Editor's Note: I recently learned that my paper with Michael Clemens (that one I referred to last week that took 5 years from submission to publication) on rethinking migration from the perspective of household finance is among the top 10% of downloads at Development Policy Review so if you're eager to read something non-pandemic check it out. Apparently at least a few other people have done so. And the paper on what is happening with microcredit in Pakistan is now officially published.
–Tim Ogden
Read MoreEditor's Note: In the last faiV I noted that the question "How are you?" didn't seem like it could survive the pandemic. Here's an article from The Atlantic on some alternatives. But my favorite alternative so far is a different answer rather than question. Hans Dieter Seibel passed on that his colleague Marion Levy Jr. has a standard response to "How are you?" that seems especially apposite now: "Terrible. But I'm glad you asked."
Read MoreThis edition of faiVLive brought together expert practitioners and researchers to discuss how we should be thinking about the impact of COVID-19 and pandemic control policies on poor households in developing countries, what policy interventions are plausible and possible, what role does microfinance have to play, and what needs to happen to enable the global microfinance industry to be useful now and six months from now.
Read MoreEditor's Note: The only two predictions I feel I confident in making right now are that a) we will find some new phrase for opening a conversation other than "How are you?" or at least some new way to answer the question, and b) that the trend of putting webcams on the bottom of a laptop screen is over. Thanks to all of you who reached out in reaction to the abbreviated version of the faiV last week focused on my concerns about the future of microfinance in the US and globally. Please keep sending information and thoughts my way.
Read MoreEditor’s Note: What a difference a month makes. I've started drafting a new edition of the faiV several times over the last six weeks, but events kept overwhelming the moment and I put it off again. Now it seems that events have overwhelmed everything. And so, here is a special edition of the faiV with few links and only two thoughts around one central theme: the existential crisis for microfinance globally.
Read MoreThis edition of the faiVLive featured Tim Ogden, Managing Director of the Financial Access Initiative at NYU shared the latest insights on SME business training programs, with guest speaker David McKenzie, Lead Economist in the Development Research Group, Finance and Private Sector Development Unit at the World Bank. Tim and David discussed what we know about small business performance and productivity, the importance of management, and training impact evaluations--all essential for innovating SME training programs.
Read MoreThis faiVLive webinar on training programs for small businesses featured guest speaker David McKenzie, Lead Economist in the Finance and Private Sector Development Unit at the World Bank’s Development Research Group, in conversation with Tim Ogden, Managing Director of the Financial Access Initiative at NYU.
Read More1. Financial Inclusion/Household Financial Security: It seems strange that I so infrequently have items specifically on microfinance so I leap at the chance when it comes along, particularly when that chance involves one of my soapboxes. For instance: the product is what the users make of it, not what the institution wants it to be. For instance, most microcredit loans aren't investment loans, they're liquidity management tools. Which, of course, makes sense since liquidity management is a more pressing need and the structure of the basic microcredit loan is so ill-suited to business investment. But there are ways to make the standard microcredit loan structure more workable for investment purposes. For instance, borrowers from the largest MFI in China form bogus groups and then funnel all of the loans to a single member to make a larger investment. It's not a niche phenomena either: the authors estimate that 73% of groups are doing this.
Another of my soapboxes is the history of development of financial institutions that serve excluded populations, and where the modern microfinance movement fits in that history. There's a new paper from Marvin Suesse and Nikolaus Wolf on the development rural credit cooperatives in Prussia between 1852 and 1913 (I did say this was a pet interest). And here's a summary version in VoxEU. If that doesn't sound like the kind of thing you would normally click on, I beg you to reconsider. It's an interesting story about what drove the creation of a new kind of financial services institution in a setting that makes it a bit easier to disentangle causes and effects, and what effect these new institutions had on their communities. I won't spoil the ending but would encourage you to think about how their results would look if measured with an individual-focused impact evaluation.
I will spoil the beginning, though: the formation of credit cooperatives was driven by changes in the economy that increased the need for access to credit. Which brings me to a third soapbox, the Great Convergence (and there's more on that below). Here's a new report from the New York Fed on constrained access to credit in the United States, including a "Credit Insecurity Index." The premise is that access to credit is important for households to manage liquidity, manage investment and manage risk (those are my terms, theirs are "manage emergencies, take advantage of opportunities, or invest"), but that access varies geographically for lots of different reasons. The report tracks 5 tiers of credit access and changes in those tiers over time, by county. There are 11 states where more than 10% of the population lives in credit-insecure counties. It's another way to illustrate how much in common parts of the US, geographically and demographically, have in common with middle-income countries. Speaking of, I'd love to see a similar exercise done in other countries.
Finally, and keeping with the Great Convergence sub-theme, here's a new paper from Jonathan Fu looking at representative data from six "emerging economies" and five "developed economies" to look at "contextual-level" predictors of financial well-being. He finds that more sources of independent information, more competition, and specifically more competition from informal and semi-formal providers helps, and that simple access and financial literacy don't (hey, another soapbox!).
