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.

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.

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.

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 research brief here.

The authors describe the opportunities and challenges faced by banks and regulators amidst a growing recognition of the need for financial access for the estimated 2.5 billion adults in the world without access to banking services. They make a strong case for technology based solutions, especially mobile communications as a mechanism to enable mass-market financial service delivery systems, particularly in hard to reach rural areas. They propose five methods to adapt existing regulatory frameworks to address risks arising from such financial inclusion initiatives and outline a role for the State in nurturing new and innovative models to achieve universal financial inclusion.

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. Access the Briefing Note 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.

Portfolios of the Poor: How the World’s Poor Live on $2 a Day examines the basic question of how the world’s poorest households survive on such modest incomes. The authors report on yearlong "financial diaries" of villagers and slum dwellers in Bangladesh, India, and South Africa--tracking penny by penny how households manage their money. This note explores the core financial instruments utilized by diarist households, and draws lessons from these practices to devise better borrowing and saving instruments for the poor.

This is the fifth 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 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.

This Briefing Note explores the “triple-whammy” of poverty, and addresses how households manage and what can be done to help households cope with their most basic, daily challenges. It further explores this phenomenon through the experiences of three diary households.  This note highlights three distinct problems which poor households face: small incomes, irregular and unpredictable cash flows, and existing financial instruments are unreliable and not suited to erratic cash flow patterns.

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

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
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.