In most of the developing world, the poor are disproportionately vulnerable to risk. Whether these risks come in the form of the death of a family member, severe illness, the loss of an asset such as livestock, or a natural disaster, these events have a particularly debilitating affect on the poor who are less able to financially absorb and recover from such shocks.
Increasingly, providing the poor with access to reliable and reasonably priced insurance instruments has become viewed as an integral component of inclusive financial sectors. This type of insurance is commonly referred to as microinsurance and is defined as “the protection of low-income people against specific perils in exchange for regular monetary payments (premiums) proportionate to the likelihood and cost of the risk involved.” ("Protecting the Poor: A Microinsurance Compendium " 2006, Churchill, C.)
The field of microinsurance is still relatively new and in its infancy stage . . .
Read MoreThere’s not enough academic research on the regulation of financial inclusion. Many of the questions might seem too applied for some researchminded economists, but that leaves regulators with few guideposts. It also seems short-sighted.
Regulation is always a question of trade-offs between competing goals. Within microfinance, for example, there is evidence that the supervision and monitoring that is part of prudential regulation increases costs substantially for microfinance institutions. That, in turn, appears to push institutions to reduce outreach to their poorer customers and women (Cull, Demirgüç-Kunt, Morduch 2011). The alternative—less regulation in order to increase outreach—carries plenty of dangers. Those are difficult trade-offs to make and there is as yet not enough empirical evidence to describe optimal regulatory schemes for microfinance.
Read MoreRegulators hope that expanding financial access will also provide greater stability to the overall financial system. This would occur as the market becomes larger and more diverse, and thus better able to withstand difficulties in any particular corner. The range of depositors would enlarge, as would the kinds of financial institutions in the market. Greater competition among providers would create pressure for quality competition. Regulators hope that expanding financial access will also provide greater stability to the overall financial system. This would occur as the market becomes larger and more diverse, and thus better able to withstand difficulties in any particular corner.
That’s the rosy scenario. The financial crisis of 2007-8 in the United States is a contrasting reminder that expanding access and increasing stability do not necessarily go hand in hand. In the United States, the expansion of mortgage finance opened way for new home buyers to engage in speculative and ill-advised real estate investments, eventually fueling the drama behind the financial crisis (McLean and Nocera 2010). The financial
crisis was created by a range of forces—including fundamental structural inequalities exacerbated by poor oversight, misaligned incentives, and some measure of outright fraud—so generalization should proceed with caution (Rajan 2010). Still, the crisis underscores the larger point: Regulators need a deeper understanding of what can happen to the stability of financial systems when millions of new participants enter. Debates over the benefits and risks of commercialized microfinance as a gateway for financial access have raged since the early days of microfinance . . .
Read MoreThe 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?
There are two complementary research strategies. One is cross-country research, which tends to show positive correlations between financial expansion and the reduction of inequality (Demirgüç-Kunt and Levine 2009 provide an overview). The work doesn’t connect the dots from microfinance explicitly, but it does help frame issues. The second approach connects the dots by imposing structure on the relationships. A good example is the general equilibrium analysis of Buera, Kaboski, and Shin (2011). They find that increasing financial access leads to macro impacts, but the magnitudes are small . . .
Read MoreThe original promise of microcredit was to reduce poverty by fostering self-employment in low-income communities, an idea first promoted at mass scale in Bangladesh (Yunus 1999). But critics of Muhammad Yunus and the Bangladesh microcredit model argue that supporting larger businesses (small and medium enterprises or SMEs) may instead create more and better jobs for poor individuals (e.g., Karnani 2007, Dichter 2006). That’s only possible, however, if those larger enterprises employ poor workers in large numbers. In a newly published paper, NYU economists Jonathan Buachet and Jonathan Morduch argue that that can’t be assumed.
Most studies of SMEs implicitly or explicitly compare them to large firms . . .
