Defying dire predictions from experts at the start of the pandemic, microfinance institutions in the Northern Triangle region of Central America showed great resilience through the challenges of the Covid-19 pandemic. Despite their relatively small scale—or perhaps because of it—the MFIs studied maintained stable profitability, have mostly grown since the pandemic, and have proven very adaptable to digital change.
Publications
Viewing all posts with tag: Microfinance
A Dialogue on the Future of Microfinance and International Development
It will soon be the 50th anniversary and 200th issue of Mondes en développement (Developing Worlds), the French and Belgian journal founded in 1973 by François Perroux of the Collège de France. To mark the anniversary, we discuss what has been learned about microfinance, which, as a modern movement, is also roughly 50 years old. We discuss issues including the early history of microfinance and connections to shifting views on poverty and growth in international thought; the role of rhetoric within the microfinance sector; debates over subsidy; changing views of group lending; gender and finance; and whether everyone wants to be an entrepreneur.
Rethinking Poverty, Household Finance, and Microfinance
High-frequency data show that the material condition of poverty is only partly captured by overall insufficiency of resources. Instead, life in poverty is often characterized by the interaction of insufficiency × instability × illiquidity, visible when measuring poverty in shorter time units than the year. In this context, reducing instability and/or illiquidity can reduce exposure to poverty even when average earning power (overall insufficiency) is unchanged. The high-frequency view shows the power of intra-year consumption smoothing, while also showing that consumption smoothing often requires the spiking of spending. The instability revealed by the high-frequency view creates a tension between flexibility and structure in the design of behavioral financial products. In practice, microfinance borrowing and saving are often used to address the ups and downs of household spending needs rather than business needs. High-frequency instability also explains why ex post moral hazard (“strategic default”) is a particular problem for lenders (rather than the textbook ex ante moral hazard depiction) and, in turn, why joint liability is difficult to sustain. The installment structure of typical microfinance loan contracts (i.e., high-frequency repayments) is similar to the structure of consumer lending products and contractual saving products, explaining how microfinance loans work naturally for purposes other than business investment, even when that departs from lenders’ nominal intentions. The high-frequency view helps to show why microfinance loans remain popular as financial tools despite modest measured impacts on average household income.
RCTs in Development Economics, Their Critics and Their Evolution
A chapter in the forthcoming edited volume, Randomized Control Trials in Development: the Gold Standard Revisited, by Florent Bédécarrats, Isabelle Guerin, and François Roubaud.
The use of RCTs in development economics has attracted a consistent drumbeat of criticism, but relatively little response from so-called randomistas (other than a steadily increasing number of practitioners and papers). Here I systematize the critiques and discuss the difficulty in responding directly to them. Then I apply prominent RCT critic Lant Pritchett’s PDIA framework to illustrate how the RCT movement has been responsive to the critiques if not to the critics through a steady evolution of practice. Finally, I assess the current state of the RCT movement in terms of impact and productivity.
The Disruptive Power of RCTs
A chapter in the forthcoming edited volume, Randomized Control Trials in Development: the Gold Standard Revisited, by Florent Bédécarrats, Isabelle Guerin, and François Roubaud.
The use of RCTs in development economics has attracted a consistent drumbeat of criticism, but relatively little response from so-called randomistas (other than a steadily increasing number of practitioners and papers). Here I systematize the critiques and discuss the difficulty in responding directly to them. Then I apply prominent RCT critic Lant Pritchett’s PDIA framework to illustrate how the RCT movement has been responsive to the critiques if not to the critics through a steady evolution of practice. Finally, I assess the current state of the RCT movement in terms of impact and productivity.
Social Investment through the Lens of Microfinance
The reality of social investment can be messy. How could it not be? The aim is to support a new sort of capitalist endeavor driven by pursuit of social progress rather than just pursuit of profit. Yet modern history has been shaped by the tensions between unbridled capitalism and struggles for social and economic justice. Microfinance has been a laboratory for these developments, somehow embracing both market denialism and market fundamentalism, showing possibilities, limits, and conundrums. We reflect on four questions central to both “big ideas” and practical action: (1) How do user fees (including prices and interest rates) help and hurt customers and businesses? (2) How worrisome is mission drift, and why does it happen? (3) What is the role of subsidy? (4) How should social returns be measured?
By Jonathan Morduch and Tim Ogden
Microfinance and Economic Development
Microfinance is generally seen as a way to fix credit markets and unleash the productive capacities of poor people dependent on self-employment. The microfinance sector grew quickly since the 1990s, paving the way for other forms of social enterprise and social investment. But recent evidence shows only modest average impacts on customers, generating a backlash against microfinance. We reconsider the claims about microfinance, highlighting the diversity in evidence on impacts and the important (but limited) role of subsidy. We conclude by describing an evolution of thinking: from microfinance as narrowly-construed entrepreneurial finance toward microfinance as broadly-construed household finance. In this vision, microfinance yields benefits by providing liquidity for a wide range of needs rather than solely by boosting business income.
