing body of research on the economic lives of the poor in developing countries emphasizes that the already difficult task of making do on a few dollars a day is made harder still by the unpredictability and variability of poor peoples’ incomes. Thus, it comes as no surprise that emergencies can derail families and prevent them from getting ahead. The Financial Access Initiative, ideas42 and the International Finance Corporationrecently released a product case study on this problem, which focuses on the design, implementation, and results of a pilot emergency (“hand”) loan product in India. The product achieved its original intent, but the pilot encountered considerable institutional and execution challenges. The experience generated lessons for future product innovation. It’s a fascinating case study that underscores the value of behavioral economics in helping us shape programs and products. Read the new paper: Emergency (Hand) Loan (March 2011).

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Week of May 9, 2011

Savings and the Poor

It is estimated that 3 out of 4 adults in developing and middle income countries don’t have bank accounts. Only about 10 percent of the 2.5 billion people living on less than $2 per day have access to a bank account. Nonetheless, researchers have confirmed that poor people actively save in cash and through informal mechanisms, but these tools do not always meet their needs. Research from Portfolios of the Poor shows that over the course of a year, a typical poor household in Bangladesh, India or South Africa uses no less than four and typically closer to ten types of financial instruments. Savings accounts are in high demand by poor people though the formal banking sector has been unable to serve them for a variety of reasons including cost. However, research has suggestedsafe savings options help people to manage emergencies (like illness) increase investment in livelihoods, and empower women . . . 

 

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Week of April 29, 2011

Our weekly round-up of what we've been reading online:

Does Microfinance Work?

In the past, the microcredit movement was driven by inspiring stories, but today donors and investors increasingly see the importance of measuring impacts. In order to credibly establish program impacts, having control groups is central, and the development of randomized controlled trials (RCT) is moving methodological possibilities forward. 

Some of the most well-known researchers in the RCT field include, Abhijit Banerjee and Esther Duflo, who just released their new book Poor Economics this week, and Dean Karlan, who co-wrote the recently published More than Good Intentions with Jacob Appel. The findings from their RCTs are central to the stories told in both these books.

Nonetheless, after 30 years of microcredit and the rise of randomized trials, we still don't have an impact evaluation that is ideal, but we're getting closer.

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Week of April 22, 2011

Lots of articles and blogs worth looking at this week. Everything from Milford Bateman’s take on why microfinance isn’t working to how the Mexican government built rigorous impact evaluation programs into its policy processes. Check it out and please add any must reads we missed via comments.
•    How We Choose--Looking at household healthcare choices in the U.S. and India 
•    IRIN Asia: Microfinance institutions pushed loans, admits BRAC 
•    "6 microfinance crises that the sector does not want to remember" at Microfinance Focus
•    Behavioral Economics and Microfinance: A Review of the Literature 
•    “Yunus’ unceremonious removal from Grameen Bank does Bangladesh no favours” says Barun Roy at the Business Standard  
•    "Has the microfinance bubble really burst?" Guest blog by Milford Bateman
•    The case for microfinance: responses to Milford Bateman from Malcolm Harper and Thankom Arun 
•    CNNMoney.com, “In developing economies, equity beats microfinance”
•    CGAP series on savings: The Power of Successful, Market-led Savings Mobilization 
•    Indian Banks Seek Personal Guarantees from Microfinance Executives for Debt Restructuring
•    Miguel Székely explains how the Mexican government built rigorous impact evaluation into its policy process 
•    Andhra Pradesh government may start its own microfinance institution as a channel for credit to SHGs 
•    “The microfinance industry under the microscope” in The Globe and Mail

How We Choose--Looking at household healthcare choices in the U.S. and India

If you live in the U.S. or another developed country, chances are the life you lead is very different from that of a poor villager in India—but the way you make important choices may not be. Recent findings from a study by the Robert Wood Johnson Foundation and the Harvard School of Public Health demonstrate that in the U.S., familiarity trumps data when it comes to picking a hospital. In other words, Americans are more likely to frequent a hospital they or someone they know had an experience with, than a hospital formally recognized for better quality. Interestingly, FAI research in India shows similar results. The study “Can Insurers Improve Healthcare Quality?” reveals that when provided with information on who is the best quality care provider by their MFI or microinsurer, clients still supplement this information with information from informal sources.

Another interesting parallel: Based on evidence demonstrating that the uninsured have worse health and higher mortality than the insured population in the U.S, you might be surprised to learn that the uninsured do not necessarily receive worse quality of healthcare (see page 9). FAI research found the same to be true in our India study—that healthcare insurance status is not significantly associated with better quality care for patients . . . 

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Behavioral Economics: A Review of the Literature

Behavioral economics exists at the intersection of psychology and economics, and gets at the heart of how people make decisions. The study of behavioral economics in microfinance has become increasingly important as economists, philanthropists, banks, non-profit organizations, and others seek to understand how the poor make choices that impact their financial health and well-being, as well as to understand how to serve them better. 

Many people have been introduced to behavioral economics through popular books like Jonah Lehrer’s “How We Decide," Malcolm Gladwell’s “Blink” and Thaler and Sunstein’s “Nudge” —books that examine how individuals make decisions ranging from what brand of ice-cream they buy, to which candidate they vote for.

Similarly, there have been a number of influential studies in microfinance that warrant a review . . . 

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Week of April 14, 2011

Great reading this week—a new paper from Jonathan Conning and Jonathan Morduch, an interview with Jane Wales of the Global Philanthropy Forum, an op-ed debate between Professor Bhagwati and The Sunday Guardian's Zafar Sobhan, and more. Add any important links we missed via comments. 

