A very interesting microfinance experiment is in the new issue of the American Economic Review, one of the premier journals in the field (Published, but gated, version here. Ungated version here). The paper is by FAI Affiliate Xavi Giné, Jessica Goldberg (see her recommended reading on savings here), and Dean Yang. It's not often that microfinance makes the pages of AER; it's a testament to the work that Xavi, Jessica and Dean did to set up this experiment and their careful analysis of the data.
In brief, the experiment tested the effects of fingerprinting borrowers from a microcredit program in rural Malawi. I had the opportunity to interview Xavi and Dean (separately) for my upcoming book on economic field experiments and we talked about this work. I’ll let them explain the project and its implications in their own words . . .
Read MoreDavid Roodman’s conversation with Jonathan Morduch is coming up tomorrow. If you haven’t read David’s book yet, you should. But we can be realists. You probably don’t have time to buy and read the whole book in the next 36 hours. So, here’s a quick cheat sheet of some highlights from David’s blog over the past few years. Reading these posts will get you up to speed (but you should still read the book!).
Perhaps David’s most famous post is an October 2009 post titled “Kiva is Not Quite What it Seems,” about the online microlender, Kiva. The post kicked off a wide-ranging debate about the role of transparency in the framing of NGOs’ operations and ultimately changed the way the organization presents itself. In the post Roodman explained there was significant divergence between Kiva’s rhetoric and marketing and how it actually did its work . . .
Read MoreOn October 3rd, FAI will host a conversation with Jonathan Morduch and David Roodman, a senior fellow at the Center for Global Development (CGD). The conversation will focus on Roodman’s new book, Due Diligence, which has been widely praised (but you should also check out some of the critiques) for its detailed, evidence-based look at the state of microfinance today.
Those familiar with Roodman from his work in microfinance may be unaware of his influential work in other areas of development. We thought we’d provide a quick overview to the other sides of David Roodman (though all of the sides feature an exceedingly careful attention to detail and data).
In addition to his work on microfinance for CGD, David also manages the Commitment to Development Index . . .
Read MoreI attended the Better than Cash Alliance launch this week at the Ford Foundation. The alliance’s goal is to accelerate the transition from cash to electronic payments in developing countries. For a good overview of the process, benefits and challenges of the transition, see this white paper from Bankable Frontier Associates (which is one of our partners in the US Financial Diaries project). For an in-depth discussion of the alliance, see David Roodman’s post.
At the launch, and in general when people talk about moving to electronic payments from cash, some of the key benefits cited are transparency and transaction records. But on my way back to the office from the event I had an unpleasant experience that reminded me that while these benefits are possible with electronic payments, they are by no means guaranteed . . .
Read MoreIn Due Diligence, David Roodman confronts important questions about the impact of microfinance and discusses how governments, foundations, and investors can best support financial services for the poor. In particular, Roodman argues for the need to deemphasize microcredit in favor of other financial services.
To learn more about Due Diligence and Roodman’s perspectives on microfinance, please join us on October 3rd for a conversation with David Roodman and Jonathan Morduch (RSVP). You can also listen to previous conversations with Timothy Ogden and Jonathan Morduch on the state of microfinance today.
In case you haven’t had time to read the book before the event, here’s a cheat sheet of sorts . . .
Read MoreA few weeks ago M-CRIL, an Indian microfinance ratings firm, published a white paper on India's evolving microfinance regulations. The overall message is that while the proposed regulatory framework is improving, it still needs work. One particular point caught my eye:
"The prevailing pricing regime – average cost of funds plus a margin cap – penalizes those MFIs that incur a high cost due to their commitment to responsible finance as well as those who are innovative in raising funds at low cost. Those that do both suffer a double 'whammy'."
While there is widespread agreement around the world that people should be protected from usurious interest rates on loans, there is little consensus on how to determine, and enforce, a cap on interest rates charged to the poor. The debate is as hot in the US (where it's fought over credit card and payday lending rates) as it is in India, Nicaragua and Bangladesh . . .
Read MoreI have written before how tiny Zidisha Microfinance is challenging long-held assumptions by leveraging internet social media and mobile payments like M-PESA to lend to clients without the help of loan officers or local staff. Since then, Zidisha has grown from tiny to small, with a portfolio now at $200,000, over 430 active borrowers, and 1400+ lenders. Its operations remain solid, with PAR30 at a respectable 6.6%1 (check out its stats for more).
I've been advising Zidisha since before its launch in 2010, and with that had the opportunity to watch the evolution of the platform's innovations. One feature, introduced in August 2011, allows borrowers to request to reschedule their loans, regardless of whether they are delinquent or not. Zidisha's online borrower portal provides two rescheduling options: adding a grace period of up to 2 months, but leaving the repayment amounts unchanged, or re-amortizing the loan over a longer period (up to 24 months) to lower the payment amount (Figure 1). The interest rate of the loan is applied over the longer period and repayment schedule is recalculated accordingly. Aside from these rules enforced through the website, there is no involvement or approval on the part of Zidisha – once a borrower submits the online request, his new repayment schedule becomes effective immediately . . .
