Although micro-credit has been perceived as effective in reducing poverty, in reality, its impact has been modest. One reason could be that most microloans extended to the poor are term loans, which are not well-suited for borrowers with variable or risky income streams, for example, traders needing working capital for purchasing inventory, or farmers who earn lump-sum income after harvest. While the Indian government has been encouraging banks to provide credit in the form of over-draft, term loans continue to remain the predominant credit product.
In 2013, the Rural Financial Institutions Programme represented by GIZ and the National Bank for Agriculture and Rural Development (NABARD), partnered with Mann Deshi Mahila Bank to launch a new overdraft facility serviced through banking agents to traders and farmers selling groceries in rural markets in Maharashtra, India.
Read MoreWe know that the path out of poverty is rarely a smooth one. The poor are buffeted by a wide range of shocks, pushing them backwards along the way. Exploring the world of risk in the Kenya Financial Diaries, we learned that for many of the poor, navigating a world of risk is actually not only about how you manage your money. It’s also about how you manage relationships with friends and family who can come to your aid when things go wrong. Consider Greta’s story:
Greta and her husband had saved money for a caesarian section she would need to deliver her baby. But public health facility workers went on strike just she was due, and the cost of care at a private facility was five times higher, much more than Greta could finance without hard and dangerous sacrifices. Through friends and family Greta was able to raise roughly 75% of the additional funds needed.
For low-income Kenyans, social network financing of risk is incredibly powerful . . .
Read MoreOver at CGAP, Julie Zollman has a terrific post on M-Shwari, the Kenyan borrowing and saving platform built on M-Pesa, examining the underlying customer needs that have led to M-Shwari’s success. Here’s a key passage:
The appeal [of M-Shwari] was the possibility of being able to borrow on demand, in real time, to stretch families’ ability to make ends meet in the short term. M-Shwari offered liquidity bigger than credit from local shops; faster, more private, and more reliable than friends and family, and cheaper than moneylenders. Here was a product that … solved a very real financial need while also getting delivery right: being accessible, having simple rules…
Read MoreThe third study for our spotlight on current microfinance research is a working paper by Afzal et al. presented at the 2014 NEUDC which delves into the similarity between savings and credit products. The authors conduct a lab experiment among women in rural Pakistan who are or have been microfinance clients.
The experiment runs in three sessions . . .
Read MoreThis week, The Wall Street Journal featured a pair of articles on current issues in microfinance. The first highlights the varied strategies governments across Asia are employing to promote financial inclusion, including mobile technologies and India's policy of universal bank accounts. However, some are concerned about the $80 overdraft feature of these accounts, and liken the potential risk of indebtedness to the past failures of microfinance. FAI's Executive Director Jonathan Morduch notes that indeed, microfinance's impact on poverty alleviation to date has been "disappointing" . . .
Read MoreGiven the mixed results of recent randomized evaluations of microfinance, an open question is whether there are broad limits to the benefits of microloans or whether programs can be tailored in specific ways to maximize impact. Two features of microfinance programs that may matter are targeting and product design. A recent working paper by Pushkar Maitra, Sandip Mitra, Dilip Mookherjee, Alberto Motta and Sujata Visaria investigates the role of these features by studying a microfinance program they term TRAIL, or Trader Agent Intermediated Lending.
The paper compares the impacts of a traditional group-based lending microfinance model to a more innovative and targeted model in the context of smallholder farming in West Bengal. The TRAIL model targets loans by incentivizing local traders to identify high potential borrowers for unsecured individual loans. The loans also have some innovative terms . . .
Read MoreDespite the long-awaited publication of six impact evaluations of microcredit, there are still many questions to be answered. But I worry about whether we will ever get answers. I don’t think that anyone involved in the impact evaluations would consider them to be the “final word” but that may be, de facto, what they are.
Why?
Back in 2011 the Development Impact blog published a survey of young academics which listed microfinance as the “least under-researched” topic in development. In other words, up-and-coming researchers were saying that enough work had been done on microfinance. You can be sure that ambitious economists looking to make their mark are not going to direct their limited energies toward a topic they think is well-covered. Indeed, while I haven’t done a thorough analysis of this, my impression is that there have been a declining number of papers devoted to credit in the last few years at NEUDC, one of the best places to see new academic work. Whether or not the impact studies are the final word on microcredit, they may be the final word in academic interest . . .
