Policy decisions often depend on evidence generated elsewhere. We take a decision theoretic approach to choosing where to experiment to optimize external validity. We frame external validity through a policy lens, taking a Bayesian approach and developing a prior specification for the joint distribution of site-level treatment effects using a microeconometric structural model and allowing for other sources of heterogeneity. With data from South Asia, we show that, relative to basing policies on experiments in optimal sites, large efficiency losses result from instead using evidence from randomly-selected sites or, conversely, from sites with the largest expected treatment effects.
Publications
Poverty at Higher Frequency
The poverty rate is an important focus of economic policy. We show, however, that in low- and middle-income countries, the poverty rate is often not what it seems. Poverty, as conventionally measured, is thought to be the proportion of households that are poor for the year, but we show that, under common data collection practices, the measure instead captures the average share of the year that households are poor. The resulting poverty rates are sensitive to the timing of household consumption, not just its total value. For policy, this means that, contrary to common assumptions, the de facto concept of national poverty in many countries is sensitive to households’ exposure to shocks and their ability to smooth consumption within the year. While created inadvertently, this de facto concept of poverty has appealing properties as a measure of well-being, and it raises new philosophical questions about the nature of deprivation. This transformation has happened without a change in the form of the poverty measures and without longitudinal data. Instead, the transformation follows from three common practices used when collecting household data: asking survey questions with short-term recall (often covering only the past week’s or month’s spending), stratifying on sub-periods (usually quarters), and surveying households only once during the year. We illustrate the implications with monthly panel data from rural India, showing that time-sensitivity in poverty measurement has quantitatively large impacts on measured poverty, improves predictions of health outcomes, and expands the scope of strategies to reduce global poverty.
Methodology and Process: An Introduction to the Small Firm Diaries
With this brief we have tried to document the most important elements of our research design so that people reading Small Firm Diaries reports, findings, and recommendations will have a clear view into how the study was conceived, how the sample population was selected, and how the data was collected and cleaned. In doing so we have shared some— though certainly not all—of the key decisions and challenges we faced along the way.
What Win-Win Lost: Rethinking Microfinance Subsidy in the Past and Designing for the Future
The modern microfinance industry was built on the idea that lenders could (and should) profit while serving poor and excluded customers. This idea—that lenders could “win” while customers would also “win” —inspired the broader field of social enterprise and opened possibilities for business-driven responses to social problems. However, in hindsight it is possible to see that not only was the idea flawed—important claims underpinning the core idea have failed to find empirical support—but the lingering belief that “win-win” was right continues to handicap not only financial inclusion and consumer protection policies, but the social investment and finance industry as a whole. The win-win formulation was driven by the assertion that customers would be indifferent to the level of interest rates on loans and that it was simply access to finance that mattered most to customers. The argument was used to justify charging the highest interest rates to the most operationally expensive customers, who turned out to not coincidentally be the poorest customers. However, studies show that customers are indeed sensitive to interest rates and that high interest rates discourage borrowers. Moreover, despite charging high rates, financial data show that most lenders failed to earn profit after fully accounting for the subsidies received from donors and social investors. Microfinance and the social investment industry it helped spawn remain important tools for addressing poverty and inequality, but both sectors are overdue for a transparent reckoning of the roles of subsidy (including its benefits) and greater recognition of the potential for exclusion caused by high prices and the drive for profitability or “sustainability”. Muddled thinking on subsidy and prices handicapped the past but does not need to handicap the future.
Lessons for Global Microfinance from . . . the United States?
The modern microfinance industry was built on the idea that lenders could (and should) profit while serving poor and excluded customers. This idea—that lenders could “win” while customers would also “win” —inspired the broader field of social enterprise and opened possibilities for business-driven responses to social problems. However, in hindsight it is possible to see that not only was the idea flawed—important claims underpinning the core idea have failed to find empirical support—but the lingering belief that “win-win” was right continues to handicap not only financial inclusion and consumer protection policies, but the social investment and finance industry as a whole. The win-win formulation was driven by the assertion that customers would be indifferent to the level of interest rates on loans and that it was simply access to finance that mattered most to customers. The argument was used to justify charging the highest interest rates to the most operationally expensive customers, who turned out to not coincidentally be the poorest customers. However, studies show that customers are indeed sensitive to interest rates and that high interest rates discourage borrowers. Moreover, despite charging high rates, financial data show that most lenders failed to earn profit after fully accounting for the subsidies received from donors and social investors. Microfinance and the social investment industry it helped spawn remain important tools for addressing poverty and inequality, but both sectors are overdue for a transparent reckoning of the roles of subsidy (including its benefits) and greater recognition of the potential for exclusion caused by high prices and the drive for profitability or “sustainability”. Muddled thinking on subsidy and prices handicapped the past but does not need to handicap the future.
Resumen Ejecutivo: Digitalización de las IMF en el Triángulo Norte de Centroamérica
Desafiando las dificultades en predicciones de los expertos al comienzo de la pandemia, las instituciones de microfinanzas en la región del Triángulo Norte de América Central mostraron una gran resiliencia ante los desafíos de la pandemia de Covid-19. A pesar de su escala relativamente pequeña, o quizás debido a esto, las IMF estudiadas mantuvieron una rentabilidad estable, en su mayoría han crecido desde la pandemia y han demostrado ser muy adaptables al cambio digital.
Executive Summary: MFI Digitization in Central America’s Northern Triangle
Defying dire predictions from experts at the start of the pandemic, microfinance institutions in the Northern Triangle region of Central America showed great resilience through the challenges of the Covid-19 pandemic. Despite their relatively small scale—or perhaps because of it—the MFIs studied maintained stable profitability, have mostly grown since the pandemic, and have proven very adaptable to digital change.
MFI Digitization in Central America’s Northern Triangle: The Impact of the Covid-19 Pandemic
Defying dire predictions from experts at the start of the pandemic, microfinance institutions in the Northern Triangle region of Central America showed great resilience through the challenges of the Covid-19 pandemic. Despite their relatively small scale, or perhaps because of it, the MFIs maintained stable profitability, and have proven to be very adaptable to digital change. This paper presents findings from a study to assess microfinance sector digitization, commissioned by the Financial Access Initiative at NYU-Wagner with funding from the Mastercard Center for Inclusive Growth.