Microfinance and Social Investment -- A New Report

Microfinance aims to accomplish two difficult goals at the same time: to create meaningful social impacts and to give investors a decent return on their money. The success of microfinance rests with getting the balance right. Fortunately, not all investors demand high financial returns, and not all demand high social returns. That diversity of preferences among investors gives room to maneuver. The crises in microfinance emerge when the balance between doing good and doing well gets too far out of whack.

“Microfinance & Social Investment” is a new research paper from  Jonathan Conning and Jonathan Morduch. The paper begins with controversial debates currently facing microfinance, but the authors’ larger goal is to describe a framework for understanding the roles of social investment and commercial investment. By putting a corporate lens on microfinance, the study explains the rationale behind high interest rates, the difficulties serving the poorest markets, and the differences between non-profit versus for-profit microfinance institutions . . .

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Week of April 8, 2011

Making Peer Incentives Work for Savings

Ignacio Mas is Senior Advisor in the Financial Services for the Poor team at the Bill & Melinda Gates Foundation.

Savings is about making sacrifices today, and that’s easier to do if you are clear on the reward that awaits you. Thus, savings products can be made more relevant for people if they are linked to a tangible goal: paying school fees for the children, buying a bicycle to cut down on commute time, investing in fertilizer at planting season. Savings products that remind people they are saving for a specific purpose are likely to see more savings take-up.

Can we extend the notion of individual savings goals to community-level goals? Imagine a bank opening a new outlet in a rural area and announcing that when the whole village saves a certain amount, it will do something to benefit the whole community: re-paint the school, purchase medical supplies for the local hospital, build a new football field for the youngsters. 

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Targeting the Ultra Poor

"Half the World is Unbanked" for the first time presented data proving that more than 2.5 billion people (half the world’s adult population) don’t have access to a bank account. Many of these individuals fall into a category we typically call “the poorest of the poor.” In the past five years, FAI and other researchers have set out to find out if this population can be helped—and how. 

Those making less than $1.25/day have been called the “ultra poor.” They are members of society who face a series of constraints and deprivations that distinguish them from the general poor. Research now indicates that most microfinance institutions serve poor and lower-income customers, but not the poorest . . . 

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Response to Pitt’s Response to Roodman and Morduch’s Replication of…, etc.

On Sunday night, Jonathan Morduch and I learned second-hand that Brown University economist Mark Pitt had circulated a paper via blast e-mail that challenges our replication of Pitt and Khandker, which was for a decade the leading study of the impact of microcredit on poverty. Here’s the abstract of the new paper:

“This response to Roodman and Morduch seeks to correct the substantial damage that their claims have caused to the reputation of microfinance as a means of alleviating poverty by providing a detailed explanation of why their replication of Pitt and Khandker (1998) is incorrect. Using the dataset constructed by Pitt and Khandker, as well as the data set Roodman and Morduch constructed themselves, the Pitt and Khandker results standup extremely well, indeed are strengthened, when estimated with Roodman’s cmp program, after correcting for the Roodman and Morduch errors.”

History has repeated itself. Back in 1999, Pitt wrote a similar response to Jonathan’s original attempt to understand Pitt and Khandker . .  

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Week of March 31, 2011

There’s some great reading this week on behavioral economics, mobile banking, over-indebtedness, microinsurance and more. Check it out and if you would like to make an addition to the list, please do so via comments.

Week of March 25, 2011

Lots of interesting articles and events this week. Check it out and please add any additional links that you think are important via comments.

Week of March 18, 2011

Here’s what we’ve been reading over the past two weeks! Feel free to add any that you think are missing via comments.

•    More evidence for the link between microfinance and health. 

•    An overview of econometric approaches to measuring the impact of microfinanceand FAI’s Jonathan Morduch’s response to the paper.

•    David Roodman also reminds us that there is no clear evidence that microfinance reduces poverty and references a paper co-authored with FAI’s Morduch.

•    Timothy Ogden on the downside of microfinance’s focus on women and girls.

•    Elisabeth Rhyne at CFI-ACCION on 3 microfinance industry efforts to raise standards.

•    13 key institutions in microfinance industry sign open letter supporting Muhammad Yunus. 

•    David Roodman offers 5 angles on the Grameen/Yunus microfinance scandal that the media haven't covered.

•    National India microfinance law might nullify repressive Andhra Pradesh one.

•    Good overview of what’s happening in Indian microfinance from the Indian Development Blog.

•    How do the poor get by in Malawi? 5 million data points from new financial diaries.

•    Measuring cross-indebtedness - new evidence from Latin America.

•    Half of Americans Lack Financial Safety Net.

•    Playspent asks: Can you make it through a month, tapped out and unemployed? Try it, you’ll be surprised by the results.

•    Even economists can be fashionistas. Portfolios of the Poor co-author Daryl Collins profiled in Elle magazine.  

People Keep Asking: Does Microfinance Alleviate Poverty?

We've been reading a new summary of the literature on microcredit impacts. The paperreviews technical issues using technical language, so it's not the paper I'd read first as an introduction unless you're doing a PhD in Economics or something similar. 

The paper covers terrain familar from The Economics of Microfinance, 2nd edition, but offers an independent review (with a couple of helpful summary tables at the end). The paper comes to similar conclusions as Armendariz-Morduch, so there will be no surprises if you've read the book. If you haven't read the book, the paper offers a smart synthesis.

Here's my summary of the state of play: After 30 years of microcredit and the rise of randomized trials, we still don't have an impact evaluation that is ideal yet, but we're getting closer. One big lesson on which we can all agree (or should all agree) is that flawed evaluations can be seriously misleading (due to self-selection, attrition, and non-comparable control groups). So getting the details right matters . . . 

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