Read MoreLast week Public Radio International reported on two young middle-class Indian men who spent three weeks in Bangalore living on 100 rupees a day followed by one week living at India’s controversial new poverty line of 32 rupees a day (roughly equal to 60 cents). “When you’re living on that amount, life is all about innovation,” says Tushar Vashisht in this story“…because every hour you’re thinking at least 10 minutes on that hour how you’re going to survive the next hour.” It's an interesting story that underscores many of the findings from Portfolios of the Poor: How the Worlds’s Poor Live on $2 a Day, foremost among them is that these two young men used savings to fund their daily existence. They didn’t experience the erratic shifts in daily income that characterizes poverty in India and other parts of the global south. “Somebody doesn’t pop out of the ground and give you $2 every day,” says Daryl Collins, co-author of Portfolios of the Poor, in this PRI story. “What is the most difficult is that sometimes it’s $5 and then it’s nothing and then it’s $1 and then it’s $2 and then it goes back to nothing.” Additionally, she adds “Somebody who is living on 100 rupees a day, they could indeed be living on 40 rupees a day because they are sending so much back home to the villages."
Read MoreFAI is excited to announce Timothy Ogden has joined as Interim Director. Many of you know Tim from his involvement in microfinance, social entrepreneurship, philanthropy as a prolific blogger . . .
Read MoreThe notion that we cannot count on brick-and-mortar investments to massively expand access to finance in developing countries is now widely accepted. We need to go branchless, and to do so safely we have an opportunity to leverage mobile phones that are increasingly ubiquitous. That’s clear at an infrastructure level, but I don’t think there is much understanding of what that means at the service level. Let me paint the picture as I see it, at the risk of sounding all high-level and new agey.
For me the starting point is recognizing that financial services are primarily about information. Mechanically, financial services are about recording a bunch of credits and debits: how much you’d like to transfer to whom, how much you have, how much you owe, how much you’ll be owed if certain events occur. More fundamentally, financial services are about trusting or being trusted, and that’s a function of the information you have on the other party . . .
Read MoreWhat products are “right” for people who are outside of the formal financial system and/or poor? It’s a question as relevant in developed economies as in developing ones. During the housing bubble in the US, financial inclusion was often a justification for what in retrospect looks more like predatory behavior. It’s difficult to tell in the moment, though, the difference between a product priced appropriately (for cost of delivery, value to the consumer, and risk among other factors) and one that is predatory when those customers are almost entirely outside the existing formal system.
The financial crisis extended the debate in the US from payday loans to mortgages and now to checking accounts, debit cards and credit cards via regulatory changes that have changed how providers charge for these services. These changes, in general, have made it much more explicit that the cost of basic financial services for the poor or those who do not manage their money carefully are much higher than for others.
Along with driving some people away from some products—fewer people can get a credit card for instance—there is some innovation happening, particularly around alternatives to checking accounts . . .
Read MorePart 1 ("The Economics of Microsavings") of this brief exploration into the economics of savings-driven microfinance looked at the role of microsavings at microfinance institutions. In one large study, poor borrowers, despite accounting for 75% of active accounts, only contributed 3% of total deposits mobilized, mainly because they maintain low balances. However, poor savings clients carry out frequent transactions, for which they have well-demonstrated willingness to pay relatively large fees. These and other fees can be a major source of revenue on its own. However, many savings clients are also borrowers, and it is through the combination of fees, high yield microcredit loans, and other services (insurance, transfers, etc.) that microsavings clients can be truly profitable.
That raises a question: if small savers are indeed profitable without providing significant funding, then where does the funding of deposit-driven MFIs come from?
Read MoreI have a confession to make. When I began composing this blog, I approached it with a fairly simple hypothesis: Microfinance institutions (MFIs) that engage in large-scale deposit taking must likewise grow their loan portfolios. After all, deposits are a source of funding with high operational cost that must be appropriately offset by growing revenue, and only microfinance portfolios provide yields high enough to achieve that. And because many poor families have a higher demand for savings services than for credit, the resulting over-liquidity could push MFIs into unsustainable portfolio growth, eventually leading to the very credit bubbles that microsavings advocates are trying to avoid.
It seems a reasonable enough hypothesis, and sufficiently controversial to be interesting. Trouble is, it’s not true. Reality turns out to be more complicated. In this two-part blog series, I will explore the underlying economics behind microsavings . . .
Read MoreThe microcredit movement is premised on the idea that access to capital will be liberating, empowering, and profit-making. But as the Indian microfinance sector closed out another year, it’s hard to be so ebullient.
The Indian microfinance crisis continued through 2011, and we now have good data and the distance to get a clearer perspective. More than anything else, the data show disturbingly high levels of debt pushed into communities. While the government blames microfinance institutions for excessive lending, government-sponsored self-help groups turn out to have contributed to a large share of the problems . . .
Read MoreIf 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?
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