When Dr. Martin Hintz of Allianz asked industry stakeholders gathered in Manila in November 2010 for the 6th Munich Re Foundation and Microinsurance Network Annual Microinsurance Conference if their microinsurance programs were profitable only a handful of the hundreds of practitioners in the audience raised their hands.
Why were there so few positive responses? Microinsurance is widely assumed to have great potential to be profitable for insurers and delivery channels, but we know little about when a business case actually exists. Like microcredit, microinsurance is often seen as an opportunity to tap into a large new market at the base of the pyramid. Under what circumstances can the unique and often costly challenges faced by microinsurance in product design, marketing, delivery, and claims administration be overcome? The MILK project is attempting to answer these questions.and help gain a better understanding of when and how a business case for microinsurance exists for insurers and delivery channels..
Read MorePayPal and M-PESA are two major successes stories, each an example of new e-payments systems taking root in the last decade. The early development of PayPal is described vividly by an insider in PayPal Wars, and my colleague Dan Radcliffe and I have attempted to categorize the reasons behind M-PESA’s success in a World Bank case study. Their design and contexts are vastly different –developed versus developing countries, banked versus unbanked customer segments, e-commerce versus remittance applications— but they share two major similarities.
The first similarity is that they both had a very specific function and powerfully targeted the proposition. At PayPal’s inception, the main case was thought to be P2P (person to person) payments, with the typical scenario being friends settling the dinner tab with each other (one person puts the meal on their credit card, the others just email him their share of the bill). Then PayPal discovered that its service was being used to pay for goods on online auctions, of which eBay was the market leader. PayPal recognized that eBay had the capacity to drive viral growth, since a few thousand sellers advertising the availability of PayPal payments could promote the service with millions of buyers. PayPal was therefore able to devote all their marketing and product development efforts to make business easier for eBay sellers, a nicely compact set of super-users with defined needs. PayPal positioned itself as the friend of the micro-seller . . .
Read MoreOver the past few years, U.S. lenders and credit bureaus have become enchanted with the notion of alternative credit scoring—the process of looking at non-traditional accounts to determine a person’s creditworthiness. It’s no longer just about how well people pay off their credit card balances and mortgages, but also their rent, electricity, insurance, and phone bills, even their day-care accounts.
Industry folk like to cast this development as a great way to bring people with no or paltry credit histories into the financial mainstream. At a recent conference, an Experian V.P. proudly stated that by taking into account rent payments, the credit bureau is able to generate credit scores for 87% of the people it otherwise wouldn’t be able to. At first blush, this is indeed an exciting development, especially since adding rental data generally improves the credit scores of people who already have them. . .
Read MoreThe heated debate about non-profit and for-profit microfinance institutions stretches back for years. It’s truly time to put that debate to rest—not because it has been resolved but because it is limiting a more important conversation about proper governance arrangements for microfinance: the question of who oversees management and in what manner.
The idea that for-profit or non-profit status is determinative in the future course of a firm, what customers it serves and how is so overly simplistic as to be laughable. There are responsible and corrupt for-profit organizations and responsible and corrupt non-profit organizations. What determines the course an organization takes over the long term—whether it hews to a vision of serving the poor or pursues profit above all else, whether it flexibly adjusts to changes in markets and contexts or becomes hidebound and irrelevant, whether it maintains a commitment to a long term vision or shifts like the wind with fads of the day—comes down to the governance arrangements that are put in place after the choice of profit status . . .
Read MoreThis post is the first of a two-part series by Michael J. McCord, Project Director of MILK and the President of the MicroInsurance Centre, and Emily Zimmerman, a Research Associate at MILK. Part 2 will cover address the business case for microinsurance.
