Low-income households are often trapped in a "debt cycle": They borrow to cover ncessary expenses, repay the loan with their subsequent income, then borrow again because they have nothing remaining after repayment. Inconsistent income and seasonality, especially for farmers, makes borrowing attractive at the time of necessity. However, the associated interest costs may stifle the chances for the borrower to accumulate savings. If they were able to forgo borrowing, saving the interest they would have paid on the loan and the resulting interest on this savings should render borrowing unnecessary in the future. This behavior would place the household in a "savings cycle" in which they would gradually accumulate savings, spend the accrued savings on large purposes, and generate income from which to draw more savings. Surely a self-perpetuating cycle involving savings should be much preferred to one involving debt.

Uses data from SafeSave, a credit cooperative in the slums of Dhaka, Bangladesh, to examine how sensitive borrowers are to increases in the interest rate on loans.

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Muhammad Yunus, the winner of the 2006 Nobel Peace Prize and the most visible leader of a global movement to provide microcredit to world’s poor, urges that we add access to credit to the list of human rights. This Framing Note asks whether a rights-based approach to microcredit will in fact be effective in making quality, affordable credit more available to poor families. More importantly, we question whether it is a constructive step in terms of the broader goal of global poverty reduction.

This brief puts a corporate finance lens on microfinance. Microfinance aims to democratize global financial markets through new contracts, organizations, and technology. We explain the roles that government agencies and socially-minded investors play in supporting the entry and expansion of private intermediaries in the sector, and we disentangle debates about competing social and commercial firm goals. We frame the analysis with theory that explains why microfinance institutions serving lower-income communities charge high interest rates, face high costs, monitor customers relatively intensively, and have limited ability to lever assets. The analysis blurs traditional dividing lines between non-profits and for-profits and places focus on the relationship between target market, ownership rights and access to external capital. Access the brief here. Access the full paper here.

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.

Many studies have looked at the experiences of poor savers and there is plenty of anecdotal evidence that savings accounts have resulted in greater asset accumulation, better risk mitigation, and other benefits for poor households. But, to what extend does a hard look at the evidence support a claim that savings accounts actually improve welfare?

This paper reviews the experimental evidence (both RCTs and natural experiments) regarding the impact of improved access to savings. While there are precious few pieces of evidence documenting the development benefits of formal savings services for poor households, the few rigorous studies that exist show savings accounts enhance the ability to save up for productivity enhancing investments and weather unexpected bad times. They may even empower women to make financial decisions within the household.

Describes finding from an experiment in rural India that suggest that the structure of microcredit loan contracts can help people with self-discipline problems who lack suitable savings products.

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The authors of this study investigate whether having access to microinsurance improved the quality of healthcare for poor patients. They found that having access to insurance was not significantly associated with receiving better quality healthcare. The paper provides recommendations for healthcare providers to improve the quality of medical care received by their clients and suggestions for further research on the mechanisms that determine health care quality.

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This note describes simultaneous borrowing and saving, and it provides evidence highlighting an explanation rooted in difficulties re-building savings. The explanation suggests why high interest rates on loans may even be a desirable attribute for some borrowers.