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Banks and Microbanks

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We combine two datasets to examine whether the scale of an economy’s banking system affects the profitability and outreach of microfinance institutions. We find evidence that competition matters. Greater bank penetration in the overall economy is associated with microbanks pushing toward poorer markets, as reflected in smaller average loans sizes and greater outreach to women. The evidence is particularly strong for microbanks that rely on commercial-funding, use traditional bilateral lending contracts (rather than group lending methods favored by microfinance NGOs), and take deposits. We consider plausible alternative explanations for the correlations, including relationships that run through the nature of the regulatory environment and the structure of the banking environment, but we fail to find strong support for these alternative hypotheses.

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Substitution Bias & External Validity: Why an innovative anti-poverty program showed no net impact

The net impact of development interventions can depend on the availability of close substitutes to the intervention. We analyze a randomized trial of an innovative anti-poverty program in South India which provides “ultra-poor” households with inputs to create a new, sustainable livelihood. We find no statistically significant evidence of lasting net impact on consumption, income or asset accumulation. Instead, income from the new livelihood substituted for earnings from wage labor. A very similar intervention made a large difference elsewhere in South Asia, however, where wage labor alternatives were less compelling. The analysis highlights the roles of substitution bias and dropout bias in shaping evaluation results and delimiting external validity. 

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Impact of Microcredit on the Poor in Bangladesh

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We replicate and reanalyse the most influential study of microcredit impacts (Pitt and Khandker, 1998). That study was celebrated for showing that microcredit reduces poverty, a much hoped-for possibility (though one not confirmed by recent randomized controlled trials). We show that the original results on poverty reduction disappear after dropping outliers, or when using a robust linear estimator. Using a new program for estimation of mixed process maximum likelihood models, we show how assumptions critical for the original analysis, such as error normality, are contradicted by the data. We conclude that questions about impact cannot be answered in these data. 

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10 Research Questions

High quality evidence on the state of financial access around the world is advancing rapidly, as the chapters of this book illustrate. A happy consequence of increasing knowledge is the ability to better recognize what we don’t yet know. Here are ten questions, some micro, some macro, that need answers if we are to make informed decisions on how to improve financial access. 

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Latest Findings from Randomized Evaluations of Microfinance

In 2009, the results from two microcredit impact studies in Hyderabad, India, and Manila, the Philippines were released to mixed responses (Banerjee, Duflo, Glennerster, and Kinnan 2010; Karlan and Zinman 2011). Some media declared microfinance a failure (Bennett 2009). Many in the microfinance community dismissed these randomized studies as too limited to be a true reflection of the entire sector . . . 

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Is Micro Too Small? Microcredit vs. SME Finance

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The original promise of microcredit was to reduce poverty by fostering self-employment in low-income communities, an idea first promoted at mass scale in Bangladesh (Yunus 1999). But critics of Muhammad Yunus and the Bangladesh microcredit model argue that supporting larger businesses (small and medium enterprises or SMEs) may instead create more and better jobs for poor individuals (e.g., Karnani 2007, Dichter 2006). That’s only possible, however, if those larger enterprises employ poor workers in large numbers. We argue that that can’t be assumed. 

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From Credit to Savings

When the Gates Foundation started a programme to expand global ‘financial services for the poor’ (FSP), many in the field, myself included, saw this as an important complement to the foundation’s work in health and education.1 The evidence is piling up that the world’s poor face the twin problems of low incomes and difficulty managing their incomes without bank accounts or insurance. Finance, in this view, allows people to invest in the future and – importantly – to marshal resources to meet needs today. Access to finance, then, is a key tool for improving the lives of the poor. The Gates Foundation’s impact on finance for the poor has been most strongly felt in re-balancing attention between credit and savings. 

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Credit is Not a Right

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The notion of “credit as a human right” flows from the argument that if we are concerned with universal access to food, shelter, and health, then we must be committed to providing access to the tools that are most likely to deliver those basic elements of life. For the sake of argument (and there is, of course, argument), we will follow Article 25(1) of the Universal Declara- tion of Human Rights, adopted by the United Nations in December 1948, and begin with the idea that access to food, shelter, and health constitute basic human rights. Yunus can then be interpreted as saying: access to credit is so powerful in reducing poverty, that access to credit should be a right itself. 

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Evaluation Fundamentals

Impact evaluations try to measure the change in a participant’s life that occurred because of an intervention. The “intervention” could be a policy, a project, an insurance product, or a specific feature of a product. For instance, the intervention could relate to a particular product feature, such as the extent of coverage, a change of pricing structure, or variations in the distribution channel. . .

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Emergency (Hand) Loan

Emergencies can derail families and prevent them from getting ahead. This study describes the design, implementation, and results of a pilot emergency (“hand”) loan product in India. The product achieved its original intent, but the pilot encountered considerable institutional and execution challenges. The experience generated lessons for future product innovation. 

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Borrowing to Save: Perspectives from Portfolios of the Poor

It’s not surprising that saving is hard for many of us. We’re impatient, temptations are at hand, and savings devices are seldom ideal. By the same token, it would not be surprising to find that we have a hard time keeping money in the bank. But, puzzlingly, new studies give examples of people withdrawing funds less often than neoclassical economic theory suggests they should (e.g., relative to the simulations of optimal savings in Deaton 1991). And, paradoxically, it is often the same people who had trouble saving who also have trouble drawing down their savings. Some are so reluctant to dis-save that they willingly borrow at expensive interest rates to avoid touching their savings. 

