In the large microfinance markets of Asia, a common but seldom-discussed observation is that the microenterprises nominally tied to microcredit borrowing rarely grow substantially, especially after the first few years. There are many possible reasons to explain this, including borrowers’ simple lack of imagination, lack of management capacity, low profitability at scale, limited ability to hire trusted workers, risk aversion, lack of access to sufficient capital for productive growth investments, poor policy environments, and insufficient access to larger markets.
What role do financial institutions play? Making microcredit loans more flexible may help – though microfinance institutions worry that being more flexible may increase risk and costs. The lack of growth may also be due to competing household needs like childcare. Even if financial access makes a big impact at first, the long-run impact hinges on the extent of continuing gains
Read MoreLast week I caught up with David Roodman who was on his way to an NYU screening of The Micro Debt, a documentary on microfinance by Tom Heinemann. Heinemann sent me the DVD a while ago, but I hadn't watched it yet so I tagged along.
Heinemann is a muckraker, a trouble-maker, a Danish Michael Moore -- especially in the scenes where his camera crew tries to corner Muhammad Yunus (unsuccessfully) at an industrial fair in Spain.
The film is an unrelenting indictment of the microfinance sector, the Nobel Committee, and Yunus. Heinemann distorts and sensationalizes, and he does a grave disservice to Grameen Bank and Yunus. In a now-resolved matter, Heinemann accuses Yunus of massive financial improprieties involving a $100 million tax dodge. Worse, the film pins a series of borrower suicides on alleged strong-arm tactics of Grameen Bank . . .
Read MoreLast week, FAI asked: Does financial access--evaluated in typical settings with a long enough time horizon to see change--substantially improve the well-being of customers? Today, the series continues to probe for insights into the questions we need to ask in order to make informed decisions on how to improve financial access.
Question 2: How much does consumption smoothing contribute to the welfare of families?
There are clear theoretical linkages between consumption smoothing, financial access, and improved wellbeing. Modern economics is built around the premise that households seek to maximize utility, not income. A core economic task of a household, rich or poor, is matching the availability of resources with the timing of consumption needs. This task is especially burdensome for poor households who have to piece together uneven cash flows using a handful of imperfect financial tools. A key role of access to predictable, reliable and convenient financial services is thus be to smooth consumption . . .
Read MoreHigh quality evidence on the state of financial access around the world is advancing rapidly. A happy consequence of increasing knowledge is the ability to better recognize what we don’t yet know. Today, FAI is launching a series on the ten questions, some micro, some macro, that need answers if we are to make informed decisions on how to improve financial access. These questions will be available as a framing note at the end of the series on the FAI site and later as part of a collection of studies to be published in a forthcoming book.
Question 1: Does financial access--evaluated in typical settings with a long enough time horizon to see change--substantially improve the well-being of customers?
The most fundamental, unresolved question concerns impact. Does expanding financial access really make a notable difference to families and communities? And, if so, how and when?
Read MoreLow-income households are often trapped in a “debt-cycle”: They borrow to cover necessary expenses, repay the loan with their subsequent income, then borrow again because they have nothing remaining after repayment. Inconsistent income and seasonality, especially for farmers, makes borrowing attractive at the time of necessity. However, the associated interest costs may stifle the chances for the borrower to accumulate savings. Piyush Tantia from ideas42 discusses the case study, "Turning Interest into Savings," which describes the design, implementation and results of piloting a debt-to-savings product in India . . .
Read MoreThis is the second of three posts addressing the standard critiques of RCTs. In the last post I addressed the External Validity Critique. In this post I’ll take up the Transcendental Significance Critique—or put a different way, the “It doesn’t matter anyway” critique. In the final post in the series, I’ll discuss some of the problems of interpretation and implementation of findings from RCTs.
The Transcendental Significance Critiques takes several different forms. One is evident in my interaction with Eric Meade on the Stanford Social Innovation Review Blog. This version suggests that RCTs don’t effectively shed light on a grand epistemological view of poverty and social change (this is a different from a critique about theory-less RCTs, a different topic entirely). Another version suggests that RCTs are irrelevant because they cannot be used to measure what really matters—which isn’t foreign aid or charitable programs. In Angus Deaton’s version of Transcendental Significance Critique focuses on national policy and broad development initiatives which can’t be field tested. Philip Auerswald’s version keys on entrepreneurship and economic dynamism which he believes are the real drivers of development and change. Finally, there is a version of the critique which focuses on the static nature of any field experiment. The results of an RCT only tell you about a particular moment in time, and usually well after that moment in time has passed. This critique argues that the world is so dynamic that moment in time snapshots are not useful . . .
Read MoreWithin development and philanthropy circles, there seems to be a cycle of critique of randomized control trials in operation. Every few months a variety of posts and articles pop up discussing the limitations of RCTs attempting to make the point that RCTs are overhyped or at least substantially less useful than proponents assert.