Poverty at Higher Frequency
Poverty is typically measured as insufficient yearly income or consumption. In practice, however, poverty is marked by seasonality, economic instability, and illiquidity across months. To capture within-year variability, we extend traditional poverty measures to include a temporal dimension. Using panel data from rural India, we show how conventional poverty measures can distort understandings of poverty: exposure to poverty is wider and more common than typically measured, and poverty entry and exit are not sharp transitions. Accounting for within-year variability improves predictions of anthropometrics, and targeting transfers to challenging periods can reduce poverty most effectively by compensating for imperfect consumption smoothing.
Just Give People Money. But How and When?
As America imagines a 21st-century safety net—and the roles of governments, businesses and communities—some of the solutions will involve just giving money. The right amount of money at the right time can make a big difference for people, especially for working families without much financial slack. That requires beginning with the idea that in fact it’s not just about money. How and when matter too.
A Dialogue on the Future of Microfinance and International Development
It will soon be the 50th anniversary and 200th issue of Mondes en développement (Developing Worlds), the French and Belgian journal founded in 1973 by François Perroux of the Collège de France. To mark the anniversary, we discuss what has been learned about microfinance, which, as a modern movement, is also roughly 50 years old. We discuss issues including the early history of microfinance and connections to shifting views on poverty and growth in international thought; the role of rhetoric within the microfinance sector; debates over subsidy; changing views of group lending; gender and finance; and whether everyone wants to be an entrepreneur.
Poverty and Migration in the Digital Age: Experimental Evidence on Mobile Banking in Bangladesh
Published in the American Economic Journal: Applied Economics, 2021.
Rapid urbanization is reshaping economies and intensifying spatial inequalities. In Bangladesh, we experimentally introduced mobile banking to very poor rural households and family members who had migrated to the city, testing whether mobile technology can reduce inequality by modernizing traditional ways to transfer money. One year later, for active mobile banking users, urban-to-rural remit- tances increased by 26 percent of the baseline mean. Rural con- sumption increased by 7.5 percent, and extreme poverty fell. Rural households borrowed less, saved more, sent additional migrants, and consumed more in the lean season. Urban migrants experienced less poverty and saved more but bore costs, reporting worse health.
Rethinking Poverty, Household Finance, and Microfinance
High-frequency data show that the material condition of poverty is only partly captured by overall insufficiency of resources. Instead, life in poverty is often characterized by the interaction of insufficiency × instability × illiquidity, visible when measuring poverty in shorter time units than the year. In this context, reducing instability and/or illiquidity can reduce exposure to poverty even when average earning power (overall insufficiency) is unchanged. The high-frequency view shows the power of intra-year consumption smoothing, while also showing that consumption smoothing often requires the spiking of spending. The instability revealed by the high-frequency view creates a tension between flexibility and structure in the design of behavioral financial products. In practice, microfinance borrowing and saving are often used to address the ups and downs of household spending needs rather than business needs. High-frequency instability also explains why ex post moral hazard (“strategic default”) is a particular problem for lenders (rather than the textbook ex ante moral hazard depiction) and, in turn, why joint liability is difficult to sustain. The installment structure of typical microfinance loan contracts (i.e., high-frequency repayments) is similar to the structure of consumer lending products and contractual saving products, explaining how microfinance loans work naturally for purposes other than business investment, even when that departs from lenders’ nominal intentions. The high-frequency view helps to show why microfinance loans remain popular as financial tools despite modest measured impacts on average household income.
Narrowing the Gender Gap in Mobile Banking
Mobile banking and related digital financial technologies can make financial services cheaper and more widely accessible in low-income economies, but gender gaps persist. We present evidence from two connected field experiments in Bangladesh designed to encourage the adoption and use of mobile banking by poor, illiterate households. We show that training can dramatically increase adoption and usage by women. At the same time, women on average persist in using mobile banking at a lower rate than men. The study focuses on migrants and their families in Bangladesh. Despite large differences between female and male migrants in income and education, the first experiment shows that a training program led to a similarly large, positive impact on mobile banking usage by female and male migrants, increasing usage rates for both by about 45 percentage points. That led to increases in remittances sent to rural areas, reduced rural poverty, and increased rural consumption. Both female and male migrants in the treatment group, however, reported worse physical and emotional health, adding to health challenges reported by women across treatment and control groups. A second experiment explores whether the way that the technology was introduced and explained made an additional difference in narrowing gender gaps. Despite the lack of statistical power to detect small treatment impacts, we find suggestive evidence that the treatment increased mobile banking adoption by female migrants.
RCTs in Development Economics, Their Critics and Their Evolution
A chapter in the forthcoming edited volume, Randomized Control Trials in Development: the Gold Standard Revisited, by Florent Bédécarrats, Isabelle Guerin, and François Roubaud.
The use of RCTs in development economics has attracted a consistent drumbeat of criticism, but relatively little response from so-called randomistas (other than a steadily increasing number of practitioners and papers). Here I systematize the critiques and discuss the difficulty in responding directly to them. Then I apply prominent RCT critic Lant Pritchett’s PDIA framework to illustrate how the RCT movement has been responsive to the critiques if not to the critics through a steady evolution of practice. Finally, I assess the current state of the RCT movement in terms of impact and productivity.
The Disruptive Power of RCTs
A chapter in the forthcoming edited volume, Randomized Control Trials in Development: the Gold Standard Revisited, by Florent Bédécarrats, Isabelle Guerin, and François Roubaud.
The use of RCTs in development economics has attracted a consistent drumbeat of criticism, but relatively little response from so-called randomistas (other than a steadily increasing number of practitioners and papers). Here I systematize the critiques and discuss the difficulty in responding directly to them. Then I apply prominent RCT critic Lant Pritchett’s PDIA framework to illustrate how the RCT movement has been responsive to the critiques if not to the critics through a steady evolution of practice. Finally, I assess the current state of the RCT movement in terms of impact and productivity.