Read MoreThe Curiosity rover’s Mars landing is only the most recent instance of the awe-inspiring advances made by the physical sciences. Our wonder at such achievements has even become codified in our language. “It’s not rocket science!” is the standard invocation to suggest a problem just requires common sense instead of the complex physics of, say, landing rovers on far-away planets. The phrase has been directed at everything from Social Security to healthcare, and yes, to poverty alleviation programs.
But, as I heard recently from researcher Duncan Watts, social science “is not rocket science—we’re actually pretty good at rocket science.” He proceeded to list a bunch of “hard” science things that humans have figured out quite well—vaccines for diseases, satellites in orbit, and any number of biological, chemical, and technological advances. The issues explored by “soft” science—how to get people vaccinated, prevent civil wars, and bring about gender equality—now that’s the hard stuff . . .
Read MoreRemittances represent an important source of income for millions of households around the world. The size of remittance flows, as compared to a country’s own domestic output, can reach numbers as high as 30% (that’s in Tajikistan, if you’re wondering.) This has led economists and policymakers alike to ask whether remittances can be relied upon to spur development. One way this might occur is if remittances are more likely to be spent on productive investments, increasing the domestic income-earning potential of households . . .
Read MoreIn 2005, a group of researchers at the University of Michigan set out to understand how people in low- and moderate-income households think about and use financial services. The Detroit Area Household Financial Services (DAHFS) study, headed by law professor and two-time Treasury official Michael Barr, included interviews with more than 1,000 randomly sampled residents of the Detroit metro area. No Slack: The Financial Lives of Low-Income Americans presents data and analysis from that study. Topics range from bank accounts to bankruptcy, from credit cards to tax refunds. Here are four brief—but important—take-aways.
1. Social ecosystem matters. In recent years, it’s become all the rage to add insights from psychology to economic models of how people make decisions—but social context matters, too . .
Read MoreI recently welcomed the news of a new national-level microfinance bill in India. I believe the Indian microfinance sector is witnessing a movement towards greater regulatory clarity following the turmoil of the Andhra Pradesh crisis. The Microfinance Institutions (Development and Regulation) Bill 2012 introduced in the Parliament on the 22nd of May comes with modifications to the earlier Bill introduced in 2007. The industry, too, has broadly welcomed the Bill as a much better version of the 2007 Bill, which lapsed on account of the dissolution of the Lok Sabha (the lower house of India’s Parliament).
The introduction of this Bill brings a much needed strengthening of the regulatory framework and consumer protection norms of the microfinance industry in India. Regulation of financial services is necessary to protect current and future clients, but it must also be undertaken with care in order to maintain access to those services . . .
Read MoreWe’ve become fans of talking about financial literacy here at the Financial Access Initiative, so I was excited to see the May issue of the American Economic Review with selected papers from the American Economic Association’s Annual Meeting. There are four papers that address financial-literacy questions. I’ll offer some big-picture thoughts further down, but first, the punch lines of the four papers . . .
Read MoreBringing the unbanked into the formal financial system requires innovation—but sometimes the innovation required is far from what we spend most of our time thinking about. A post at the New York Fed’s Liberty Street Economics blog details an important innovation required to bring women into bank branches at the turn of the 20th century: a private room for extracting cash from their stockings.
The post notes other important milestones in banking women—a long term process that began around the time of the U.S. Civil War when California established the financial independence of women regardless of marital status. Still, more than a century later, the “ridiculous” idea of women managing their own bank accounts was being used for easy laughs on television shows . . .
Read MoreFAI asked Jessica Goldberg to tell us about the research papers that have influenced how she thinks about savings and the poor. This is what she told us:
I tend to think of the papers that have influenced my thinking about savings as making three related, big-picture points:
- Savings is complicated
- Savings matters
- We can help!
Together, these papers remind me that we need to think carefully about why people save, about the relationship between savings and investment, and about what types of savings products are most likely to improve people’s wellbeing.
Savings is complicated
To me, Robert Townsend’s 1994 paper "Risk and Insurance in Village India" really captures important ways that people’s complicated lives and social situations affect their decisions around savings.
Read MoreFAI asked Chris Dunford to tell us about books and papers that really made a difference in how he thought about savings and the poor. This is his response:
Portfolios of the Poor: This book has changed the “narrative” in the microfinance community more than any other since the founding of the microfinance industry. Though the effort to promote a “client-centered” approach (a.k.a. demand-driven rather supply- or product-driven) has been concerted for over a decade, this book is what made clear and compelling both the importance and implications of starting with an understanding of what the client is already doing. But it goes further to help us understand what the poor are doing, not just those who step forward to be clients of current microfinance services. The book’s orientation and messages liberate us from the institutional straightjacket to revisit fundamental questions of what we might do to help the poor help themselves deal with financial issues. For me and my colleagues at Freedom from Hunger, and apparently for so many others, the book resonates with the stories we’ve been hearing from clients for decades and gives us a broader perspective in which to situate those stories.