Read MoreIn January, the American Economic Journal: Applied Economics published a special issue devoted to impact evaluations of microcredit. You can see an overview and some of my thoughts here (and some other write ups here and here). Justin Sandefur, from CGD, titles a blog post on the issue, “The Final Word on Microcredit?”
I really hope the answer to Justin’s (rhetorical) question is “No.” Because I still have a lot of questions.
If you haven’t been keeping score on the microcredit evaluations, all of which have been circulating for a few years now, here’s the bottom line according to Esther Duflo (editor of AEJ:Applied and co-author of one of the studies) “These loans do help, but the changes are not transformative, certainly not transformative enough to justify charitable donations to the standard microcredit model.”
To provide a bit more detail, while the six studies are quite different—who got access to credit, loan amounts and terms, local context, time, metrics, etc.—none found significant increases in income, consumption or spending on things like health or education . . .
Read MoreLast night FAI had the pleasure of co-hosting a lively and informative panel discussion on the impact of cash transfers in international development with the Microfinance Club of New York. The panel (moderated by FAI's Timothy Ogden) included Paul Niehaus and Jeremy Schapiro, co-founders of GiveDirectly, Jenny Aker, Assistant Professor of Development Economics at The Fletcher School, and Johannes Haushofer, Assistant Professor of Psychology and Public Affairs at Princeton University.
As is to be expected when you mix practitioners and academics, the evening's conversations had a good mix of thoughtful insights, debates, and allusions to other bodies of work for futher research. Below is a list of what was mentioned as well as some additional items we feel are a nice complement for the issues raised by the panelists, including a new FAI infographic showing what we know so far about microcredit. . .
Read MoreEach of the U.S. Financial Diaries' Household Profiles presents the financial life of one family in the USFD study. While these families are not necessarily representative of the total sample, they illustrate recurring themes: households struggling with income volatility, unplanned expenses, and finding ways to save and invest, but also using creative–and sometimes counter intuitive–budget and money management strategies to help make ends meet.
The latest profile focuses on Elena Navarro, 27-year-old woman living outside of San Jose, CA. She has a bachelor’s degree and ambitions to attend law school. While Elena’s degree and experience qualify her for jobs that pay well above the poverty line, she lives close to the margin . . .
Read MoreEarlier this week, The New York Times published a feature on new initiatives aimed at bringing informal savings groups into the formal financial sector:
While informal lending circles among families, acquaintances, co-workers and neighbors are familiar to hundreds of millions of people all over the globe, they are rarely recognized by mainstream financial institutions . . .
Read More“If you build it, he will come.” Unfortunately, this line that worked so well in Field of Dreams is less effective in the world of social enterprise. Simply producing and having the networks to distribute a product does not guarantee its success—to be successful, a product must address a customer need.
What better way to understand customers’ needs, wants, and limitations than to involve them in the design process? This customer-centric philosophy is also known as human-centered design (HCD). I work with Proximity Designs, a social enterprise that sells locally manufactured solar lanterns and low-cost irrigation products to smallholder farmers in rural Myanmar. Before we launched these products at scale, our team presented prototypes to farmers in the field. Farmers could see, hold, and operate the products and give us immediate feedback on size, color, weight, price, and wattage.
But when Proximity launched its microfinance services in 2010, we had to come up with a different approach . . .
Read MoreThere’s a new weapon in the fight to expand financial access.
he Entrepreneurial Finance Lab, founded by faculty and students from the Harvard Kennedy School and Harvard Business School, is pioneering new personality-assessment based tools to expand credit access. Survey-based measures of personality characteristics – such as ethics, character, intelligence, attitudes and beliefs – combined with measures of business skills turn out to be powerful predictors of loan repayment in real-world settings. The Entrepreneurial Finance Lab creates alternative credit scores based on these characteristics to expand credit access in partnership with banks and microfinance institutions from around the world.
The approach originates from research in both psychology and business administration . . .
Read MoreA recently released World Bank Policy Research Working Paper presents results of an audit study of Mexican banks, investigating whether bank employees hide the lowest cost options from potential customers in order to turn a higher profit.
Financial products can vary widely in cost while providing more or less the same services. The dispersion in prices for products that offer essentially the same benefits – checking accounts, savings accounts, loans, and index funds – is thought to at least partly reflect a lack of information on the part of consumers. Savvy and informed consumers would gravitate to the lowest cost option, and competition would then drive prices down to the same level for equivalent products.