Migration and the Diffusion of Covid-19 in South Asia
The initial spread of COVID-19 halted economic activity as countries around the world restricted the mobility of their citizens. As a result, many migrant workers returned home, spreading the virus across borders. We investigate the relationship between migrant movements and the spread of COVID-19 using district-day-level data from Bangladesh, India, and Pakistan (the 1st, 6th, and 7th largest sources of international migrant workers). We find that during the initial stage of the pandemic, a 1 SD increase in prior international out-migration relative to the district-wise average in India and Pakistan predicts a 48% increase in the number of cases per capita. In Bangladesh, however, the estimates are not statistically distinguishable from zero. Domestic out-migration predicts COVID-19 diffusion in India, but not in Bangladesh and Pakistan. In all three countries, the association of COVID-19 cases per capita and measures of international out-migration increases over time. The results show how migration data can be used to predict coronavirus hotspots. More broadly, the results are consistent with large cross-border negative externalities created by policies aimed at containing the spread of COVID-19 in migrant-receiving countries.
COVID-19 and the Future of Microfinance: Evidence and Insights from Pakistan
The initial spread of COVID-19 halted economic activity as countries around the world restricted the mobility of their citizens. As a result, many migrant workers returned home, spreading the virus across borders. We investigate the relationship between migrant movements and the spread of COVID-19 using district-day-level data from Bangladesh, India, and Pakistan (the 1st, 6th, and 7th largest sources of international migrant workers). We find that during the initial stage of the pandemic, a 1 SD increase in prior international out-migration relative to the district-wise average in India and Pakistan predicts a 48% increase in the number of cases per capita. In Bangladesh, however, the estimates are not statistically distinguishable from zero. Domestic out-migration predicts COVID-19 diffusion in India, but not in Bangladesh and Pakistan. In all three countries, the association of COVID-19 cases per capita and measures of international out-migration increases over time. The results show how migration data can be used to predict coronavirus hotspots. More broadly, the results are consistent with large cross-border negative externalities created by policies aimed at containing the spread of COVID-19 in migrant-receiving countries.
Can Migration Patterns Help Predict the Spread of COVID-19 in South Asia?
Within one week in March, the lockdowns ordered by South Asian governments to combat the COVID pandemic dramatically reversed rural-to-urban migrant flows. Our team’s early analysis shows that migration patterns may help predict the location of COVID outbreaks.
faiVLive: The Truth About Training - Annotated Bibliography
In a webinar on February 20, 2020, 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. Below are a list of the papers referenced during their conversation. You can access a recording of the webinar here.
What is the Impact of Investing in Financial Systems?
What is particularly useful about this very readable review is the synthesis of evidence on both households and firms, which tend to be covered separately by most researchers. As Tim notes, evidence from diaries about how many households must juggle their finances just to meet some basic goals around managing consumption, investment and risk, is suggestive about how firms manage theirs.
Migration and Household Finances: How a different framing can improve thinking about migration
It is time to reframe fundamentally the research agenda on migration, remittances, payments and development. Many policy‐makers in the developing world, and researchers, tend to view migrant remittances as windfall income, rather than as returns on investment, which is how families with migrants tend see remittances. Migration is thus, among other things, a strategy for financial management in poor households: location is an asset, migration an investment. We propose that this shift of perspective on remittances—from windfall to return on investment—leads to more fruitful research questions.
Paying in Pieces: A Natural Experiment on Demand for Life Insurance under Different Payment Schemes
Risk is pervasive in low-income economies, but insurance markets tend to be under-developed and demand for existing products is often low and poorly understood. Usually, customers must buy insurance by making a single lump-sum payment. We study a popular life insurance product sold by Mexico’s leading microfinance institution. We exploit a large-scale natural experiment involving 200,000 poor female microcredit customers and show that demand increased by 59 to 74 percent when customers were allowed to pay in weekly installments instead of in a lump sum, even though doing so was more costly for them. The finding is not explained by price or income, which do not change. We describe the possible roles of liquidity constraints and other explanations, and relate the result to discussions of demand for microinsurance and other products, including merit goods, in similar contexts.
Social Investment through the Lens of Microfinance
The reality of social investment can be messy. How could it not be? The aim is to support a new sort of capitalist endeavor driven by pursuit of social progress rather than just pursuit of profit. Yet modern history has been shaped by the tensions between unbridled capitalism and struggles for social and economic justice. Microfinance has been a laboratory for these developments, somehow embracing both market denialism and market fundamentalism, showing possibilities, limits, and conundrums. We reflect on four questions central to both “big ideas” and practical action: (1) How do user fees (including prices and interest rates) help and hurt customers and businesses? (2) How worrisome is mission drift, and why does it happen? (3) What is the role of subsidy? (4) How should social returns be measured?
By Jonathan Morduch and Tim Ogden
The USFD Methodology: The financial lives of low- and moderate-income Americans
The U.S. Financial Diaries (USFD) is a research study that collected detailed financial data from 235 low- and moderate-income households over the course of a year. USFD employed a research approach that combines quantitative and qualitative methods. Our goal was to better understand households’ financial situations and choices by observing household finances at frequent intervals over a long period of time. We designed surveys to record every dollar that participating families earned, spent, borrowed, saved, and shared with family or friends. We also tracked government transfers, assets, financial instruments, and employment, and asked households about their financial goals, attitudes about money, significant life events and physical and mental health.
Microfinance and Economic Development
Microfinance is generally seen as a way to fix credit markets and unleash the productive capacities of poor people dependent on self-employment. The microfinance sector grew quickly since the 1990s, paving the way for other forms of social enterprise and social investment. But recent evidence shows only modest average impacts on customers, generating a backlash against microfinance. We reconsider the claims about microfinance, highlighting the diversity in evidence on impacts and the important (but limited) role of subsidy. We conclude by describing an evolution of thinking: from microfinance as narrowly-construed entrepreneurial finance toward microfinance as broadly-construed household finance. In this vision, microfinance yields benefits by providing liquidity for a wide range of needs rather than solely by boosting business income.