For instance, Philip Auerswald, an economist at George Mason University who focuses on entrepreneurship, rehashed—though in slightly different form—some of the standard critiques this past week. After engaging in discussion in the comments on Phil’s site I thought it might be useful to address some of these common critiques in a more public and visible space.
The most important point to make up front is that RCTs do have limitations. They are by no means a perfect instrument even theoretically; there are also serious practical limitations in the way RCTs are deployed, reported and interpreted. The second most important point is that most of these limitations are shared by the alternatives to RCTs. I am most frustrated by critiques of RCTs that do not acknowledge this . . .
Read MoreU.S. poverty-watchers have long expected another uptick in the poverty rate, and on Tuesday the Census put numbers to that (correct) expectation: 46.2 million Americans fell below the federal poverty line in 2010, a full 15.1% of the population. That marks the third annual increase in the poverty rate. In 2009, 14.3% of Americans were in poverty; in 2008, 13.2% were.
For a real-world sense of what that means, consider that in 2010, the federal poverty line for a family with two adults and two children was $22,113.
This, of course, is the continued impact of the Great Recession. The recession may have “ended” in June 2009, but the unemployment rate is still at 9.1%. We are also now starting to see the waning effects of stimulus spending, which, according to the Center on Budget and Policy Priorities, managed to keep 4.5 million people out of poverty in 2009.
In other words, this story is going to be with us for a long while yet. And so we should be clear about what that story is . . .
Read MoreSome time ago, I had a conversation with a microfinance investor. What is the greatest challenge facing the sector? – I asked. His answer: multiple borrowing – multiple borrowing was getting people into too much debt; multiple borrowing was transforming micro-enterprise lending into consumer finance; and multiple borrowing was rewriting the traditional relationship between MFIs and their clients.
Of course, multiple lending is present in all of these cases. But thinking about multiple borrowing along these lines misunderstands the basic situation. Multiple borrowing isn’t a reflection of some recent or extreme developments to be ascribed to runaway growth, greed, or willing ignorance. Nor is it some foreign element to be excised from microfinance. No, multiple borrowing is an intrinsic part of the practice, one that has been with us for years. Nor, despite press articles to the contrary, is it a result of heavy market penetration, or even saturation.
This is a realization I came upon during a recent trip to Haiti . . .
Read MoreA lot of today’s research is focusing on tweaks to financial contracts and marketing with the aim to improve take-up and impact. The grail is big gains generated by small changes.
But big impacts often require much more than tweaks. That’s especially true for mobile money, in which scale and interconnectedness really matter.
Mobile money systems seek to create an ecosystem within which money is passed around and stored in electronic form. It’s hard to get such an ecosystem going, but M-PESA in Kenya shows us how once it gets big enough it can become a powerful snowball. Critical mass thresholds are associated with two types of transactions that are particularly problematic . . .
Read MoreDaniel Rozas reflected recently on the moral component of encouraging savings among the poor. As Daniel points out, Victorian efforts at “reforming” the poor generally couched saving or thrift as a moral question. That moral component isn’t often found in today’s discussion of encouraging savings.
It’s an interesting observation and worth thinking about. But while thinking about it, we should also consider the morality on the other side of the equation. Are there ethical concerns with encouraging savings? I can think of a few.
First, there is an issue that Daniel highlights: class imperialism. Put another way, how much should the wealthy be able to dictate to the poor how they live their lives? I think there are few who yearn for prior days when poverty was primarily viewed as the result of moral failings, failings which could be overcome by overseers all too often literally attempting to whip the poor into shape . . .
Read MoreI’m just beginning a year of much-awaited research time in Tokyo. I was planning to take a few weeks to settle in and lie low, but my eye was caught by an ambitious, bursting-at-the-seams new study, supported by Britain’s DFID and completed by independent researchers (Duvendack, Palmer-Jones, Copestake, Hooper, Loke, and Rao). The topic is one that I’ve written about often: “What is the evidence of the impact of microfinance on the well-being of poor people?”
Here are some thoughts, written during an early-morning round of jet lag.
The DFID study is a sprawl (17 appendices), obviously a major effort, and filled with technical observations. But I fear that it also will add confusion to a conversation that’s already muddled.
The biggest confusion focuses on the essential difference between
• Proving that something doesn’t work and
• Not being able to prove that it works.
In the first case, you’re able to rigorously show that the intervention makes no difference . . .
Read MoreIn the past few years, poor people are increasingly gaining access to financial services - to make payments and deposits - through the expansion of branchless banking. As researchers from CGAP, the Gates Foundation and other institutions have noted, partnerships between banks and other village based institutions such as post offices, retail institutions and microfinance organizations have played an important role in increasing the access to services to poor people living in low-density areas.
