Migrants send a lot of money to developing countries—several times more than foreign aid. Researchers and policymakers have seized on these very large flows and built an agenda to understand how these remittances can foster development. Indeed, you most often hear remittance flows compared to aid flows.
Something fundamental is wrong with this agenda however. Researchers tend to study remittances as if they were windfall income, like aid or oil revenue, that arrives like manna from heaven. This leads researchers toward the kind of questions you might ask about windfall income: Are remittances spent on ‘good’ things like investment and education? Do families and countries become ‘dependent’ on remittances?
Read MoreOn the Center for Financial Inclusion blog, Ignacio Mas and Beth Rhyne are discussing a central question in the evolution of electronic payments in developing countries: why aren't people using it to pay? Even in countries like Kenya with very high rates of adoption of a electronic payment platform, the vast majority of money that goes into the system come back out into physical cash in 24 to 48 hours. Ignacio makes a case that electronic payments systems need to be more integrated into other financial behaviors, like savings and credit, before they will be used for routine payments. The reason is fairly simple: unless you are storing value in the electronic system (as with a savings account) using the electronic system for a payment involves at least one extra step to turn cash into electronic form.
Beth responds that if people are receiving their income in electronic form in the first place, like benefits payments or paychecks, and the merchants they frequent take payment in electronic form then there is good reason for users to keep their money in the electronic system. Using Ignacio's same logic, cashing out involves an extra step if the inflow is electronic and the outflow can be electronic. Beth's argument is one of the reasons organizations like the Better than Cash Alliance are focused on encouraging governments to use electronic payments to pay salaries or benefits to households . . .
Read MoreFAI asked Samantha Duncan to tell us about the research papers and books that have influenced how she thinks about insurance. This is what she told us:
My thinking on insurance has evolved and been influenced by personal experiences, but also some books and papers. I am a practitioner at heart, and my earliest thinking came from spending time inside the homes of poor people across Latin America and Asia; getting to know them, their families, and how they live their lives. However, there have also been a number of research papers and books that have had a tremendous impact on my thinking and work. I’ve outlined some of the ideas that have deeply resonated with me below.
Insight 1: The risks poor people face are debilitating. There is a cycle of poverty . . .
Read MoreThe opening of the new Affordable Care Act health insurance marketplaces presents millions of Americans with a complicated financial decision. How do they value insurance? The marketplaces will primarily serve people who are not employed full time or are in low-wage jobs—and are therefore likely to be juggling tight finances already. What is the cost of paying down debt more slowly to buy insurance? The obvious intervention to help people make better financial decisions when faced with complex options is financial literacy.
Unfortunately, the evidence on financial literacy is pretty dismal. David McKenzie’s study of a voluntary financial literacy program in Mexico that finds no effect is pretty representative. Earlier this year, author Helaine Olen wrote that financial literacy is “a bunch of hooey,” Jason Zweig at The Wall Street Journal cited educational programs that actually make people worse off financially, and FINRA released a study showing that financial literacy among Americans has weakened since 2009.
While financial literacy levels are linked to better financial decisions, study after study shows that financial literacy courses are ineffective . . .
Read MoreThis summer the Journal of Development Studies accepted a manuscript by Jonathan Morduch and myself laying out our critique of an influential microcredit study from the 1990s by Mark Pitt of Brown University and Shahidur Khandker of the World Bank. Our article should appear in the journal this year or next. The acceptance is milestone for Jonathan and me, for it represents a ratification of our work, and is very long in coming.
It was 15 years ago that Jonathan first laid out his doubts about Pitt and Khandker (P&K). Pitt retorted the next year. And there the dispute rested, never adjudicated by journals, until I entered the picture 6 years ago by writing a program that, for the first time, allowed an exact replication of P&K’s math.
Jonathan and I have played a sort of doubles match with Mark and Shahid . . .
Read MoreA dinner I attended on Monday night previewed the upcoming Financial Inclusion 2020 Global Summit in London. The Summit’s ultimate goal is to include 2.5 billion more people in the formal financial system by 2020. It was an interesting (off the record) conversation. Without violationg the rules of engagement, I want to focus in on a topic I raised: Who is going to pay for financial inclusion?
Providing financial services to poor households has been and will continue to be expensive. While technology (like electronic payments) and innovative approaches (like KGFS) can reduce costs, they cannot make serving poor customers cost- or profit-competitive with serving wealthier customers. The bottom line is that including 2.5 billion people in the financial system is going to cost money. Someone will have to pay.
Read MoreUnderlying, sometimes deeply underlying, much of the conversation about financial services for poor households is the question of how much control poor households have over their lives and how capable they are of making good choices. The Yunus theory of microcredit assumes that the poor have a great deal of control--the only thing they lack is credit. Once they have it, they can make smart, informed choices about how to use capital to improve their lives. The growing enthusiasm for cash-transfer-style programs is built on similar foundations. Paul Niehaus, one of the founders of GiveDirectly, a new charity that focuses on unconditional cash transfers for poor households in Kenya (if you don't know GiveDirectly, do listen to the This American Life story about them), often talks about a core motivation of the approach being the belief that poor households know better how to spend cash than outsiders do. . . .
Read MoreSelf-funded groups are an increasingly common way of delivering microfinance services. In India, for example, self-help groups increased their membership dramatically in Andhra Pradesh after the microfinance crisis of 2009-2010. In Africa, several international NGOs are promoting village savings and loans associations (VSLAs) as member-driven, local institutions.
Can these groups “replace” traditional microfinance, in the sense that they do not need the intervention of loan officers or professional managers? An interesting paper contributes to answering this question . . .
Read MoreThe original theory of microcredit was that it offered the opportunity for poor households to create profitable microenterprises. But there were always households left behind—those that were too poor to create a microenterprise or plausibly repay even the very small loans on offer.
One attempt to address these households, usually called the “ultra poor,” was to create an asset transfer and training program that would allow them to “graduate” into standard microcredit. BRAC’s Targeting the Ultra Poor program is perhaps the best known of these. Evaluations of TUP-style programs have been mixed – with some showing no effect and others strong effects. It seems that a major factor is local labor markets—when ultra poor households have good wage labor alternatives, asset transfers do not help much. When local labor markets are thin or non-existent, asset transfers can make a big difference . . .
Read MoreThis post is written by Bindu Ananth and Amit Shah. Bindu Ananth is President of the IFMR Trust and Amit Shah is Head of Business Intelligence at IFMR Rural Finance. They co-edited the recently published book “Financial Engineering for Low-Income Households.”
Five years ago when we set up the KGFS model of financial institutions in remote-rural India, we wanted to make a fundamental shift in the way financial services were offered to households. We wanted the organising principle to be suitability, i.e., how do we make sure that every single customer receives the portfolio of financial services that is most suitable given her needs and preferences? This is essentially what wealth managers are supposed to do for ultra-rich individuals but we wanted to do it for clients with a mean income of USD 1000 per year through staff with twelve years of formal education . . .
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Ten years ago, FAI managing director Tim Ogden published Experimental Conversations, a collection of interviews with economists and other people who critique, promote, and use randomized controlled trials (RCTs) in development economics. One of the interviewees was Michael Kremer, a pioneer of the movement, now a Nobel laureate, and recently appointed Chief Economist of the World Bank.