How do you entice low-income families to save? One of the great innovations at Bank Rakyat Indonesia (BRI) was to give people a chance to win prizes if they held savings in the bank's SIMPEDES account. Getting lottery coupons proved far more popular than getting interest. The idea flew in the face of the traditional view that families are always risk averse. The SIMPEDES success helped show that families could be averse to the risk of big losses—but simultaneously risk-loving over small bets. BRI implemented the idea in 1984, and it's now morphed into a tenet of behavioral economics . .
Read MoreMicrofinance without the MFI? Zidisha tests the boundaries of microlending methodology
What does a microlending operation look like? Well, it may be a bank or an NGO (and many others in between), it probably has some branches, branch managers, loan officers. The funding of the MFI may come from deposits or from debt, whether from a local or foreign institution, including from online platforms such as Kiva. There may be variations on these themes, but that pretty much describes microlending as we know it.
What if you took all that away – the branches, the loan officers, the institutional funders? Could the lending still work? Well, one model is that of Zidisha, an online lending platform that connects lenders in (mostly) developed countries with borrowers in developing ones. And, unlike Kiva, the connections are real – borrowers create their own online profiles, post their own loan applications, and make their own repayments. They also post their own comments, as do the lenders. There is no local MFI intermediary – it is literally the first true person-to-person (P2P) microfinance lending platform in the world (Disclosure: I am lender on Zidisha, and have been informally advising the organization for several years).
Naturally, getting there has required a lot of innovation and experimentation . . .
Read MoreDoes the Standard Microcredit Model Work Without Growth?
One of the central questions of microcredit—the question that shut the poor out of access to credit for so long—is “why would the poor repay?” As Esther Duflo and Abhijit Banerjee pointed out in my recent interview with them. This is still a substantial mystery that has not been fully answered. To quote Banerjee, “These are desperate people with lots of financial demands. People in the family are sick, people lose jobs, the daughter needs to get married…but 90 percent repay. What is going on?”
One of the proposed, partial answers to the question is that microcredit has provided a reliable and growing source of financing. In other words, if you repay, you are virtually guaranteed to get another, larger loan.
As David Roodman and I were (virtually) discussing the scenarios in which the crisis in Andhra Pradesh could cause damage to the industry worldwide (see my post, David’s post on his blog, and my comment on his post), it occurred to me that, to date, the miraculous microcredit business model seems to only have experienced growth. As we all know, business models that look fantastic during rapid growth often turn out to be incapable of surviving in times of slow growth, much less recessions and shrinking markets . . .
Read MoreRemembering 2 Pay
There’s a lot of excitement about mobile banking. So much excitement that it’s easy to forget that mobile phones can be used for other purposes—like contacting people. That might be corrected by a new paper on using text messages to remind people to repay loans. The study is by Ximena Cadena, a research analyst at Ideas42, and Antoinette Schoar, a professor at MIT’s Sloane School. It follows on a recent study by Dean Karlan, Margaret McConnell, and Sendhil Mullainathan that shows that savings rates rise when people are sent text messages simply reminding them to save. Cadena and Schoar instead remind people to pay their monthly loan installments.
What makes their study especially interesting is that they compare the impact of a monthly text message reminder (timed to be received just before installments are due) to other kinds of interventions. One alternative is getting a hefty cash bonus for repaying on time. Another is a reduction in the interest rate of their next loan . . .
Read MoreEradicating poverty and the Buddhist dilemma: An Interview with Dean Karlan
Is there a sure-fire solution to eradicating global poverty? The experts generally fall into two camps: those who believe what is needed is more money in more places; and those who think that too much has already been spent too inefficiently and ineffectively, requiring a new and smarter approach to aid. Hence the Buddhist dilemma that Dean Karlan and Jacob Appel allude to in the introduction to their new book, More Than Good Intentions: How a New Economics Is Helping to Solve Global Poverty. Karlan, a development economist at Yale and co-founder of FAI, and Appel, a researcher at Innovations for Poverty Action, founded by Karlan, argue that there is a third way ---combining behavioral economics with rigorous evaluation. Their new book takes readers around the globe –where economic theory collides with real life – and offers a new way to understand what is working (and not working) in the fight to reduce poverty. FAI talks to Dean Karlan.
Solving poverty—checking your preconceptions at the door . . .
Read MoreThe world’s #1 MFI is getting smaller
The last decade saw an incredible expansion of the microfinance industry, reaching 190.3 million borrowers in 2009. In 2007, in the heat of this expansion, Forbes Magazine named Bangladesh’s ASA as the top microfinance institution worldwide. In his book The Pledge, Stuart Rutherford describes ASA’s moves to maintain successful development outreach and profitability simultaneously. At the time, ASA was one of the few institutions with a clear claim to truly achieving the “win-win” promise of microfinance.
We just received ASA’s 2010 Annual Report. The report marks two interesting trends since 2007. First, the number of loans and members served are declining. But, second, the total loan disbursement and average loan size are increasing . . .
Read MoreIs there a business case for microinsurance?
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 MoreContrasting Two E-payment Success Stories: PayPal and M-PESA
PayPal 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 MoreAlternative Credit Scoring: How Excited Should We Be?
Over 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 MoreThinking Seriously About Governance
The 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 MoreDoes microinsurance provide value to clients and their families?
This 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 MoreA Call for Better Language
You 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 MoreFive takeaways from the Microfinance USA 2011 Conference
This 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 MoreNot That Handbook of Microfinance
Joanna 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 MoreDocumenting Divides
Philadelphia, 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 MoreGift Cards as Tools of Financial Inclusion
Timothy 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 MoreMicrofinance'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 . . .
Read MoreProduct 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).
Read MoreSavings 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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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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