If there’s one microfinance word that rose above all others in 2011, it’s overindebtedness. As of the time of writing, it racks up the highest count on CGAP blog’s tag cloud (not counting generic terms like “microfinance”). It seems fitting, then, to start 2012 with a blog post on this very subject.
When we talk about overindebtedness, it usually comes for the perspective of the industry’s responsibility, whether the MFI, funders, or regulators. Prevention of overindebtedness came up as the most widely evaluated client protection principle in the Smart Campaign’s survey of social rating agencies and microfinance investors.
This is, of course, all right and proper. It is the industry’s job to practice responsible lending, and avoiding overindebting clients deserves a place at the top of that agenda. But no matter the level of diligence on the part of lenders and financial education provided to clients, some borrowers will still become overindebted – be it because of bad business decisions, destabilizing macroeconomic shifts, or simply a string of bad luck. So what becomes of clients that, despite best efforts, still become overindebted?
Read MoreExpanding financial access can be a beautiful thing, but how people understand and make use of financial tools deeply matters, too. Acknowledging the importance of financial literacy has become quite the trend in microfinance circles, even if folks aren’t entirely sure of how best to approach the subject.
Jonathan Morduch and I recently wrote a white paper for the McGraw-Hill Research Foundation about the state of financial literacy—and attempts to improve it—in the U.S. While the consumer finance landscape is, of course, quite different in the U.S. than it is in the developing world, many of the lessons we draw are applicable to other pockets of the world. After all, if people in a country where high-quality, low-cost financial products tend to be plentiful so often make foolish decisions about money management and financial planning, there clearly must be more complicated dynamics at play . . .
Read MoreSince the assignment for a round-up of the year from my perspective was broad, I’m going to take full advantage, stretching this to financial access from microfinance and adding a few things which have a somewhat tenuous connection to this year. I’ve tried to mainly stick with writing about events, rather than events themselves (no doubt revealing my personal biases), but a few events snuck through.
1. Due Diligence: Could anything other than David Roodman’s multi-year, incredibly thorough and supremely careful public examination of microfinance top this list? While he began writing before 2011 and the book won’t be published for another month or so (though you can order it at a 25% discount now), this is unquestionably the writing that happened this year that will be remembered and referred to longest. Due Diligence is already part of the canon in the field. Like Portfolios of the Poor, I don’t think anyone who hasn’t read Due Diligence can legitimately claim a serious interest in microfinance . . .
Read MoreWhat has been the biggest event in the financial inclusion space over the last year?
The shift in the field’s thinking to recognize the poor’s deep need for payments capabilities on par with other financial needs.
A year or two ago, had you polled the financial inclusion field and asked whether they thought that a person to person money transfer service (like M-PESA) would have a significant welfare benefit for poor households, on par with credit, savings or insurance, the majority would have said “no.” Most would have said that a mobile money type service is important for the potential to enable the other financial services, and may be somewhat useful to the extent it lowers the cost of moving money around, but would have said it’s not likely to be all that effective in improving household welfare in meaningful ways . . .
Read MoreAs CEO of a global microfinance network I spent much of 2010 answering questions about the crisis in India and advocating for the continued relevance of microfinance as a model. This year’s challenges, however, gave me an opportunity to talk about theessential role of transparency and good governance and the importance of building on a deep understanding of client needs to tailoring products to fit those needs.
While the crisis dominated the media for much of the year, it would be regrettable if we didn’t acknowledge some of the important positive developments in the last 12 months. As an organization focused on increasing women’s access to financial services, we at Women’s World Banking (WWB) have a few things to cheer . . .
Read MoreCritics of microfinance have knocked down an army of straw men in recent years, and 2011 was no different. But it’s high time for microfinance practitioners to stop being defensive. We know enough about the perils and potentials of poverty-focused microfinance to address the real needs of the poor.
Early champions, including Sir Fazle Hasan Abed of BRAC, Mohammad Yunus of Grameen and Ela Bhatt of India’s Self-Employed Women’s Association, recognized that financial services alone would not be sufficient to break the bonds of poverty. Critics of microfinance became more shrill in 2011, but as a recent article in The New Republic points out, “the growing backlash is in danger of overcorrecting.”
Going into 2012, the microfinance field faces three key challenges . . .
Read MoreI for one am glad this year is over. Maybe, as the Washington Post suggested today, first prize for the worst year goes to the U.S. Congress, or maybe it goes to the government of Greece. But it was no picnic for microfinance. This was the worst year for microfinance since forever – at least since it was called microfinance.
This year the microfinance sector got hit with three whammies. The first was the crisis in Andhra Pradesh, where rapid loan growth created overindebtedness that triggered a political backlash that is still sending ripples through microfinance in India and beyond. The second was the news from impact research challenging the efficacy of microcredit in moving people out of poverty. The third whammy is the rise of “financial inclusion” making electronic payments innovations and mobile banking the new darling of donors and policy makers, and relegating microfinance to the status of legacy.
