Bringing the unbanked into the formal financial system requires innovation—but sometimes the innovation required is far from what we spend most of our time thinking about. A post at the New York Fed’s Liberty Street Economics blog details an important innovation required to bring women into bank branches at the turn of the 20th century: a private room for extracting cash from their stockings.
The post notes other important milestones in banking women—a long term process that began around the time of the U.S. Civil War when California established the financial independence of women regardless of marital status. Still, more than a century later, the “ridiculous” idea of women managing their own bank accounts was being used for easy laughs on television shows . . .
Read MoreFAI asked Jessica Goldberg to tell us about the research papers that have influenced how she thinks about savings and the poor. This is what she told us:
I tend to think of the papers that have influenced my thinking about savings as making three related, big-picture points:
- Savings is complicated
- Savings matters
- We can help!
Together, these papers remind me that we need to think carefully about why people save, about the relationship between savings and investment, and about what types of savings products are most likely to improve people’s wellbeing.
Savings is complicated
To me, Robert Townsend’s 1994 paper "Risk and Insurance in Village India" really captures important ways that people’s complicated lives and social situations affect their decisions around savings.
Read MoreFAI asked Chris Dunford to tell us about books and papers that really made a difference in how he thought about savings and the poor. This is his response:
Portfolios of the Poor: This book has changed the “narrative” in the microfinance community more than any other since the founding of the microfinance industry. Though the effort to promote a “client-centered” approach (a.k.a. demand-driven rather supply- or product-driven) has been concerted for over a decade, this book is what made clear and compelling both the importance and implications of starting with an understanding of what the client is already doing. But it goes further to help us understand what the poor are doing, not just those who step forward to be clients of current microfinance services. The book’s orientation and messages liberate us from the institutional straightjacket to revisit fundamental questions of what we might do to help the poor help themselves deal with financial issues. For me and my colleagues at Freedom from Hunger, and apparently for so many others, the book resonates with the stories we’ve been hearing from clients for decades and gives us a broader perspective in which to situate those stories.
What has this to do with savings? The composite picture from financial diaries gives us vivid understanding of the roles and variety of savings in the financial management tool kit of the poor . . .
Read MoreThe concept of social investment has received growing attention over the last decade. The core idea is simple: investing in organizations that produce a substantial positive soal outcome -- and at least some financial return. Advocates for social investment frequently use the phrase “doing well while doing good.”
While there has been much discussion of social investment, there has been relatively little actual investment. The one area where substantial flows of capital have emerged under the social investment umbrella is microfinance. Thus, there are important lessons and insights for social investment as a whole to be gained by examining the experience of the microfinance industry in trying to marry profit and social returns.
Over the last two decades, microfinance has grown from a promising experiment to a burgeoning industry that serves over 200 million people worldwide. The early hope was that microfinance would drive toward full sustainability, earning all the necessary funds for their operations and growth. Microfinance banks would earn solid profits and wouldn’t need subsidies after the banks were fully established to keep going. Muhammad Yunus himself has voiced support for the concept of “social businesses” – businesses designed to produce some financial return (which gets re-invested in the business) while delivering social returns. But it has turned out that social investors (and the subsidies they bring) remain critical if social goals are to be achieved . . .
Read MoreIt’s been 21 years since the publication of Michael Sherraden’s Assets and the Poor,the book that put asset poverty on the U.S. policymaking map. That was cause for celebration last week in Washington D.C., where the New American Foundation hosted a symposium to talk about what more might be done to help Americans—particularly low-income and minority ones—build savings and other assets. The researchers, advocates, funders, and government officials in the room covered a large variety of topics, including child savings accounts, the “teachable moment” of tax time, behaviorally informed product design, asset limits in public benefits programs, universal individual retirement accounts, mortgage lending practices, and the puzzling persistence of the racial wealth gap.