By Jonathan Morduch and Robert Cull
The Microfinance Business Model: Enduring Subsidy and Modest Profit
Recent evidence suggests only modest social and economic impacts of microfinance. Favorable cost-benefit ratios then depend on low costs. This paper calculates the costs of microcredit and other elements of the microcredit business model using proprietary data on 1,335 microfinance institutions between 2005 and 2009, jointly serving 80.1 million borrowers. The costs of making small loans to poorer clients are high, and when revenues fall short of costs, subsidies are necessary to deliver services to those clients on a sustainable basis. Using a method that accounts for the opportunity costs of all forms of subsidy, the analysis finds that the median institution receives five cents of subsidy per dollar lent and $51 of subsidy per borrower (in PPP adjusted terms). Relatively low levels of median subsidy suggest that even modest benefits of microcredit could yield impressive cost-benefit ratios. The distribution of subsidies is highly skewed, however: the average subsidy per dollar lent is 13 cents and the average subsidy per borrower is $248. The data show that subsidies per borrower are substantially higher for commercial microfinance banks and some non-bank financial institutions that make relatively large loans. MFIs organized as non-governmental organizations (NGOs), in contrast, generally rely less on subsidy.
By Robert Cull, Asli Demirgüç-Kunt, and Jonathan Morduch
US Financial Diaries Household Profile: Living Paycheck to Paycheck
Amy Cox is a white 34-year-old single mother of two. She lives with her children, Hailey, 9, and Andy, 8, near Cincinnati, OH. Amy is among the few people in the USFD study who lived paycheck-to-paycheck. During our year with her, she spent almost all of each week’s paycheck within 10 days. When she did have a little extra cash, she usually spent it on her children within a few weeks. As with many households in our study, Amy was caught between seeking financial stability and mobility. Despite Amy’s struggles, she was trying to better her situation. Amy’s major financial choices are difficult to evaluate without knowing what the outcomes ultimately were.
US Financial Diaries Household Profile: Thriving but Still Vulnerable in the U.S.
Mateo Valencia, 31, and Lucia Benitez, 30, are an unmarried couple living in Queens with their four- year-old son Pablo. The family lives in a three-bedroom, one- bathroom townhouse, and they rent out rooms to friends and relatives who are between homes or jobs. They both moved to the U.S. in 2005 from Ecuador. Mateo and Lucia are in many ways emblematic of the American immigrant experience. They came to the U.S. with hopes of building a better life and while they are not truly secure yet, they are finding opportunities.
US Financial Diaries Household Profile: Budgeting for a Year with Lumpy Income
Sandra Young, 52, is an African American woman living in Brooklyn with her grown children: Tyler, 25, and Kayla, 24. Sandra manages several branches of a tax preparation agency, which means that she earns most of her income during the six months between November and April. Sandra illustrates the depth of the retirement savings challenge: behavioral science and nudges to encourage saving for the future over spending for the present are invaluable, but may not be nearly enough to enable Americans to generate a secure retirement.
US Financial Diaries Household Profile: Getting By with Limited Resources
Lauren Walker, 29, is a single mother living with her four-year-old son Riley in a rented townhome in a small town in eastern Mississippi. Lauren works full time as an administrative assistant for a local construction and engineering firm, and she covers her frugal needs with her annual income. But the annual perspective hides months lived very close to the financial edge.
US Financial Diaries Household Profile: Getting By With Help from Friends
Rita Douglas, 62, lives in a two-bedroom apartment in a marginal, sometimes dangerous neighborhood near Cincinnati, OH. Rita lives her financial life closer to the edge than many Americans, so she experiences the ups and downs in her available resources more acutely. But the issues that she faces as she juggles her bills are, in fact, quite common, and the coping strategies that she employs to stretch her resources are often effective. Most notably, Rita dramatically improves her prospects by sharing with others.
US Financial Diaries Household Profile: Keeping Control by Relying on Cash
Mike Smith, a single man in his mid-50s, lives in a two-bedroom, one-bathroom house in Kentucky, in a small town near the Ohio River. This snapshot of Mike Smith’s financial life provides a window into many themes that arise repeatedly in the US Financial Diaries. Mike is “underbanked” but, like many, he is underbanked by choice. Looking at his finances it’s clear that he would benefit from using a wider set of financial products, and using the ones he already has more intensively. The underlying reason he is underbanked is that he seeks control and transparency in his finances – a goal that is shared by millions of Americans and that Mike simply demonstrates in an extreme version.
US Financial Diaries Household Profile: Relying on Erratic Income Sources
Tim and Clara Adrian are in their early 30’s and live in Mississippi in a four-bedroom house that they own. The Adrians’ financial life – like the rest of their life is full, busy and complicated. They use a range of financial products to facilitate saving, spending and borrowing, including a checking account, prepaid card, mortgage, store credit, 401(k) plan and cash. These products are effective at facilitating particular types of transactions, but they don’t fully leverage the strengths of this family. It is worth thinking about how innovative modifications to these products, or new financial vehicles entirely, could bolster the Adrians’ ability to manage both their day-to-day and long-term financial needs, increasing their financial health over time.
US Financial Diaries Household Profile: Adjusting to a New Life in the US
Ahmed and Shaila Hossain are immigrants from Bangladesh who moved in 2010 to Queens, NY, where there is a large Bangladeshi community. Stories of immigrant families like the Hossains are so much a part of the United States’ national self-image that it is easy to think that we already understand the narrative. And, indeed, there is much here that is consistent with the plotline that we already know. For example, the Hossains have taken several steps back – by taking on debt, and leaving educational credentials and close family behind – in hopes of taking more steps forward. However, there is also much in their story that illuminates our understanding not only of that experience, but also of the experience of millions of other Americans – both recent immigrants and others – who are trying to achieve greater financial prosperity in the face of income insecurity and volatility.
US Financial Diaries Household Profile: Extended Family Strives to Get Ahead
The Rodriguez family is a multigenerational household living in a small town near San Jose, California. Maria Rodriguez, 60 years old, lives with her husband Dean, 75; her mother, Regina, 83; and her two sons, Martin, 36, and Daniel, 34. The Rodriguez household’s financial health reflects a series of fortuitous circumstances and good but imperfect choices – many of which represent themes that are echoed throughout the US Financial Diaries.