What has this to do with savings? The composite picture from financial diaries gives us vivid understanding of the roles and variety of savings in the financial management tool kit of the poor . . .
Read MoreThe concept of social investment has received growing attention over the last decade. The core idea is simple: investing in organizations that produce a substantial positive soal outcome -- and at least some financial return. Advocates for social investment frequently use the phrase “doing well while doing good.”
While there has been much discussion of social investment, there has been relatively little actual investment. The one area where substantial flows of capital have emerged under the social investment umbrella is microfinance. Thus, there are important lessons and insights for social investment as a whole to be gained by examining the experience of the microfinance industry in trying to marry profit and social returns.
Over the last two decades, microfinance has grown from a promising experiment to a burgeoning industry that serves over 200 million people worldwide. The early hope was that microfinance would drive toward full sustainability, earning all the necessary funds for their operations and growth. Microfinance banks would earn solid profits and wouldn’t need subsidies after the banks were fully established to keep going. Muhammad Yunus himself has voiced support for the concept of “social businesses” – businesses designed to produce some financial return (which gets re-invested in the business) while delivering social returns. But it has turned out that social investors (and the subsidies they bring) remain critical if social goals are to be achieved . . .
Read MoreIt’s been 21 years since the publication of Michael Sherraden’s Assets and the Poor,the book that put asset poverty on the U.S. policymaking map. That was cause for celebration last week in Washington D.C., where the New American Foundation hosted a symposium to talk about what more might be done to help Americans—particularly low-income and minority ones—build savings and other assets. The researchers, advocates, funders, and government officials in the room covered a large variety of topics, including child savings accounts, the “teachable moment” of tax time, behaviorally informed product design, asset limits in public benefits programs, universal individual retirement accounts, mortgage lending practices, and the puzzling persistence of the racial wealth gap.
It was a rich and multi-faceted conversation, but what may have struck me the most was the work being done by the state of Delaware, which is quickly expanding its program of free financial coaching to low- and moderate-income residents. This is very much in the tradition of cities such as New York and San Francisco, which have gotten well-deserved attention over the past few years for steps they are taking to bolster the financial stability of their populations. Efforts range from expanding the use of low-cost bank accounts to counseling people about how to budget and avoid taking on unnecessary debt. A number of municipalities have come together to form Cities for Financial Empowerment, and the ones at the head of the movement, like New York, are now pushing to integrate financial counseling into other government services, such as workforce development, homeless prevention, and community courts . . .
Read MoreIt’s the microfinance bête noire. The great unspeakable. The furtive shadow slinking down the narrow alleys of poverty. Yes, the consumer loan. Has microfinance really come to this, we ask? Helping the poor buy a TV? Charging 40% interest for the couch to go in front of that TV? And what about family celebrations, festivals, dowries? Is that really what microcredit is for?
Consumption lending has been creeping out from the shadows for some time, but mostly for “good” consumption like school fees, urgent medical care, or basic needs like food during those difficult periods when income is scarce. Still, for many of us the TV-on-credit notion that represents what is so easy to think of as “bad” consumption remains too painful an idea to swallow.
But how to draw the line? If not the TV, then what about a microwave? A motorbike? Plumbing in the home?
Read MoreThe Findex project helps to correct a long-standing imbalance in evidence on global finance: an abundance of data on the supply of financial services but curiously little that’s systematic and comparative about global demand. Together with the IMF’s Financial Access Survey, we’re finally getting a clear picture of the holes in global financial access.
There’s a lot to celebrate now that the Findex is here. So much so that it’s striking that it took so long to create a constituency for the efforts. Stanley Fischer had initiated the push in 2004 as head of the Advisors Group for the UN Year of Microcredit, and I joined Princess Maxima of the Netherlands in pushing the agenda forward in advisory roles with the UN in 2005. But it was the Gates Foundation’s support of the World Bank research group in 2010 that ultimately got us here.
The Findex headline turns out to replicate an earlier count of the global financial gap: half the world is unbanked, about 2.5 billion adults, the same bottom line that came from aggregating a range of independent surveys from ten years ago. But even if the headline is familiar, the Findex delivers rich details . . .
Read MoreA lot of progress has been made in understanding the savings behavior of poor households over the last few years. A raft of new studies are beginning to appear that promise to advance our understanding further.
But thus far, the new studies are providing as many new mysteries as answers. David Roodman does a good job of exploring the mysteries presented by one of the first of these studies—a trial of a commitment savings product in Malawi. In summary, the researchers found that access to a commitment savings product helped increase savings balances—but NOT in the commitment savings account. Sometime soon I’ll be blogging about a new paper from Pascaline Dupas and Jonathan Robinson that similarly suggests that a commitment device works even though it doesn’t require much commitment.
The mysteries aren’t limited to commitment devices though . . .
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