Whether the result of variable incomes, liquidity constraints or reduced access to formal financial services, poor households face unique financial constraints that undermine their ability to effectively guard against risk and accumulate meaningful savings. There’s been a lot of research into these questions in the last few years. Two important papers, “Barriers to Household Risk Management: Evidence from India” and “Savings Constraints and Microenterprise Development: Evidence from a Field Experiment in Kenya,” circulating for a few years have finally been published this month in the American Economic Journal: Applied Economics. Now that they’re “official” it’s worth revisiting them . . .
Read MoreWhat’s Next? Chris Dunford on Proving the Consumption Smoothing Benefits of Microfinance
A new theory of change is emerging for microfinance. People from poor households tap microfinance services to smooth consumption and build assets to protect against risks ahead of time and cope with shocks and economic stress events after they occur—leading to widespread poverty alleviation but not widespread poverty reduction.
This is the narrative coming out of the financial diaries reviewed by Portfolios of the Poor and the research summarized in Poor Economics and Due Diligence. More or less independently, perhaps in spite of that research, the microfinance industry has been adjusting toward supporting resilience strategies of the poor as it has become more sensitive to client demand – by moving toward a mix of loan, saving and other services and greater flexibility and choice to accommodate the use of microfinance for supporting diverse household needs rather than focusing just on the needs of micro entrepreneurs . . .
Read MoreWhat's Next: Five Factors – Beyond Mobile Money – that will make Financially-Inclusive G2P a Reality
What’s next? Jamie Zimmerman says it's the opportunity to make government-to-person payments a major vehicle of financial inclusion.
Mobile money and electronic payments have leaped to the fore of many financial access conversations. Take the launch of the Better Than Cash Alliance (BTCA) and the recently released latest Bill & Melinda Gates Foundation (BMGF) strategy as prime examples. Some (Tim Ogden of FAI, Jesse Fripp of SBI and I for instance), have suggested tingeing the optimism over payments with caution, citing several hurdles that we must still overcome, and questions we must answer, before payments can become a financial access success story . . .
Read MoreA Call for Rigorous Data and Standardized Measures
Last November, the Consumer Financial Protection Bureau’s Office of Financial Empowerment hosted a conference on “Empowering Low-Income and Economically Vulnerable Consumers: Making the Case through Access, Data and Scale.” A key highlight of the conference was a breakout session about the incentives and obstacles to collecting data in the field. Leading the session were representatives from LISC, NeighborWorks, CGAP and the University of North Carolina’s Center for Community Capital. Everyone agreed that we need more rigorous data. What was less clear was exactly how to get there. Two key questions emerged throughout the day:What outcomes are we measuring? And, how do we collect data?
What outcomes are we measuring?
Read MoreWhat’s Next? David Mckenzie on Risk Isn’t Just for Farmers, but isn’t all bad either
One of the big changes observed in discussions over microfinance in the past few years has been increasing emphasis on discussing microfinance, rather than just microcredit. In practice this has meant a lot of discussion about microsavings, with advocates pointing to studies showing greater impacts from offering savings accounts than from offering loans.
But finance is about much more than just savings and loans. As emphasized in Portfolios of the Poor, one of the issues with living on $2 a day is that incomes for the poor are incredibly volatile, so that the $2 a day average masks days of nothing and days of higher incomes. Building up precautionary savings offers one way to help smooth these shocks, while credit provides another. But some of the shocks experienced by the poor are large enough when they occur that they wipe out savings and leave people in a position where they will struggle to either obtain loans or be able to repay them straight away . . .
Read MoreWhat's Next: Financial Access in 2013
The microfinance space has never been a dull place. As the tumult of the last few years—debates about effectiveness, industry crises and crashes in several countries—seemingly dies down, it’s a good time to speculate about what’s next. It seems clear that “business as usual” in terms of rapid growth and expansion paired with unvarnished enthusiasm and uncritical praise is not what’s next.
So what is?
Over the next few weeks we’ll be running a series of blog posts from folks at FAI and around the financial access world offering their takes on what’s next. Some are calls to action, others are predictions, and others pose the important questions we need to answer now. If you’d like to contribute, send us a tweet @financialaccess.
Herewith are my thoughts on “What’s Next?” . . .
Read MoreBad Data
At FAI, we’re big advocates for data. Why? Because you can’t make good policy without data. Data can be collected in many ways and come in many forms: transaction records, panel surveys, financial diaries, or field experiment results. We get excited about the opportunity to collect or analyze data about the financial behavior of poor households.
While we often lament the lack of data, it is equally important to remember that quality of data is just as important. Poor quality data leads to decisions just as bad, if not worse, than no data. Two recent posts on data quality are a good reminder of the lingering problem of data quality even where data does exist . . .