In and Out of Poverty: Episodic Poverty and Income Volatility in the U.S. Financial Diaries (Working Paper)
We use data from the U.S. Financial Diaries study to relate episodic poverty to intra-year income volatility and to the availability of government transfers. The U.S. Financial Diaries data track a continuous year’s worth of month-to-month income for 235 low- and moderate-income households, each with at least one employed member, in four regions in the United States. The data provide an unusually granular view of household financial transactions, allowing the documentation of episodic poverty, and the attribution of a large share of it to fluctuations in earnings within jobs. For households with annual income greater than 150 percent of the poverty line, smoothing within-job income variability reduces the incidence of episodic poverty by roughly half. We decompose how month-to-month income volatility responds to receipt of eight types of public or private transfers. The transfers assist households mainly by raising the mean of income rather than by dampening intra-year income variability.
By Jonathan Morduch and Julie Siwicki
The Case for Social Investment in Microcredit
There are strong arguments for continued investment in microcredit. These arguments are based on, not in contradiction to, the recent evaluations of microcredit impact. That the average impact of access to microcredit is modest is not in serious doubt. However, every evaluation of the impact of microcredit shows that there are people who benefit, and that most borrowers, when lenders behave responsibly, do not experience harm. Comprehensive research on microfinance and subsidy shows that virtually all microfinance institutions are subsidized, but these subsidies are small. There are two clear paths for increasing microcredit’s impact through continued investment.
By Timothy Ogden
Economics and the Social Meaning of Money
The Social Meaning of Money too shows how preferences develop and are reinforced by social contexts. Economists have not yet paid much attention to preference formation, but the work so far suggests that it is a promising path for empirical inquiry, especially as researchers look to next steps in understanding the economics of gender and the nature of decision-making under conditions of substantial scarcity.
By Jonathan Morduch
Exploring the Business Models Behind Microsaving
The financial and business models for collecting savings by microfinance institutions have been relatively little explored in literature. This paper seeks to fill the gap by evaluating deposit-taking MFIs that rely on two primary types of savings: those that emphasize raising funding (through large deposit accounts) and those that emphasize service (through small deposit accounts). The findings suggest that geographic location, level of economic development, and regulatory environment all play an important role in dictating the types of models that are likely to be adopted. Different models also have substantially different funding and operating costs. Finally, net outreach levels in terms of number of savers served appear to be little affected by choice of model, though in many cases outreach may be skewed by widespread presence of empty accounts, which overstate the number of active depositors, and understate the average account balance.
By Daniel Rozas
Big Questions in Insurance
For the world’s poor, living with unpredictable and inadequate income flows makes it difficult to cope with risk. Catastrophic events such as illness or crop failure can be devastating financially. Households use a variety of strategies to protect themselves from misfortune. Formal insurance may be the last resort after all other possible mechanisms for risk protection become unworkable.
But how exactly will insurance be delivered? What new innovations matter most in insuring the poor? What can be done to increase microinsurance take‐up rates? This briefing note seeks to explore these questions and provide additional resources on these and related topics.
Big Questions in Savings
It would appear self-evident that poor families are unable to save. If these households are barely making ends meet, they must be so preoccupied with covering immediate needs that thinking about the future is a luxury. However, this proves not to be the case. Most poor households, even those earning less than $2 a day per person, have disposable income (Banerjee and Duflo, 2007).1 And yet, demand for and use of formal and informal savings products falls far below what theory would predict.
In this briefing note, we explore the benefits and risks for saving, the issue of profitability for making savings products available to the poor, how people are saving, and new innovations that can facilitate great access to savings tools.
Big Questions in Payments
Digital payments may be an important part of closing gaps around financial access. But how will digital payment systems be deployed? What design elements would create value for poor users? How can payment systems be the first stepping stone to other financial products? What are the regulatory issues surrounding mobile payment systems? This briefing note seeks to explore these questions and provide additional resources on these and related topics.
Banks and Microbanks
We combine two datasets to examine whether the scale of an economy’s banking system affects the profitability and outreach of microfinance institutions. We find evidence that competition matters. Greater bank penetration in the overall economy is associated with microbanks pushing toward poorer markets, as reflected in smaller average loans sizes and greater outreach to women. The evidence is particularly strong for microbanks that rely on commercial-funding, use traditional bilateral lending contracts (rather than group lending methods favored by microfinance NGOs), and take deposits. We consider plausible alternative explanations for the correlations, including relationships that run through the nature of the regulatory environment and the structure of the banking environment, but we fail to find strong support for these alternative hypotheses.
What We Know So Far: 15 RCTs on Microsavings
What We Know So Far: from 15 randomized control trials (RCTs) on the impact of microsavings.
What We Know So Far: 9 RCTs on Microcredit
What we know so far: 9 randomized control trials (RCTs) about the impact of microcredit.
Income Gains and Month-to-Month Income Volatility: Household evidence from the US Financial Diaries (Working Paper)
The US Financial Diaries track the finances of a small sample of low and moderate-income households over a year. The households faced substantial swings in income from month to month. On average, they experienced 2.5 months when income fell more than 25 percent below average.
US Financial Diaries Issue Brief: Emergency Savings
Households should have at least three months of income set aside in emergency savings, according to standard financial literacy curricula. Most snapshot surveys of American households’ actual emergency savings paint a dire picture against this standard. Volatile incomes could explain some of the gap. The assumed “emergency” in emergency savings advice is usually the loss of a steady job, by implication an infrequent occurrence. But households in our survey experience smaller, more frequent, shortfalls in income. These smaller “emergencies” may require them to regularly draw down emergency savings.
US Financial Diaries Issue Brief: Savings Horizons
The US Financial Diaries methodology has two features that allow us to better understand household saving behavior. First, because we track flows into and out of accounts, not just balances at a single point-in-time, we are able to see saving activity over a year. As income and spending needs rise and fall, households save, draw down, and build up their savings again, leaving average balances that do not fully capture the extent of saving behavior. Second, because we followed households for a full year we have the opportunity to both discuss with households their expectations for the use of savings and track the actual uses of those savings. As a result, we gained new insight into how households thought about and used savings and how they used the variety of financial tools available.
The Wisdom of the Group: How Lessons from Savings Groups Can Guide Financial Product Innovation
In this note we focus on the savings group as a model for delivering products to address this market failure. Reviewing recent research, we extract the mechanisms that make savings groups effective. We then explore the potential to apply these factors to formal products that make sense for both providers and consumers.