By Jonathan Morduch and Robert Cull
The Microfinance Business Model: Enduring Subsidy and Modest Profit
Recent evidence suggests only modest social and economic impacts of microfinance. Favorable cost-benefit ratios then depend on low costs. This paper calculates the costs of microcredit and other elements of the microcredit business model using proprietary data on 1,335 microfinance institutions between 2005 and 2009, jointly serving 80.1 million borrowers. The costs of making small loans to poorer clients are high, and when revenues fall short of costs, subsidies are necessary to deliver services to those clients on a sustainable basis. Using a method that accounts for the opportunity costs of all forms of subsidy, the analysis finds that the median institution receives five cents of subsidy per dollar lent and $51 of subsidy per borrower (in PPP adjusted terms). Relatively low levels of median subsidy suggest that even modest benefits of microcredit could yield impressive cost-benefit ratios. The distribution of subsidies is highly skewed, however: the average subsidy per dollar lent is 13 cents and the average subsidy per borrower is $248. The data show that subsidies per borrower are substantially higher for commercial microfinance banks and some non-bank financial institutions that make relatively large loans. MFIs organized as non-governmental organizations (NGOs), in contrast, generally rely less on subsidy.
By Robert Cull, Asli Demirgüç-Kunt, and Jonathan Morduch
The Case for Social Investment in Microcredit
There are strong arguments for continued investment in microcredit. These arguments are based on, not in contradiction to, the recent evaluations of microcredit impact. That the average impact of access to microcredit is modest is not in serious doubt. However, every evaluation of the impact of microcredit shows that there are people who benefit, and that most borrowers, when lenders behave responsibly, do not experience harm. Comprehensive research on microfinance and subsidy shows that virtually all microfinance institutions are subsidized, but these subsidies are small. There are two clear paths for increasing microcredit’s impact through continued investment.
By Timothy Ogden
Big Questions in Credit
“Does microcredit work?” It’s a question we hear a lot. But the answer depends on what the question really is. Does microcredit slash poverty? (Not clearly.) Does microcredit increase micro-enterprise profit? (Some of the time, but capital often gets channeled to other uses and not everyone is a great entrepreneur.) Does microcredit improve the lives of borrowers? (Yes it can, but seldom dramatically and sometimes microcredit can get borrowers into trouble.) Rather than being a single tool used to solve a single problem (like funding a business), microcredit is often one among a set of tools, whose usefulness as a set may be fundamental but whose individual impact is often incremental and thinly spread.
FAI's Timothy Ogden and Economist Rohini Pande In Conversation
Ogden and Pande discuss her work and why standard microcredit may undermine business investment, from her recent paper: "Does the Classic Microfinance Model Discourage Entrepreneurship Among the Poor?"
Carlos Danel: Part 2 - The Future of Microfinance
In 1990, Carlos Danel and Carlos Labarthe co-founded Compartamos—which means "let's share" in Spanish—to provide poor residents (mainly rural women) of Mexico with access to economic opportunities. At its inception Compartamos was a nonprofit organization serving mainly indigenous, rural women in some of the poorest regions in Mexico. The company has since evolved into a commercial bank. While some are critical of the company for what they believe is its emphasis on profits over social returns, our research into microfinance and social investment provides a more nuanced response to the criticism. Nonetheless, there's no denying Compartamos' impact on the region. It is currently one of the largest microcredit institutions in all of Latin America. Most of its more than 600,000 clients live in rural areas of Mexico.
Carlos Danel: Part 3 - The Indian Microfinance Crisis
In 1990, Carlos Danel and Carlos Labarthe co-founded Compartamos-which means "let's share" in Spanish-to provide poor residents (mainly rural women) of Mexico with access to economic opportunities. At its inception Compartamos was a nonprofit organization serving mainly indigenous, rural women in some of the poorest regions in Mexico.
Carlos Danel: Part 1 - The SKS IPO
In 1990, Carlos Danel and Carlos Labarthe co-founded Compartamos-which means "let's share" in Spanish-to provide poor residents (mainly rural women) of Mexico with access to economic opportunities. At its inception Compartamos was a nonprofit organization serving mainly indigenous, rural women in some of the poorest regions in Mexico.
Jonathan Morduch on Microfinance and Social Investment, Part 1
FAI Insights: The Financial Access Initiative's Jonathan Morduch explains the motivation for his most recent research report with Jonathan Conning on "Microfinance & Social Investment." This is part 1 of a two-part video series.