Read MoreBanking the World: Empirical Foundations of Financial Inclusion
About 2.5 billion adults, just over half the world’s adult population, lack bank accounts. If we are to realize the goal of extending banking and other financial services to this vast “unbanked” population, we need to consider not only such product innovations as microfinance and mobile banking but also issues of data accuracy, impact assessment, risk mitigation, technology adaptation, financial literacy, and local context. In Banking the World, a new collection of research papers edited by Robert Cull, Asli Demirgüç-Kunt, and Jonathan Morduch, experts take up these topics . . .
Read MoreWho Pays for Transactions? How Much?
One of the many important questions in the transition to mobile and/or electronic money is who will bear the costs associated with using the system. This question is particularly salient since the Kenyan government announced it was planning to begin taxing mobile money transfers, adding to the cost of the system. The Kenyan government seems to believe that operators will absorb the cost of the tax, but others suggest that it will be passed on to consumers, "picking the pocket of the poor."
Who will bear the cost of the tax and the other costs of operating mobile money systems? On a theoretical basis, this is an easy question to answer: the people who benefit will bear the costs—if those costs are lower than the benefits. In economic theory, it is even irrelevant who is initially charged for the costs, as costs will be passed on to those willing to pay to receive the benefits (known as tax incidence).
Practically, it’s a hard question to answer because we have very little information on the true costs and benefits of any money system . . .
Read MoreAlbert Hirschman, 1915-2012
Albert Hirschman died on Monday. He was one of the most creative and broad-ranging development economists of the past fifty years.
His early work at Harvard was fairly technical, but he’ll be remembered for his later explorations of ideology and the evolution of ideas. He is best known for asking why bad situations, especially in developing economies, and bad ideas, here in the US, persist. His later writing is intellectually lively, discursive and often rooted in historical examples.
Exit, Voice, and Loyalty is his most famous book, and it deserves to be read much more widely . . .
Read MoreMarketing Matters: Increasing Microinsurance Coverage Beyond Lowering Prices
Poor households in developing countries face large and varied risks. Many agriculture-dependent households, for example, are at risk of drought- or flood-induced crop failures or livestock deaths. The death of a family member often implies having to fund expensive burial ceremonies, and if the deceased was the household’s primary earner, replacing her/his stream of income is an even bigger problem. A short “Client Math” survey by the Microinsurance Learning and Knowledge (MILK) project of Compartamos borrowers in Mexico, for instance, shows that funeral costs alone (including the costs of the funeral itself as well as connected costs such as food and drink, but excluding lost wages) typically amount to half of a family’s annual income (my calculations from data described in Poulton and Magnoni 2012). Similar figures have been reported from around the world.
Poor families have imperfect tools to manage these risks. They rely on self-insurance, traditional risk-sharing arrangements, informal insurance networks, and/or credit and savings. These strategies, however, are inflexible and/or expensive, and do not provide enough protection . . .
Read MoreThe Promise of Electronic Payments
A few weeks ago I wrote that a transition to electronic payments will not be a boon to poor households unless the financial systems that undergird payments become more focused on serving poor households. It’s vitally important to think of the value and benefits of electronic payments within a system.
A couple of recent news stories highlight what a financial system enabled by electronic payments can do, even without the active cooperation of traditional banks.
In the last two months, both Amazon and Google have launched programs to extend credit to small business customers. Amazon is making loans available to people who sell through the company’s website to finance larger inventories heading in to the Christmas shopping season. . . .
Read MoreNew Research: Three papers from Sendhil Mullainathan
We do our best (not always successfully) to keep up with new research relevant to finance, poverty and development. Today, I’ll be sharing highlights from some new papers by FAI affiliate Sendhil Mullainathan.
In “Behavioral Design: A New Approach to Development Policy,” Mullainathan andSaugato Datta advocate for employing a behaviorally-informed economic perspective to design development policies and programs. Since behavioral economics helps us understand why people behave as they do, analyzing development policies through a behavioral lens allows us to make better policy diagnoses, which in turn lead to better-designed policies.
Mullainathan and Datta outline three ways in which behavioral economics can improve program design. First, it can change how we diagnose problems . . .
Read MoreIs the Other Shoe Dropping on Microfinance Investment?
In the last week, two significant deals in the world of microfinance investment have been announced. First, Bamboo Finance announced that it was acquiring "a controlling interest" in Accion Investments, a $105 million for-profit investment fund started by Accion. In context, Bamboo Finance had $195 million of assets under management. Yesterday, Microvest GMG Asset Management announced they had taken on MinLam Microfinance Fund, a $47 million debt fund making loans in local currencies. Microvest GMG currently has $245 million of assets under management.