Savings Outside of Groups
Savings groups are a popular and effective way of helping poor households increase their savings. But is there a way to incorporate the mechanisms that make them effective outside of the group in savings products in general?
Financial Access 101: Why Savings Groups Work
Savings groups are a popular and effective way of helping poor households increase their savings. But why do they work? We explore the mechanisms that make savings groups effective in this video.
Financial Access 101: Intro to Savings Groups
Despite conventional wisdom, poor families DO save. However, they do not always have access to safe, reliable systems to build savings. Savings groups are one tool that help poor households better manage their financial lives.
US Financial Diaries: Informal Finance
Jonathan Morduch of the Financial Access Initiative, and Rachel Schneider of CFSI discuss the new report from the U.S. Financial Diaries Project. Households often use informal tools that are harder to see from outside, like short-term loans from friends or relatives.
What's Behind Door #3? Investment in Migration for the World's Poor
What accounts for the determination of migrants to make it across borders, braving incredibly harrowing journeys by train, boat and foot? For many people around the world, migration is the very best investment they can make.
NextBillion Interviews FAI's Timothy Ogden on USFD Project
Timothy Ogden, managing director of NYU's Financial Access Initiative discusses the U.S. Financial Diaries project, which tracked the financial activity of over 200 lower-income American households for a full year.
When is Income Not Income?
Based on the working paper, "Migration as a Strategy for Household Finance," by Michael Clemens and Timothy Ogden.
US Financial Diaries Issue Brief: An Invisible Finance Sector: How Households Use Financial Tools of Their Own Making
People run their financial lives with a variety of tools. The first tools that come to mind are likely to be formal, like checking accounts and credit cards. But households often use informal tools that are harder to see from outside, like short-term loans from friends or relatives. It’s tempting to think that these informal tools are last resorts, or second-best solutions, but informal financial mechanisms are often combined with formal tools, and sometimes are preferred. Among the families in the U.S. Financial Diaries (USFD), for instance, the use of informal loans was as common as the use of alternative financial services (e.g., payday loans, pawn shop loans), though the volumes transacted informally tended to be smaller. Understanding how these informal finance tools work, and why households use them, can offer new perspectives for financial services innovators and policy makers.
David McKenzie: Mental Accounting Part 2
FAI's Tim Ogden sat down with David McKenzie, Lead Economist in the Development Research Group at the World Bank to discuss the importance of mental accounting in his work and the development research agenda.
David McKenzie: Mental Accounting Part 1
FAI's Tim Ogden sat down with David McKenzie, Lead Economist in the Development Research Group at the World Bank to discuss the importance of mental accounting in his work and the development research agenda.
Michael Clemens: Migration and Remittances Part 3
FAI's Tim Ogden and Michael Clemens, Senior Fellow at the Center for Global Development (CGD) and visiting scholar at NYU-Wagner, recently published a Framing Note discussing new research approaches on the role of migration and remittances in household financial management.
Michael Clemens: Migration and Remittances Part 2
FAI's Tim Ogden and Michael Clemens, Senior Fellow at the Center for Global Development (CGD) and visiting scholar at NYU-Wagner, recently published a Framing Note discussing new research approaches on the role of migration and remittances in household financial management.
Michael Clemens: Migration and Remittances Part 1
FAI's Tim Ogden and Michael Clemens, Senior Fellow at the Center for Global Development (CGD) and visiting scholar at NYU-Wagner, recently published a Framing Note discussing new research approaches on the role of migration and remittances in household financial management.
Dean Karlan on Commitment Savings
Dean Karlan discusses some important findings in commitment savings research citing studies in the Phillipines, Malawi, Kenya, and Ghana.
Dean Karlan and Timothy Ogden discuss microfinance
"What do you do with the households that are so poor that there is no real sustainable livelihood going on?" Professor Dean Karlan and FAI's Managing Director Timothy Ogden discuss some of the recent research into poverty alleviation programs targeting the ultra-poor; questions of internal validity versus external validity; and evaluating economic well-being as well as psychological well-being.
US Financial Diaries Issue Brief: Spikes and Dips: How Income Uncertainty Affects Households
When asked whether “financial stability” or “moving up the income ladder” is more important, 77% of the participants in the U.S. Financial Diaries (USFD) research study chose “financial stability.” This response illustrates the high level of financial uncertainty and unpredictability that these households face. Many factors contribute to feelings of financial instability: insufficient income, unpredictable expenses, a lack of savings, inadequate financial management, and reliance on complicated or poorly designed financial products and services. This research note focuses on how people earn and receive income.
Migration as a Strategy for Household Finance: A Research Agenda on Remittances, Payments, and Development
It is time to fundamentally reframe the research agenda on remittances, payments, and development. We describe many of the research questions that now dominate the literature and why they lead us to uninformative answers. We propose reasons why these questions dominate, the most important of which is that researchers tend to view remittances as states do (as windfall income) rather than as families do (as returns on investment). Migration is, among other things, a strategy for fi- nancial management in poor households: location is an asset, migration an invest- ment. This shift of perspective leads to much more fruitful research questions that have been relatively neglected. We suggest 12 such questions.
Timothy Ogden in Conversation with Nava Ashraf (Part 3)
FAI Managing Director Timothy Ogden and Harvard Business School Associate Professor Nava Ashraf continue their discussion of her commitment savings research. In Part 3 of the conversation, they talk about product design, behavioral psychology, and more.
Timothy Ogden in Conversation with Nava Ashraf (Part 2)
FAI Managing Director Timothy Ogden and Harvard Business School Associate Professor Nava Ashraf discuss her commitment savings research. They talk about inter- and intra-household issues, information asymmetries, and product design to encourage savings.
FAI's Timothy Ogden in Conversation with Harvard's Nava Ashraf (Part 1)
FAI Managing Director Timothy Ogden and Harvard Business School Associate Professor Nava Ashraf discuss her commitment savings research. They also talk about what we currently know about commitment savings and why it works.
FAI 101: Adverse Selection
Clearly, poor households would benefit from access to formal insurance. But why is it so hard to get it to them? One reason is what economists call "adverse selection." Watch the video.
Financial Access 101: Moral Hazard and Microinsurance
Clearly, poor households would benefit from access to formal insurance. But why is it so hard to get it to them? One reason is what economists call "moral hazard." Watch the video.