It was a rich and multi-faceted conversation, but what may have struck me the most was the work being done by the state of Delaware, which is quickly expanding its program of free financial coaching to low- and moderate-income residents. This is very much in the tradition of cities such as New York and San Francisco, which have gotten well-deserved attention over the past few years for steps they are taking to bolster the financial stability of their populations. Efforts range from expanding the use of low-cost bank accounts to counseling people about how to budget and avoid taking on unnecessary debt. A number of municipalities have come together to form Cities for Financial Empowerment, and the ones at the head of the movement, like New York, are now pushing to integrate financial counseling into other government services, such as workforce development, homeless prevention, and community courts . . .
Read MoreIt’s the microfinance bête noire. The great unspeakable. The furtive shadow slinking down the narrow alleys of poverty. Yes, the consumer loan. Has microfinance really come to this, we ask? Helping the poor buy a TV? Charging 40% interest for the couch to go in front of that TV? And what about family celebrations, festivals, dowries? Is that really what microcredit is for?
Consumption lending has been creeping out from the shadows for some time, but mostly for “good” consumption like school fees, urgent medical care, or basic needs like food during those difficult periods when income is scarce. Still, for many of us the TV-on-credit notion that represents what is so easy to think of as “bad” consumption remains too painful an idea to swallow.
But how to draw the line? If not the TV, then what about a microwave? A motorbike? Plumbing in the home?
Read MoreThe Findex project helps to correct a long-standing imbalance in evidence on global finance: an abundance of data on the supply of financial services but curiously little that’s systematic and comparative about global demand. Together with the IMF’s Financial Access Survey, we’re finally getting a clear picture of the holes in global financial access.
There’s a lot to celebrate now that the Findex is here. So much so that it’s striking that it took so long to create a constituency for the efforts. Stanley Fischer had initiated the push in 2004 as head of the Advisors Group for the UN Year of Microcredit, and I joined Princess Maxima of the Netherlands in pushing the agenda forward in advisory roles with the UN in 2005. But it was the Gates Foundation’s support of the World Bank research group in 2010 that ultimately got us here.
The Findex headline turns out to replicate an earlier count of the global financial gap: half the world is unbanked, about 2.5 billion adults, the same bottom line that came from aggregating a range of independent surveys from ten years ago. But even if the headline is familiar, the Findex delivers rich details . . .
Read MoreA lot of progress has been made in understanding the savings behavior of poor households over the last few years. A raft of new studies are beginning to appear that promise to advance our understanding further.
But thus far, the new studies are providing as many new mysteries as answers. David Roodman does a good job of exploring the mysteries presented by one of the first of these studies—a trial of a commitment savings product in Malawi. In summary, the researchers found that access to a commitment savings product helped increase savings balances—but NOT in the commitment savings account. Sometime soon I’ll be blogging about a new paper from Pascaline Dupas and Jonathan Robinson that similarly suggests that a commitment device works even though it doesn’t require much commitment.
The mysteries aren’t limited to commitment devices though . . .
Read MoreIn most of the developing world, the poor are disproportionately vulnerable to risk. Whether these risks come in the form of the death of a family member, severe illness, the loss of an asset such as livestock, or a natural disaster, these events have a particularly debilitating affect on the poor who are less able to financially absorb and recover from such shocks.
Increasingly, providing the poor with access to reliable and reasonably priced insurance instruments has become viewed as an integral component of inclusive financial sectors. This type of insurance is commonly referred to as microinsurance and is defined as “the protection of low-income people against specific perils in exchange for regular monetary payments (premiums) proportionate to the likelihood and cost of the risk involved.” ("Protecting the Poor: A Microinsurance Compendium " 2006, Churchill, C.)
The field of microinsurance is still relatively new and in its infancy stage . . .
Read MoreThere’s not enough academic research on the regulation of financial inclusion. Many of the questions might seem too applied for some researchminded economists, but that leaves regulators with few guideposts. It also seems short-sighted.