While these transactions likely have a variety of motivations, it's impossible not to wonder if we are seeing the beginning of a wave of consolidation driven by the souring of public sentiment on microfinance . . .
Read MoreFrom Responsible Lending to Responsible Profit
If there’s one issue that’s most difficult for microfinance practitioners to explain to the lay public, it’s high interest rates. As Elisabeth Rhyne describes it, at some point the numbers get so high that people become outraged and stop listening altogether. Most recently, the issue was put back in the public eye through Hugh Sinclair’s Confessions of a Microfinance Heretic and the media coverage it has spurred.
With few exceptions, his critique that microfinance investors are investing in MFIs charging exhorbitant interest rates has gone largely unanswered. That’s not a tenable position for the long-term. For a socially responsible fund, the case ought to be simple – if you have investments that you’d rather not have to publicly support and explain, then either those investments don't belong in your portfolio or you should learn how to explain those investments . . .
Read MoreThe Impact and Unintended Consequences of Microcredit
After nearly 30 years of the microcredit movement, we've finally started seeing rigorous impact evaluations in the last few years. Randomized control trials of some variant of microcredit have been conducted in India, Morocco, Mongolia and the Philippines. Each of these trials adds to the evidence, but each is in a specific context, with differences in contracts, eligibility, loan size and structure, and most importantly among the borrowers. That’s why it’s still exciting to see new trials which provide evidence in a different context.
“Microfinance at the Margin: Experimental Evidence from Bosnia and Herzegovina,”a new working paper presented at the 2012 Innovations for Poverty Action (IPA) Conference, gives us yet another different context to examine how households use microcredit and its impact on their lives. The authors of the study – Britta Augsburg, Ralph De Haas, Heike Harmgart and Costas Meghir – look at a group of randomly-selected loan applicants who normally would have been rejected during the loan screening process, in many cases because they lacked the necessary collateral to secure a loan . . .
Read More“Going the Last Mile” – Framing Incentives for Loan Officers in the Field
In microfinance circles, people tend to be fond of asking the question, “Does microfinance work?” Over the last decade, countless studies have attempted to answer this question by studying the net impact of microcredit on the lives of borrowers. Yet, these impact studies don’t necessarily tell us much about the nuances of how organization-level factors might influence the final impact of microcredit. NYU Economist Hunt Alcott and FAI Affiliate Sendhil Mullainathan have a recent paper that notes that the MFIs that participate in rigorous impact evaluation aren’t like MFIs in general. But there is a very important deeper level of analysis that is important. Little attention has been paid to how individual groups and actors shape the nature of microfinance services – that is, how the behaviors of funders, bank executives, and front-line loan officers might fundamentally alter the delivery and outcome of microlending.
Here at FAI, we’re not just interested in financial products but in how systems and people interact to make the right (or wrong) products available (or unavailable). For example, why do loan officers behave as they do? What incentives affect a loan officer’s job performance and how? How does the relationship between the loan officer and the client influence the borrowing and repayment process?
Read MoreNew Paper Highlight: How Does Risk Management Influence Production Decisions? Evidence from a Field Experiment (Shawn Cole, Xavier Giné and James Vickery)
Intuitively, insurance should be highly appealing to poor households for two reasons—they face a lot of risks, and have few resources to effectively deal with negative shocks. But microinsurance hasn’t taken off. That leads to two main questions: Does microinsurance provide the benefits that we theoretically think it does? And if so, how do we overcome the barriers that are preventing people from buying insurance? Of course, the answer to the second is quite dependent on the answer to the first.
A new paper by Cole, Giné and Vickery presented at Innovations for Poverty Action’s recent Impact and Policy Conference in Bangkok tries to uncover some answers on the real world impact of microinsurance not just in terms of protection from an actual shock. One possible benefit of microinsurance is that it allows poor households to make different choices because they have to worry less about the impact of a shock . . .
Read MorePiggy banks and other “banks on hooves”
Why are piggy banks in the shape of a pig? I had been certain that piggy banks were simply a decorative representation of the fact that keeping a pig (or any livestock) is an informal way to save—“deposits” paid into the pig by feeding and housing it can be “withdrawn” once the pig is sold. A bit of research informed me, however, that the etymologists have the economists beat on this one. The name derives from the old English word for the ceramic once commonly used to make household containers, “pygg.” Saving in these “pygg banks” became popular, and potters began to create savings boxes in the shape of the animal.[i]
Linguistic origins of the piggy bank aside, I have been thinking about livestock-as-savings after happening upon a book chapter by economists Christopher Barrett, Marc Bellemare, and Sharon Osterloh . . .
Read MoreFingerprinting Microcredit Borrowers Gets the Spotlight
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 . . .
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