Roughly half the adults in the world, about 2.5 billion people, have no bank account nor even access to a “semi-formal” financial service like microcredit. But what if they did?

In the June 10, 2011 issue of Science, Karlan and Zinman report on a randomized evaluation of microcredit in the Philippines. This article by Jonathan Morduch weighs in on the results of the Karlan-Zinman study and helps establish new frame for thinking about the ways in which microcredit can helping poor families borrow and manage cash flow.

This paper 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 full paper here. Access the brief here.

In this paper, the authors examine the impacts of access to formal microinsurance on economic development as measured by sow production. The study looks at two aspects to determine the impact of insurance. The first examines the impact on economic outcomes for farmers when they have access to formal vs. informal insurance. The second part highlights the vital importance of trust in insurance related transactions and how it factors into the insurance purchase decision.

The full paper can be accessed here

The Grameen Bank of Bangladesh is the best-known and most widely imitated microfinance pioneer. But Grameen found itself in trouble in the late 1990s as the quality of its loan portfolio beagn to decline sharply, and a devastating flood further eroded loan repayments.  It responded by adopting a new model in 2001, dubbed Grameen II. Grameen II was designed to be more flexible than the original model:  aligning repayment schedules with household income flow, meeting the demand for secure and reliable savings products, and acknowledging the varied needs of clients. This brief documents Grameen II's innovations in product design.

This is the seventh note in the Portfolios of the Poor Briefing Notes series. You can link to the other notes below.

Briefing Note 1: The "Triple-Whammy" of Poverty
Briefing Note 2: Borrowing to Save
Briefing Note 3: How do the Poor Deal with Risk?
Briefing Note 4: Research Methodologies
Briefing Note 5: Creating Better Portfolios—Core Financial Products for the Poor
Briefing Note 6: Portfolios of Bangladesh’s Poor
Briefing Note 8: Understanding Price
Briefing Note 9: Three-Country Analysis

These Briefing Notes were created as part of a toolkit of instructional resources for FAI and MicroSave’s June 8-9 virtual conference Reimagining Microfinance Around the World: Implementing Lessons from Portfolios of the Poor. Co-authors Daryl Collins, Jonathan Morduch, Stuart Rutherford and Orlanda Ruthven, and MicroSave’s Graham A.N. Wright moderated the event and discussed with conference “attendees” how to turn lessons from the financial diaries into real, on-the-ground solutions for economic development. The collection of suggested readings and videos for the conference can be accessed on this page.

This Framing Note is the fourth in a policy series by the Financial Access Initiative exploring various dilemmas which policymakers face across several topics of great importance to financial inclusion. This paper describes the contours of the interest rate policy dilemma, updating previous sources with new theory about consumer behavior and new evidence from the demand side about how clients respond to interest rates; and from the supply side as to what drives the setting of rates. The focus here is not on interest rate policy in general, which would include its use in monetary policy, but rather the interest rate control regime applied especially to small or micro loans.

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.

Access the full paper here.

The global financial crisis provides a sharp reminder of how weak lending practices not only affect the lives of many people but also can have severe systemic consequences.  However, policies designed to protect may unintentionally restrict the extension of credit, especially to poorer borrowers.  

While the financial crisis provides evidence of the need for greater consumer protection, adding costs and complexity to credit processes may slow renewed formal lending.  Confronted by these growing pressures at a macro-economic level, policy makers and regulators face a “regulator’s dilemma”: how much and how to intervene in credit markets to protect not only those borrowers who already have access to formal credit, but also to protect access to credit itself. At the heart of successfully resolving this dilemma, as in all such dilemmas, is the process of carefully identifying and evaluating the trade-offs involved.

The FAI Policy Note “Consumer Protection in Credit Markets” advocates an evidence-based approach and provides pointers to help policy makers establish a regime of consumer protection appropriate to the state of development of different credit markets and in line with broader national objectives such as financial inclusion.

Using two new datasets, the authors examine whether the presence of banks affects the profitability and outreach of microfinance institutions. They 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 relying on commercial-funding and using traditional bilateral lending contracts (rather than group lending methods favored by microfinance NGOs).  The authors 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 fail to find strong support for these alternative hypotheses.

Access the research brief here.

A review of recent innovations that are improving the quantity and quality of financial access.  Authors relate the innovations and empirical evidence to theoretical ideas, drawing links in particular to new work in behavioral economics and to randomized evaluation methods.

Access the full paper here.