Regulation is always a question of trade-offs between competing goals. Within microfinance, for example, there is evidence that the supervision and monitoring that is part of prudential regulation increases costs substantially for microfinance institutions. That, in turn, appears to push institutions to reduce outreach to their poorer customers and women (Cull, Demirgüç-Kunt, Morduch 2011). The alternative—less regulation in order to increase outreach—carries plenty of dangers. Those are difficult trade-offs to make and there is as yet not enough empirical evidence to describe optimal regulatory schemes for microfinance.
Read MoreRegulators hope that expanding financial access will also provide greater stability to the overall financial system. This would occur as the market becomes larger and more diverse, and thus better able to withstand difficulties in any particular corner. The range of depositors would enlarge, as would the kinds of financial institutions in the market. Greater competition among providers would create pressure for quality competition. Regulators hope that expanding financial access will also provide greater stability to the overall financial system. This would occur as the market becomes larger and more diverse, and thus better able to withstand difficulties in any particular corner.
That’s the rosy scenario. The financial crisis of 2007-8 in the United States is a contrasting reminder that expanding access and increasing stability do not necessarily go hand in hand. In the United States, the expansion of mortgage finance opened way for new home buyers to engage in speculative and ill-advised real estate investments, eventually fueling the drama behind the financial crisis (McLean and Nocera 2010). The financial
crisis was created by a range of forces—including fundamental structural inequalities exacerbated by poor oversight, misaligned incentives, and some measure of outright fraud—so generalization should proceed with caution (Rajan 2010). Still, the crisis underscores the larger point: Regulators need a deeper understanding of what can happen to the stability of financial systems when millions of new participants enter. Debates over the benefits and risks of commercialized microfinance as a gateway for financial access have raged since the early days of microfinance . . .
Read MoreThe most basic question is the micro one: whether microfinance typically yields notable impacts on the lives of low-income families. The logical follow-on is, to the extent that micro impacts emerge, how do those impacts
add up? Is there a reasonable case that expanding microfinance can make a dent in regional or national economic growth rates? In national-level poverty rates?
There are two complementary research strategies. One is cross-country research, which tends to show positive correlations between financial expansion and the reduction of inequality (Demirgüç-Kunt and Levine 2009 provide an overview). The work doesn’t connect the dots from microfinance explicitly, but it does help frame issues. The second approach connects the dots by imposing structure on the relationships. A good example is the general equilibrium analysis of Buera, Kaboski, and Shin (2011). They find that increasing financial access leads to macro impacts, but the magnitudes are small . . .
Read MoreThe original promise of microcredit was to reduce poverty by fostering self-employment in low-income communities, an idea first promoted at mass scale in Bangladesh (Yunus 1999). But critics of Muhammad Yunus and the Bangladesh microcredit model argue that supporting larger businesses (small and medium enterprises or SMEs) may instead create more and better jobs for poor individuals (e.g., Karnani 2007, Dichter 2006). That’s only possible, however, if those larger enterprises employ poor workers in large numbers. In a newly published paper, NYU economists Jonathan Buachet and Jonathan Morduch argue that that can’t be assumed.
Most studies of SMEs implicitly or explicitly compare them to large firms . . .
Read MoreLast week Public Radio International reported on two young middle-class Indian men who spent three weeks in Bangalore living on 100 rupees a day followed by one week living at India’s controversial new poverty line of 32 rupees a day (roughly equal to 60 cents). “When you’re living on that amount, life is all about innovation,” says Tushar Vashisht in this story“…because every hour you’re thinking at least 10 minutes on that hour how you’re going to survive the next hour.” It's an interesting story that underscores many of the findings from Portfolios of the Poor: How the Worlds’s Poor Live on $2 a Day, foremost among them is that these two young men used savings to fund their daily existence. They didn’t experience the erratic shifts in daily income that characterizes poverty in India and other parts of the global south. “Somebody doesn’t pop out of the ground and give you $2 every day,” says Daryl Collins, co-author of Portfolios of the Poor, in this PRI story. “What is the most difficult is that sometimes it’s $5 and then it’s nothing and then it’s $1 and then it’s $2 and then it goes back to nothing.” Additionally, she adds “Somebody who is living on 100 rupees a day, they could indeed be living on 40 rupees a day because they are sending so much back home to the villages."