I watched the industry coming to terms with these challenges throughout 2011 . . .
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. That's why FAI launched 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.This is the seventh installment of the 10 Research Questions on Improving Financial Access series.
Question 7: Can the expansion of microfinance add up to macro impacts?
The most basic question is the micro one: whether microfinance typically yields notable impacts on the lives of low-income families. The logical follow-on is, to the extent that micro impacts emerge, how do those impacts add up? Is there a reasonable case that expanding microfinance can make a dent in regional or national economic growth rates? In national-level poverty rates?
Read MoreThis is the third (and I hope final for a while) post in a series on the standard critiques of randomized control trials (RCTs). The first post examined the External Validity Critique; the second took on the Transcendental Significance Critique. In both, I suggested that while the critiques aren’t invalid they are typically overblown and rarely acknowledge that other evaluation approaches carry the same or similar challenges.
In this post, I want to lay out what I think the advocates of RCTs, including myself, could be doing better to maximize the short and long-term impact of RCT-based studies and of the movement itself.
First is to dial up the humility. I’ve argued elsewhere that the greatest threat to aid and charity is overpromising and inflated expectations . . .
Read MoreLast week, Innovations for Poverty Action’s SME Initiative brought together researchers and practitioners to discuss recent research on SMEs (Small and Medium Enterprises), mostly in the developing world.
Why the growing interest in SMEs? Partly it’s a reaction to the murky results on the impacts of microfinance. Evidence is increasingly suggesting that microenterprises do not tend to grow much and their impacts on income and consumption are up for debate. Against that, supporting SMEs may be a more effective way to provide jobs and reduce poverty.
Given that, what struck me most about the conference is not what was discussed, but what was not discussed. Many big-picture questions that underlie the focus on SMEs were not explicitly raised . . .
Read MoreThe evidence on financial education has, to date, not been encouraging. As Cole and Zia write in Chapter 14, being financially literate clearly helps, but the value of financial education is a different question. We know the desired outcome (literacy) but not a reliable way to get there enough of the time, nor is it clear that literacy is enough. Behavioral economics teaches us that consumers also need ways to implement ideas, especially when temptations and distractions are difficult to keep at bay.
Intuition that improved financial decision making through training would have powerful effects is strong, and there’s some evidence in that line (e.g., Karlan and Valdivia 2011). So where exactly are existing financial literacy programs going off track? Is it curriculum? Is it delivery? Is it context?
Read MoreIn developed economies, households often use both savings and borrowings to produce large amounts of capital to buy fixed assets like houses and vehicles. House buyers, for example, make a down-payment from their savings and borrow the rest. Saving and borrowing are thus complements in this context.
Behavioral economics provides another mechanism through which saving and borrowing act as complements: for households that are loathe to draw down their hard-earned savings, the ability to borrow–and thus to leave their stash of savings untouched—can function as a helpful way to maintain accumulations. Were households more confident in themselves, or if they had better mechanisms to achieve discipline, “borrowing to save” would be less useful, but in an imperfect world it can be the best of an array of imperfect strategies (Morduch 2010).
In other contexts, borrowing and saving are depicted as alternative activities . . .
Read MoreCredit is just one useful financial service, but credit has been the first focus of microfinance institutions because there’s a business model that makes lending possible, not because it is necessarily most important for customers. Customers pay handsomely for access to credit. Regulations also often make it much easier to lend than to take deposits (since the risk rests with the lender).
Saving programs have emerged, and some advocates now claim that deposit services deserve claim to being the most fundamental need for poor families – and for the poorest specifically. But the picture developed by Collins et al (2009) pushes against that view. We argue that a range of financial devices are sought and used together, with different degrees of substitution and complementarity. None have clear primacy . . .
Read MoreIf micro-businesses tend to stay micro, perhaps there are better options? Critics of the hoopla around microcredit suggest that job creation is better done by larger enterprises (e.g., Karnani 2007). The rush to support small and medium enterprises (SMEs) has been given attention by the G-20 countries and is tied in part to the idea that SMEs can contribute to the goal of poverty reduction by employing low-skilled workers. But can they? It’s an empirical question which has been met with little evidence so far.
Bauchet and Morduch investigate data on the employees of SMEs supported by BRAC Bank in Bangladesh. Their conclusion is that these employees are far more educated and skilled than microcredit borrowers; in line with this, SME employees come from households that are considerably less poor on average. And they tend to be men, while microcredit borrowers in Bangladesh are mainly women. In sum, the two groups – SME employees and microcredit borrowers – look very different in the Bangladesh surveys. Will these kinds of results hold up elsewhere, particularly in Latin America and Eastern Europe where the gender and education profiles of microcredit borrowers is different from that in South Asia?
Read MoreIn 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 . . .
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