Big Questions in Credit
“Does microcredit work?” It’s a question we hear a lot. But the answer depends on what the question really is. Does microcredit slash poverty? (Not clearly.) Does microcredit increase micro-enterprise profit? (Some of the time, but capital often gets channeled to other uses and not everyone is a great entrepreneur.) Does microcredit improve the lives of borrowers? (Yes it can, but seldom dramatically and sometimes microcredit can get borrowers into trouble.) Rather than being a single tool used to solve a single problem (like funding a business), microcredit is often one among a set of tools, whose usefulness as a set may be fundamental but whose individual impact is often incremental and thinly spread.
Responsible Consumer Lending
Early pioneers of the microfinance movement touted it as a vehicle to promote entrepreneurship and subsequently provide a pathway for poverty alleviation. However, financial diaries research such as that published in Portfolios of the Poor, shows us that microloans have multiple purposes beyond spurring small‐scale enterprises. The poor have myriad expenses beyond their business endeavors such as health care costs, school fees, housing repairs, and unexpected emergencies. Consumer lending is one possible tool to help the poor cope with their (often unpredictable) consumption financing needs. However, it may not be the appropriate solution in all instances and also carries the risk of encouraging over‐ indebtedness and financing for “bad” consumption, such as to buy aspirational material goods.
Substitution Bias & External Validity: Why an innovative anti-poverty program showed no net impact
The net impact of development interventions can depend on the availability of close substitutes to the intervention. We analyze a randomized trial of an innovative anti-poverty program in South India which provides “ultra-poor” households with inputs to create a new, sustainable livelihood. We find no statistically significant evidence of lasting net impact on consumption, income or asset accumulation. Instead, income from the new livelihood substituted for earnings from wage labor. A very similar intervention made a large difference elsewhere in South Asia, however, where wage labor alternatives were less compelling. The analysis highlights the roles of substitution bias and dropout bias in shaping evaluation results and delimiting external validity.
FAI Video: Shawn Cole Discusses Microinsurance and Factors Affecting Take Up
Economist Shawn Cole discusses findings from several experiments on rainfall insurance in India and index insurance products. In Part 2 of this FAI video conversation, Cole discusses an experiment that was conducted in Gujarat, India. Here the researchers were interested in understanding what were the barriers to adoption of a particular product. The goal of the study is to help farmers manage risks due to failed monsoons when making production decisions.
Shawn Cole Discusses Microinsurance: Investment Impact of Rainfall Insurance
Shawn Cole discusses findings from several experiments on rainfall insurance in India and index insurance products. The goal of the effort is to help farmers manage risks due to failed monsoons when making production decisions.
Impact of Microcredit on the Poor in Bangladesh
We replicate and reanalyse the most influential study of microcredit impacts (Pitt and Khandker, 1998). That study was celebrated for showing that microcredit reduces poverty, a much hoped-for possibility (though one not confirmed by recent randomized controlled trials). We show that the original results on poverty reduction disappear after dropping outliers, or when using a robust linear estimator. Using a new program for estimation of mixed process maximum likelihood models, we show how assumptions critical for the original analysis, such as error normality, are contradicted by the data. We conclude that questions about impact cannot be answered in these data.
FAI's Timothy Ogden and Economist Rohini Pande In Conversation
Ogden and Pande discuss her work and why standard microcredit may undermine business investment, from her recent paper: "Does the Classic Microfinance Model Discourage Entrepreneurship Among the Poor?"
How Microfinance Really Works
About half of the world’s adults lack bank accounts. Most of these “unbanked” are deemed too expensive to serve, or not worth the hassle created by banking regulations. But what may be good business from a banker’s perspective isn’t necessarily what’s best for society. The inequalities that persist in financial access reinforce broader inequalities in the distribution of income and wealth. This is the opening for microfinance – and also its challenge.
FAI Video: Pascaline Dupas of Stanford University
FAI Video: Pascaline Dupas of Stanford University talks to FAI about testing a commitment savings product for health investments.
Price and Information in Life Microinsurance Demand: Experimental Evidence from Mexico
Poor households in developing countries face large and varied risks, but often have inadequate informal tools to manage them. Microinsurance is being developed to create a better alternative, and it should--in theory--be in high demand. Yet take-up of microinsurance remains low. I study the impact of price and information on the demand for life microinsurance among microfinance borrowers of Compartamos in Mexico. I randomly assigned 8,700 borrowers to two of four treatments: (i) no longer receive a base amount of subsidized insurance coverage (high price) or keep the subsidy (low price), and (ii) being informed with a message emphasizing the financial toll of a funeral and how the insurance payoff helps to face it (financial information) or information emphasizing the emotional toll of a funeral on the surviving family (emotional information). On average, eliminating the subsidy led to a decrease in insurance coverage, but the two messages did not impact coverage. The impacts are heterogeneous, however. . .
Unequal Access
Around the world, only about half of adults (aged fifteen and older) have access to an account with a formal financial institution. In low income countries, less than a quarter do.
How and Why Do People Borrow?
Even in high income countries, family and friends remain an important source of borrowing...
Account penetration is high in wealthy countries, but there is great variation in account penetration among lower income countries
A formal bank account provides a secure way to save, and is the gate- way to accessing many other financial services that can help individuals manage their financial lives. While a formal account is taken for granted as a necessity by many people in high income countries, account access varies widely for their low income counterparts.
Across low income countries, there is great variation in formal account penetration
Although there is an overall positive relationship between GDP per capita and rates of account holding among coun- tries in the sample, differences of twenty percentage points or more are not uncommon be- tween countries with similar income levels. For example, over 40% of residents of Kenya have a formal account while less than 10% of Benin’s residents do.
Remittances and Account Penetration
Countries that receive more remittances (as a percentage of GDP) tend to have lower account penetration.
Lending Sources by Country GDP
In wealthy and poor countries alike, people rely on a variety of lending sources to meet their financial needs.
Mobile Phone Penetration and Mobile Money Usage
Mobile phone penetration does not explain much of the cross-country variation in rates of sending money via mobile phone.
Mobile Payments and the Urban-Rural Divide
Infographic: mobile payments are more common in urban areas, but there are important exceptions.