Read MoreFAI is excited to announce Timothy Ogden has joined as Interim Director. Many of you know Tim from his involvement in microfinance, social entrepreneurship, philanthropy as a prolific blogger . . .
Read MoreThe notion that we cannot count on brick-and-mortar investments to massively expand access to finance in developing countries is now widely accepted. We need to go branchless, and to do so safely we have an opportunity to leverage mobile phones that are increasingly ubiquitous. That’s clear at an infrastructure level, but I don’t think there is much understanding of what that means at the service level. Let me paint the picture as I see it, at the risk of sounding all high-level and new agey.
For me the starting point is recognizing that financial services are primarily about information. Mechanically, financial services are about recording a bunch of credits and debits: how much you’d like to transfer to whom, how much you have, how much you owe, how much you’ll be owed if certain events occur. More fundamentally, financial services are about trusting or being trusted, and that’s a function of the information you have on the other party . . .
Read MoreWhat products are “right” for people who are outside of the formal financial system and/or poor? It’s a question as relevant in developed economies as in developing ones. During the housing bubble in the US, financial inclusion was often a justification for what in retrospect looks more like predatory behavior. It’s difficult to tell in the moment, though, the difference between a product priced appropriately (for cost of delivery, value to the consumer, and risk among other factors) and one that is predatory when those customers are almost entirely outside the existing formal system.
The financial crisis extended the debate in the US from payday loans to mortgages and now to checking accounts, debit cards and credit cards via regulatory changes that have changed how providers charge for these services. These changes, in general, have made it much more explicit that the cost of basic financial services for the poor or those who do not manage their money carefully are much higher than for others.
Along with driving some people away from some products—fewer people can get a credit card for instance—there is some innovation happening, particularly around alternatives to checking accounts . . .
Read MorePart 1 ("The Economics of Microsavings") of this brief exploration into the economics of savings-driven microfinance looked at the role of microsavings at microfinance institutions. In one large study, poor borrowers, despite accounting for 75% of active accounts, only contributed 3% of total deposits mobilized, mainly because they maintain low balances. However, poor savings clients carry out frequent transactions, for which they have well-demonstrated willingness to pay relatively large fees. These and other fees can be a major source of revenue on its own. However, many savings clients are also borrowers, and it is through the combination of fees, high yield microcredit loans, and other services (insurance, transfers, etc.) that microsavings clients can be truly profitable.
That raises a question: if small savers are indeed profitable without providing significant funding, then where does the funding of deposit-driven MFIs come from?
Read MoreI have a confession to make. When I began composing this blog, I approached it with a fairly simple hypothesis: Microfinance institutions (MFIs) that engage in large-scale deposit taking must likewise grow their loan portfolios. After all, deposits are a source of funding with high operational cost that must be appropriately offset by growing revenue, and only microfinance portfolios provide yields high enough to achieve that. And because many poor families have a higher demand for savings services than for credit, the resulting over-liquidity could push MFIs into unsustainable portfolio growth, eventually leading to the very credit bubbles that microsavings advocates are trying to avoid.
It seems a reasonable enough hypothesis, and sufficiently controversial to be interesting. Trouble is, it’s not true. Reality turns out to be more complicated. In this two-part blog series, I will explore the underlying economics behind microsavings . . .
Read MoreThe microcredit movement is premised on the idea that access to capital will be liberating, empowering, and profit-making. But as the Indian microfinance sector closed out another year, it’s hard to be so ebullient.
The Indian microfinance crisis continued through 2011, and we now have good data and the distance to get a clearer perspective. More than anything else, the data show disturbingly high levels of debt pushed into communities. While the government blames microfinance institutions for excessive lending, government-sponsored self-help groups turn out to have contributed to a large share of the problems . . .
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