A key potential source of information on financial product attributes and prices is bank employees. Bank employees presumably know their products, but may strategically choose not to divulge information about lower cost options . . .
Read MoreThe majority of the world’s poor share one profession: farming. Most of these farmers cultivate less than 10 acres of land, far away from paved roads and with limited access to the improved seed and fertilizer they need to produce good harvests. Most of these farmers also lack access to financial services that could help them buy that seed and fertilizer. If the global microfinance industry seeks to have a long-term impact on global poverty, it must address the needs of smallholder farmers. Most microfinance institutions are focused in urban and peri-urban areas, but a few are starting to offer products specifically targeted at farmers.
We’ve seen fast-growing interest in the farm microfinance sector in the last few years. The books, videos, and papers discussed below helped us understand the market opportunity in farm microfinance, and what needs to happen for the market to take off . . .
Read MorePopular financial advice guru Dave Ramsey has long advocated for what he calls the “debt snowball” approach to repaying debt for financially stressed households: order your debts by amount, smallest to largest, and repay them in order, ignoring interest rates. This sounds decidedly unscientific, and from a classical economics perspective it is bad advice. Rational actors should settle debts with highest interest rates first, regardless of the size of debt, in order to minimize the total amount they will have paid when all debts are finally settled. But, argues the snowball, if the debt never gets paid off at all because the debtor is daunted to the point of paralysis by the prospect of paying off a huge debt, then the classical advice is irrelevant . . .
Read MoreThere has been plenty written on the failure of microcredit-funded enterprises to grow or achieve more than minimal profitability. If you’re curious why microenterprises don’t grow, I recommend reading a new piece that provides some insight into the life of a microentrepreneur. It’s from an unexpected source: a Fast Company magazine article about the emerging world of task-based “entrepreneurship” in the United States. Companies like Uber, TaskRabbit, Postmates, AirBnB and Amazon (via its Mechanical Turk service) allow people to earn income by doing odd-jobs, renting out a room or running errands. The rosy view that all these companies present is that they are providing an opportunity for people to earn money on their own terms and in the hours that they are not otherwise occupied. And each prominently features stories of individuals who are doing quite well, even quitting regular jobs and substantially profiting from using these tools (not unlike, it should be noted, the stories that emanate from microcredit).
But that is not the experience of the average user . . .
Read MoreToday The New York Times features a perspective from Shaila Dewan on the importance of credit and saving in the lives of the poor. Dewan highlights that life without credit can be expensive and severly limiting in terms of accessing housing and other services or dealing with emergencies. She also notes that savings and credit are interconnected and quotes FAI's Jonathan Morduch on his own observations of the relationship between this activities from his research in Bangladesh . . .
Read MoreThe Taylors overdraft their checking account every two weeks, on purpose.
As described in a recent issue brief published by the U.S. Financial Diaries, the Taylor family’s income level varies significantly from month to month. Sometimes it’s not enough to cover all of their expenses. So, they opened an account at a bank with a simple overdraft fee structure: One $35 charge per overdraft, no daily fees, and an allowance of up to $500 at a time. Since the Taylors typically make only one large cash withdrawal per paycheck – the entire amount of pay – this bank would charge them at most one $35 overdraft fee each cycle, if they happen to need more cash than the amount of that week’s direct deposit.
The Taylors use overdrafts as another household might swipe a credit card or take out a payday loan. Since their credit history eliminates the card option and they are already tied up with a payday lender, over-drafting becomes another logical – and probably more convenient – place for them to turn to stay on top of their bills. It’s clear that the family responded to and relies on their new bank's transparent behavior. They saw its fee policy, understood how they could manage it, and became a customer . . .
Read MoreLast week was a big one for those hoping to reach “full financial inclusion” by 2020. The President of the World Bank has signed on to the cause, and the Center for Financial Inclusion just rallied the troops in London at the Financial Inclusion 2020 Global Forum.
As with most really big global goals, success requires making strides in China. China is the last huge, untapped market for microfinance, but there are signs that that’s changing. The focus of microfinance in China is on credit, and the numbers of providers has been growing fast, with a big jump since 2010. At the end of 2010, the China Association of Microfinance had 2,614 formal members in 31 provinces and cities. The early members were mainly public-interest microfinance institutions focused on poverty reduction . . .
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