What’s next? Jonathan Morduch says: Making RCTs more useful.
When you’re thirsty, that first gulp of water is really satisfying. But after months of just drinking water, you’ll likely start hoping for more from your beverages.
I think that’s where we are with RCTs of microfinance.
The first microfinance RCTs were refreshing. They quenched a thirst for any credible, rigorous evidence on microcredit impacts. No one was particularly hankering for data specifically on microfinance in Manila, Hyderabad, Morocco, or Bosnia. But that’s what we got. It didn’t particularly matter where the studies were from, or what the particular financial methodology was, or who exactly the customers were. Especially since the results were not only credible but surprising and provocative. Researchers were opportunistic choosing sites and partners , and who can blame them?
Read MoreIt's been over two years since the start of the great India insolvency. Four years since the Bosnia blight and No Pago Nicaragua. And nearly six years since the Morocco microfinance meltdown.
At this point, it's reasonable to say that the first global crisis in microfinance has passed. Life is on the mend.
In a recent email, Alok Prasad, head of the Microfinance Institutions Network in India (MFIN) described its most recent quarterly report as "green shoots in evidence." The numbers certainly bear him out. Elsewhere, investors speak of tightening their exposure to countries with overheating markets, pay attention to issues of overindebtedness, and are wary of the sort of runaway growth that was being posted by Indian MFIs back in 2008-10.
Development of sector-level infrastructure is likewise moving apace, with ever increasing credit bureau coverage of microfinance clients and increasing implementation of client protection practices . . .
Read MoreHundreds of millions of people in the developing world work in microenterprises. These businesses tend to be very small, often employing only a single operator, and they tend to have difficulty growing. Yet growing evidence suggests that such businesses could increase profits by increasing investment – a number of recent studies find that the marginal return to capital among small firms in developing countries tends to be very high (i.e. de Mel et al. 2008). If returns to capital are high, why don’t microenterprises borrow, invest and grow rapidly?
The obvious answer is that these firms don’t have access to credit. But while credit constraints are likely part of the explanation for the puzzle, accumulating evidence suggests that it’s not just credit that limits investment . . .
Read MoreFocusing on financial access can sometimes obscure the rationale for doing so. We don’t really care about access to finance for its own sake. The point of providing quality financial services to poor households is to give them an easier, more stable path to prosperity. But what are the pitfalls and slippery spots on that path that we hope to ameliorate?
It seems that financing health care is one of the biggest obstacles that poor households face. Take Joseph, a farmer from the Kenyan Rift Valley Province. When his three-year old daughter inhaled a piece of corn she began struggling to breathe. Joseph had no cash at the time, so he waited before visiting a doctor, hoping she would get better. But after three days, symptoms became so serious that Joseph had to take his daughter to the hospital for emergency care. The only way Joseph could accumulate the sums necessary to pay the bill was to sell his land. When I met him two years later, it seemed unlikely that Joseph would ever be able to buy it back. Selling the land had pushed the household into extreme poverty . . .
Read MoreWhat’s next in financial access in 2013? Bindu Ananth and Deepti George say a focus on measuring and improving quality.
It has been over four years since we started KGFS, an attempt to provide a complete suite of financial services to financially excluded low-income households in India. Our journey began in the village of Karambayyam in Thanjavur, Tamil Nadu. In that village of 3200 households that has no other formal financial institution, the KGFS branch and its three wealth managers have enrolled 2030 households and created a customised financial well-being report for each of them. Following up on these reports has resulted in the sale of 4966 insurance policies, 300 pension policies and credit disbursements of USD 2mn with no losses for this single branch. Mid-line results from an impact evaluation being conducted by Rohini Pande and Erica Field suggest that the presence of a KGFS branch has a significant impact on reducing the stock of informal, expensive debt. Over the last four years, we have built five independently managed KGFS institutions in five distinct regions of the country. These institutions together comprise a total network of 170 branches and are now serving about 300,000 households. The first of these institutions, with 68 branches in Thanjavur district of Tamil Nadu, turned profitable within four years of inception . . .
Read MoreWhether 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 MoreA 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? 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 MoreLast 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 MoreOne 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 MoreThe 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 MoreAt 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 MoreAbout 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 MoreOne 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 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 MorePoor 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 MoreA 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 MoreWe 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 MoreIn 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 More