At Ashoka, we have seen an increase in another important force. Social entrepreneurs from different fields (education, health, etc.) are creating channels through which the poor can save. To achieve their social goals social entrepreneurs are often in constant contact with people in the villages and they develop strong network of trust and credibility - more so than other more traditional organizations such as small business or local government offices. In most cases, these branchless banking solutions are located in remote villages where there are no options for banks to partner with traditional branchless banking agents (for example, large retail chains or franchises or more traditional microfinance institutions) . . .
Read MoreThe idea behind APR – annualized percentage rates – is to put different interest rates into comparable terms. Some loans are for 2 months, say, and some for 2 years, so to compare them, it can be helpful to ask: “what would the rate be if the loan was for a year?”
Comparing apples to apples makes sense. Or at least that’s the financial industry/expert consensus.
Arjan Schutte is managing partner of Core Innovation Capital, a venture capital fund that invests in innovative financial technology aimed at the underbanked in the U.S. Arjan argues that APRs are misleading when it comes to short-term loans. Arjan points out that Americans took out $40 billion in pay-day loans last year (not including all the other types of short-term credit such as overdraft, pawn, etc.). Most of these loans are very short term, usually for emergency liquidity and a quick infusion of cash to meet short term needs. In that case, borrowers are thinking more about the dollar cost of the transaction than about the interest rate . . .
Read MoreThe Andhra Pradesh (AP) microfinance crisis looks set to drag on. In the wake of proposed national legislation to regulate microfinance across the country, the AP government has signaled that it will fight to maintain its current controls and limits on the industry.
Those limits have all but dried up microfinance in AP, a state which accounts for about 40 percent of all microcredit lending in India. I recently wrote a piece for the Harvard Business Review suggesting a way in which the AP crisis could negatively impact the global microfinance industry . . .
Read MoreWhich mechanisms would you put in place if you wanted to save more?
Suggestions are given at the tail-end of a recent UK study by the Personal Finance Research Centre. The researchers ran four focus groups and 30 one-on-one interviews with low income citizens in the UK.
Here are some of the ideas that the respondents suggested:
1. Seize the bits. Identify small, affordable amounts that can be saved while hardly being noticed in terms of one’s day to day standard of living. Bank of Amerieca’s “Keep the Change program” is one example from the US. "Portfolios of the Poor" has good examples from Bangladesh and India. It’s always great to get something for (nearly) nothing, and the big question is whether those small bits will add up to something meaningful quickly enough . . .
Read MoreExpansion of financial inclusion through savings has grown immensely as a focal point in microfinance policy and leadership circles over the past couple of years. Recent market crises where overindebtedness played a major role have only increased the urgency of this objective.
The focus isn’t unwarranted. As Tim Ogden points out in an earlier post, the upside of asset accumulation is obvious, while there’s no comparable risk of over-saving as there is with over-indebtedness.
Much research has been done to examine the savings practices of the world’s poor, with the implicit objective of developing better savings services. Some of the most enlightening findings come from Portfolios of the Poor, and from Stuart Rutherford’s work with SafeSave in Bangladesh. One interesting finding from this line of research suggests that expanding financial inclusion through savings doesn’t end with offering opportunities to save, but also requires creating obligations to save . . .
Read MoreMicrofinance, like every other area of finance, has proven itself vulnerable to hype and fad. The long cycle of hyping microcredit seems to finally have run its course (though enthusiasm for microcredit has proved remarkably resistant to reality before). But there’s a new darling of the microfinance world that’s taking over much of the enthusiasm formerly reserved for microcredit: savings.
Savings does have plenty going for it. It’s easy to understand and uncontroversial. Savings doesn’t have the moral baggage that lending and borrowing does. The downside of savings is hard to see. No family ever got caught in a “savings trap” or became “savings slaves.” Meanwhile the upside to accumulating assets is obvious . . .
Read MoreThe recent acquisition of the online bank ING Direct by Capitol One caused heated responses from some of ING’s 7.7 million customers. Their biggest fear was that Capital One would abandon ING’s labeled savings account option. The simple option allows customers to open and nickname additional savings accounts into which they can set up online automatic transfers and funnel money toward a specific purpose.
Top nicknames for ING sub-accounts include “savings,” “vacation,” “emergency fund/rainy day,” “house” and “taxes.” People can use this feature on the go, instantly opening a new labeled savings account from their smart phone when they decide they would like to start saving for something new, like “roof repair,” while they’re driving home in a hail storm, or a “wedding ring,” after a successful first date . . .
Read MoreI think the most important message from the raft of research on various forms of microfinance over the last two or three years is that we need to be fundamentally rethinking the products on offer. Many people have begun advocating for savings as the core product of microfinance and that’s certainly one form of rethinking. But just as important is to look at existing credit products to see if they can be tweaked to better meet the needs of clients . . .
Read More