2. Digital Finance: Writing about digital finance is frequently tough because the line between what is "finance" and what is "digital finance" isn't all that clear much of the time. Thirty years ago most credit card transactions were digital (the information was passed over phone lines from modem-to-modem!) but we don't tend to think of that as "digital finance." Another of my soapboxes is that often the "digital" in "digital finance" is used as a justification to pretend the rules of finance don't apply. Here's a useful review in an unusual outlet (Computer) on the "technical potential versus practical reality" of digital finance, specifically blockchain and crypto, for low-income people. It cites some examples I was unaware of and presents the arguments for the benefits pretty clearly. But the best reason to read it is the Challenges section features a heading you almost never see from pieces that emerge from the digital side of digital finance: "Low-income groups' limited power and financial/social capital." Another thing I really like is it draws a distinction between FinTechs and TechFins, the latter being tech firms dabbling in finance.
The Economist has a piece this week on that issue specifically: "how digital financial services can prey upon the poor" with a specific focus on the potential for abuse of data gathered on poor customers who have little understanding of what is being gathered by whom or the consequences (to be fair, none of us do). To the point about the blurred line between finance and digital finance, there's not much there that hasn't been true of non-digital finance for a very long time.
The Economist piece relies heavily on CGAPs long-standing attention to these issues, and Matthew Soursourian and Ariadne Plaitakis have more to add in a look at how digital finance may require changes to competition policy in financial services, specifically as TechFins play a larger role. Oh look, they specifically call out issues of political power!
In their case it's the political power that the market power of TechFins brings, but it's not just the political power of corporations that becomes worrisome in digital finance. The political power of governments is even more concerning to the extent that it enables even more channels for surveillance, oppression and exclusion. Here's a story about Kenya's digital ID initiative that is excluding many marginalized groups from getting the IDs that will soon be necessary for many aspects of life including access to the financial system. But even those people who are included may end up excluded because the government lacks the tools and expertise to protect the very sensitive data that goes into the biometric IDs.
Read More1. SMEs: So this is kind of old, at least in faiV terms. But it's new to me, and a good illustration of one of the fundamental ideas that underpins how I look at all research/interventions related to SMEs: Reality has a surprising amount of detail. The point the author is making is quite different from what I take from it, so let me explain a bit more. Figuring out how to run a small business, in most contexts where we care about helping people running small businesses--developing countries, marginalized groups or areas in developed countries, other people markets and regulation have failed--is really, really hard because there is a surprising amount of detail at every step in the process. Product, location, competition, marketing, production, accounting, financing, investment--all of them involve a surprising amount of detail, and lots of little ways to get things wrong. But with so much detail it's hard to figure out if something is going wrong, much less what specific thing is going wrong.
At this surprising level of detail we tend to throw programs that either only address one small detail (e.g. incentives for formalization), or lots of details spread out across many tasks (e.g. business training). In both cases we see small or negligible effects for the most part (in part because most impact evaluations of training don't have nearly enough power to detect the size of change we could reasonably expect).
That's a fairly long disquisition to set up that the next faiVLive will be on the topic of SME business training specifically. On February 20th, at 10am Eastern, David McKenzie and I will discuss what we know about SME performance, management, survival and especially training. Register to join us here.
Finally, while I remain one of the holdouts against the term "financial health" (more on that another day), here's a report from my old colleague Piotr Korynski, now at The Microfinance Centre, looking at the application of financial health to SMEs. It's definitely worth a read to start peeling back layers on the surprising level of detail required to really understand what is happening inside SMEs.
2. Cash: At this point I feel like any discussion of the death of cash should come with a mandatory voiceover of Mark Twain saying "Reports of my death have been greatly exaggerated." Here's Olivier Usher from Nesta on 2020 being a tipping point in the "cash crash." There are some interesting data points here, and more importantly, some important questions about how payment mechanisms affect behavior, or allow others to control behavior.
The virtual voiceover to this particular death of cash pronouncement is from New York City, where the city council just yesterday approved a regulation requiring all businesses in the city to accept cash as payment. That means that 3 of the 15 largest cities in the US, as well as the entire state of New Jersey have banned the death of cash.
3. Financial Inclusion: Financial inclusion, like cash, has frequently been confined to the dustbin of history in recent years, in favor of other terms. As I mentioned I still prefer inclusion (while noting the irony of the name of the research center I manage) but the reasons that others don't are fair and reasonable. One of the main reasons "inclusion" replaced "access" was the recognition that opening lots of dormant accounts really shouldn't count for anything. But shifting terms didn't really blunt the criticism. Here's Bhavana Srivastava and co. from MSC on when financial inclusion is not inclusive for women, and how to change that. Here's IDEO.org on essentially the same topic, looking at what it will take to include women in the financial system in Tanzania, Bangladesh, Kenya, Nigeria, Pakistan and India. And here's Mayada El-Zoghbi on why measures of access and inclusion don't square up with each other.
Bobbi Gray of the Grameen Foundation also has some problems with financial inclusion (sort of)--here's her list of financial inclusion "notions that must die." Of particular note is the third: financial inclusion is always positive. Keep that one in mind while you read this piece on "financial inclusion will see mass market adoption in 2020." If you're wondering what that means, I'm not sure you'll gain much insight from reading it--it's another in a long line of proclamations that "new data" is going to solve all the problems of financial inclusion. But their is one particular sentence that meant I had to link it: "one can only hope that common-sense regulations will enable these technological advances to deliver on their promise of greater financial inclusion." There are so many ways to read that sentence! And most of them aren't encouraging, but are probably right.
To illuminate that somewhat obscure criticism, here's a piece on a highly effective, yet illegal, way to make lending fairer to women. There is no such thing as "common-sense" regulation. This stuff is really, really hard--this would be a good time to go back to the link to Mayada's piece above and read it if you haven't.
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