Do clients really benefit from microinsurance? Microinsurance, a younger sibling of microcredit is in a relatively nascent phase, yet it has caught the attention of governments, donors, practitioners and even investors worldwide with promises of helping people manage risks and reduce the financial burden when a shock occurs. However, poor people have been using a wide variety of both formal (such as credit, savings, and cash transfers) and informal (burial groups, family and community networks) tools to cope with risk for ages. The Microinsurance Learning and Knowledge (MILK) project seeks to understand what, if anything, microinsurance adds to these other tools. Our first step in this process consisted of clearly defining value and conducting a landscape review of existing studies that have asked questions about value. The process showed that we actually know quite little about the value microinsurance has for poor clients. Over the next three years, MILK will implement original and collaborative research to begin to fill the many gaps that remain in our understanding of value . . .
Read MoreYou 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 MoreThis week the Microfinance USA 2011 conference took place in downtown Manhattan. It was buzzing – not thanks to the old guard like me, but because so many younger people are doing so much interesting work. There were lots of sessions running in parallel, and I couldn’t see more than a fraction, so here are 5 highly-selective take-aways.
1. Folks working on the international side and the domestic side have more to share with each other than ever. Why? The international side has moved beyond the focus on Grameen Bank-style micro-credit to support micro-enterprise. Even Grameen Bank has moved beyond that (most notably, they’ve become a deposit institution big-time: the last figures I saw showed them taking in $1.47 in savings for every $1 they lent). That puts focus on a wide range of new financial ideas, from mobile telephone banking to insurance. The U.S. side is also engaged in new uses of technology and ideas that are more about banking than traditional microfinance (credit scoring, debit cards, etc.) Maybe the most interesting thing about the conference was how little it actually had to do with traditional microfinance – and that turns out to open up lots of wide-ranging conversations . . .
Read MoreJoanna Ledgerwood’s Microfinance Handbook is a great resource on institutional and financial perspectives, still full of insight even though 2011 marks its 13th birthday. Ledgerwood is at work on a new volume, this time from the demand side, and it’s eagerly anticipated.
While we wait for that, we’re happy to see a very different Handbook of Microfinance just published, edited by Beatriz Armendáriz and Marc Labie. Among their affiliations, Armendáriz and Labie are part of CERMi, a leading microfinance research center, located at ULB in Brussels . . .
Read MorePhiladelphia, Mississippi has come a long way since 1964, when members of the Ku Klux Klan murdered three idealistic young men for investigating the burning of a black church, a tragedy that fueled pressure to pass the Civil Rights Act of 1964. Visit Philadelphia today, as members of the U.S. Financial Diaries team recently did, and the topic of conversation is just as likely to fall to economic struggles as it is to lingering racial tensions.
Eastern Mississippi is no economic backwater. Companies are investing, and banks do steady business. But while racial divides were once the clearest obstacles, parents today worry about economic opportunities and pitfalls. Check cashers, pawn shops, and car title lenders operate a few blocks from bank branches. Citizens work hard, but jobs for unskilled workers often pay poorly and offer limited benefits. Even as racial divides ebb, economic divides run deep.
How does that translate into the financial lives and decisions of individuals?
Read MoreTimothy Ogden is an executive partner at Sona Partners, the editor in chief of Philanthropy Action, and co-author of Toyata Under Fire. He also blogs at HBR and SSIR.
At a conference I attended recently, one of the founders of M-Pesa noted that the expansion of mobile payments beyond Kenya has been disappointing. While policy makers in many countries wrestle with the proper regulatory regime for mobile payments, it’s worth looking at some other non-traditional forms of payments and transactions and contemplating the useful role they could play in financial inclusion.
Take for instance the recent announcement that Gift Card Mall is expanding from the U.S. into hundreds of retail outlets of Office Depot and Comercial Mexicana. If you’ve been through a grocery or pharmacy in the US in the last year you’ve probably seen Gift Card Mall—it’s a simple display of dozens of different branded gift cards . . .
Read MoreIn 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 . . .
Read MoreA 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).
Read MoreIt 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 . . .
Read MoreIn 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.
Read MoreIf 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 . . .
Read MoreBehavioral 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 . . .
Read MoreMicrofinance 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 . . .
Read MoreIgnacio 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.
Read More"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 . . .
Read MoreOn 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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