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.

In this report we use experimental measures of time discounting and risk aversion for villagers in south India to highlight behavioral features of microcredit, a financial tool designed to reduce  poverty and fix credit market imperfections. The evidence suggests that microcredit contracts may do more than reduce moral hazard and adverse selection by imposing new forms of discipline. We find that, conditional on borrowing from any source, women with present biased preferences are more likely than others to borrow through microcredit institutions. Another contribution of microcredit may thus be to provide helpful structure for borrowers with self-discipline problems.

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.

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, saving, 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.

This is the ninth 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 7: Grameen II and Portfolios of the Poor
Briefing Note 8: Understanding Price

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 Briefing Note offers insight into the ways poor households manage risks. Based on the financial diaries research in Portfolios of the Poor: How the World’s Poor Live on $2 a Day, this brief describes the formal and informal risk management tools used by poor households in Bangladesh, India, and South Africa, and examines how these tools can be improved to help the poor mitigate risk and plan for the future. The note also features new mechanisms for helping poor households deal with risk, including partial coverage, product design, and insurance.

This is the third 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 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 7: Grameen II and Portfolios of the 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.

Randomized experiments are an increasingly popular way to evaluate the impacts of development interventions. They provide hope that we can overcome important biases common to nearly all statistical evaluations. When done well, randomized control trials (RCTs) can provide clear, transparent, and credible evidence in complicated contexts, but their design and implementation is subject to a number of challenges. This note reviews some of the technical issues surrounding RCTs, describes four examples from microfinance, and discusses their advantages and drawbacks relative to other evaluation approaches.

Farmers face a particular set of risks that complicate the decision to borrow. Researchers use a randomized experiment to investigate: 1) the role of crop-price risk in reducing demand for credit among farmers, and 2) how risk mitigation changes farmers' investment decisions. In rural Ghana they offer farmers loans with an indemnity component that forgives 50% of the loan if crop prices drop to a threshold price. A control group is offered a standard loan product. The authors find high loan uptake among all farmers and little significant impact of the indemnity component on uptake or other outcomes of interest.

Microfinance banks use group-based lending contracts to strengthen borrowers' incentives for diligence, but the contracts are vulnerable to free-riding and collusion. We systematically unpack microfinance mechanisms through ten experimental games played in an experimental economics laboratory in urban Peru. Risk-taking broadly conforms to theoretical predictions, with dynamic incentives strongly reducing risk-taking even without group-based mechanisms. Group lending increases risk-taking, especially for risk-averse borrowers, but this is moderated when borrowers form their own groups. Group contracts benefit borrowers by creating implicit insurance against investment losses, but the costs are borne by other borrowers, especially the most risk averse. Evaluates the presence of market imperfections such as free-riding in group-based mechanisms. Access the full paper here.

La primera estimación global de su clase revela que 2.5 mil millones de adultos no utilizan los servicios financieros formales para ahorrar o para pedir prestado. ¿Quién son estas poblaciones que no tienen servicios financieros? ¿Dónde viven? ¿Cómo sobreviven? ¿Y qué lecciones estas estimaciones llevan a cabo para los legisladores que trabajan para mejorar niveles de inclusión financiera para las poblaciones pobres?