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Three-Country Analysis: Portfolios of the Poor

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How do the world’s poorest households manage their financial lives on $1 and $2 a day? The authors of Portfolios of the Poor tracked the earning, borrowing, spending, and saving practices of 250 households in Bangladesh, India, and South Africa. The resulting “financial diaries” reflect a mixed-research methodology that is systematic in data collection, and simultaneously captures the complexity of people’s lives. This brief takes a closer look at the research samples from all three countries. 

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Understanding Price: Portfolios of the Poor, How the World’s Poor Live on $2 a Day

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The financial diaries provide insight into the prices poor households paid for financial instruments, and the logic behind their financial decisions. Researchers revealed that surviving on small, irregular, and unpredictable earnings often generates financial behaviors that at first seem counter-intuitive-such as paying or borrowing to save. Through the financial diaries approach, (see the “Research Methodology” Briefing Note) researchers were forced to confront assumptions and take a fresh look at understanding the price of microfinance-paying close attention to what price means to poor households, the cost financial institutions assume in lending to the poor, and the universal tension between the impatience to meet financial demands today, and the desire to save for the future. 

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La mitad del mundo no tiene servicios financieros

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Durante el último cuarto de siglo, el movimiento de las microfinanzas ha llevado a una expansión global de servicios financieros para los pobres del mundo. La Campaña de la Cumbre de Microcrédito, un grupo de defensa líder, contó 154 millones clientes en todo el mundo a finales de 2008. Eso es impresionante, pero es sólo un comienzo en relación con la demanda insatisfecha. Los expertos coinciden en que la demanda insatisfecha de financiación es grande, pero el número exacto (o incluso un número aproximado, pero creíble) ha sido difícil de precisar, con estimaciones que van desde quinientos millones de personas a tres mil millones. 

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The Impact of Microcredit on the Poor in Bangladesh: Revisiting the Evidence, Brief

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Microcredit is commonly credited with reducing poverty, empowering women, and delivering other important impacts, particularly to extremely poor house- holds. Rhetoric, however, has outpaced evidence. Empirical studies are scarce, and existing ones have been influential despite a lack of thorough scrutiny. In this paper, David Roodman and FAI managing director Jonathan Morduch attempt to replicate the two most-noted studies on the impact of microcredit, both based on survey data from Bangladesh collected in the 1990s. Pitt and Khandker (PK, 1998) find that microcredit raises household consumption, especially when lent to women. Khandker (2005) concurs and goes further to say that microcredit has more of an impact on the extremely poor than on the moderately poor. Morduch (1998) finds no evidence for impact on consumption levels, but does find that microcredit. decreases the volatility of consumption. This paper shows that the evidence for impact is weak in all of these studies. But, significantly, it doesn’t find that microcredit causes harm, and it doesn’t prove that the impacts commonly attributed to microcredit—like reducing poverty and empowering women—do not exist. Rather, this paper shows that it’s hard to draw much from these data—and that better answers will need to come from other data sets using other methods. 

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Microfinance Meets the Market

Microfinance institutions have proved the possibility of providing reliable banking services to poor customers. Their second aim is to do so in a commercially-viable way. We analyze the tensions and opportunities of microfinance as it embraces the market, drawing on a data set that includes 346 of the world’s leading microfinance institutions and covers nearly 18 million active borrowers. The data show remarkable successes in maintaining high rates of loan repayment, but the data also suggest that profit- maximizing investors would have limited interest in most of the institutions that are focusing on the poorest customers and women. Those institutions, as a group, charge their customers the highest fees in the sample but also face particularly high transactions costs, in part due to small transactions sizes. Innovations to overcome well-known problems of asymmetric information in financial markets were a triumph, but further innovation is needed to overcome the challenges of high costs. 

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From Microfinance to m-Finance

In some countries it can take years to get a new telephone line installed. In 1990, there were just 10 telephone lines installed for every 1000 people in the Philippines. In Kenya, the ratio was 7 per thousand. In India, 6 per thousand. Compare that with the United Kingdom with 441 lines per thousand in 1990, or the United States with 545. For decades, public sector telephone companies in developing economies seldom had incentives or budgets to rapidly expand land line networks, and the private sector has had even less motivation to serve the costly-to-reach. 

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The Unbanked: Evidence from Indonesia

Why do so many poor households lack access to finance? Are the unbanked creditworthy? Largely not interested in borrowing? The answers are at the heart of ongoing debates around the deepening of financial systems We examine household-level data from 1438 households in six provinces in Indonesia. All households, whether or not they were presently borrowing, were assessed by bank professionals to judge creditworthiness. About 40 percent of poor households were judged creditworthy, but only 14 percent had recently borrowed. Possessing collateral was a minor determinant of creditworthiness. Despite depictions of widespread pent-up demand for loans, about half of creditworthy poor households report being averse to taking on debt. Loans for small business were desired, but respondents often highlight broader household needs, including paying for school fees, medical treatment, and home repair.