Urban-Rural Mobile Payments
The potential to reach rural communities with mobile payments has not yet been realized in many countries.
Carlos Danel: Part 2 - The Future of Microfinance
In 1990, Carlos Danel and Carlos Labarthe co-founded Compartamos—which means "let's share" in Spanish—to provide poor residents (mainly rural women) of Mexico with access to economic opportunities. At its inception Compartamos was a nonprofit organization serving mainly indigenous, rural women in some of the poorest regions in Mexico. The company has since evolved into a commercial bank. While some are critical of the company for what they believe is its emphasis on profits over social returns, our research into microfinance and social investment provides a more nuanced response to the criticism. Nonetheless, there's no denying Compartamos' impact on the region. It is currently one of the largest microcredit institutions in all of Latin America. Most of its more than 600,000 clients live in rural areas of Mexico.
10 Research Questions
High quality evidence on the state of financial access around the world is advancing rapidly, as the chapters of this book illustrate. A happy consequence of increasing knowledge is the ability to better recognize what we don’t yet know. Here are ten questions, some micro, some macro, that need answers if we are to make informed decisions on how to improve financial access.
Latest Findings from Randomized Evaluations of Microfinance
In 2009, the results from two microcredit impact studies in Hyderabad, India, and Manila, the Philippines were released to mixed responses (Banerjee, Duflo, Glennerster, and Kinnan 2010; Karlan and Zinman 2011). Some media declared microfinance a failure (Bennett 2009). Many in the microfinance community dismissed these randomized studies as too limited to be a true reflection of the entire sector .
Is Micro Too Small? Microcredit vs. SME Finance
The 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. We argue that that can’t be assumed.
Turning Interest Into Savings
Low-income households are often trapped in a "debt-cycle": They borrow to cover necessary 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.
From Credit to Savings
When the Gates Foundation started a programme to expand global ‘financial services for the poor’ (FSP), many in the field, myself included, saw this as an important complement to the foundation’s work in health and education.1 The evidence is piling up that the world’s poor face the twin problems of low incomes and difficulty managing their incomes without bank accounts or insurance. Finance, in this view, allows people to invest in the future and – importantly – to marshal resources to meet needs today. Access to finance, then, is a key tool for improving the lives of the poor. The Gates Foundation’s impact on finance for the poor has been most strongly felt in re-balancing attention between credit and savings.
Turning Interest Into Savings
Commitment devices facilitate self-control by allowing the customer to set aside future money and prohibiting withdrawal from these funds for a set period spending; this allows them to circumvent the temptation to spend money immediately.
Why Finance Matters
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? Muhammad Yunus, the 2006 Nobel Peace Prize winner and founder of Bangladesh’s Grameen Bank, argues that this lack of financial access means that the poor, especially poor women, can’t obtain the tiny loans (known as microcredit) that they need to build their businesses and get on a path out of poverty. The idea has taken hold: in 2009 Grameen Bank served 8 million customers (the average loan balance was just $127). World-wide, microcredit advocates claim over 190 million customers.
Using the Financial Diaries Approach
Using the Financial Diaries Approach
U.S. Financial Diaries Project Launch
U.S. Financial Diaries Project Launch
Jonathan Morduch: Credit Is Not a Right
Is credit a human right? Muhammad Yunus, the most visible leader of a global movement to provide microcredit to world's poor, says it should be. NYU's John Gershman and FAI's Jonathan Morduch disagree.
Carlos Danel: Part 3 - The Indian Microfinance Crisis
In 1990, Carlos Danel and Carlos Labarthe co-founded Compartamos-which means "let's share" in Spanish-to provide poor residents (mainly rural women) of Mexico with access to economic opportunities. At its inception Compartamos was a nonprofit organization serving mainly indigenous, rural women in some of the poorest regions in Mexico.
Carlos Danel: Part 1 - The SKS IPO
In 1990, Carlos Danel and Carlos Labarthe co-founded Compartamos-which means "let's share" in Spanish-to provide poor residents (mainly rural women) of Mexico with access to economic opportunities. At its inception Compartamos was a nonprofit organization serving mainly indigenous, rural women in some of the poorest regions in Mexico.
Do Interest Rates Matter? Credit Demand in the Dhaka Slums
"Best practice" in microfinance holds that interest rates should be set at profit-making levels, based on the belief that even poor customers favor access to finance over low fees. Despite this core belief, little direct evidence exists on the price elasticity of credit demand in poor communities. We examine increases in the interest rate on microfinance loans in the slums of Dhaka, Bangladesh. Using unanticipated between-branch variation in prices, we estimate interest elasticities from -0.73 to -1.04, with our preferred estimate being at the upper end of this range. Interest income earned from most borrowers fell, but interest income earned from the largest customers increased, generating overall profitability at the branch level.
Jonathan Morduch on Microfinance and Social Investment, Part 1
FAI Insights: The Financial Access Initiative's Jonathan Morduch explains the motivation for his most recent research report with Jonathan Conning on "Microfinance & Social Investment." This is part 1 of a two-part video series.
Jonathan Morduch on The Research Agenda, Part 2
FAI Insights: Jonathan Morduch explains the research agenda for his new study with Jonathan Conning on "Microfinance & Social Investment." This is part 2 of a two-part video series on the subject.
Credit is Not a Right
The notion of “credit as a human right” flows from the argument that if we are concerned with universal access to food, shelter, and health, then we must be committed to providing access to the tools that are most likely to deliver those basic elements of life. For the sake of argument (and there is, of course, argument), we will follow Article 25(1) of the Universal Declara- tion of Human Rights, adopted by the United Nations in December 1948, and begin with the idea that access to food, shelter, and health constitute basic human rights. Yunus can then be interpreted as saying: access to credit is so powerful in reducing poverty, that access to credit should be a right itself.
Evaluation Fundamentals
Impact evaluations try to measure the change in a participant’s life that occurred because of an intervention. The “intervention” could be a policy, a project, an insurance product, or a specific feature of a product. For instance, the intervention could relate to a particular product feature, such as the extent of coverage, a change of pricing structure, or variations in the distribution channel.
Microfinance and Social Investment
This paper puts a corporate finance lens on microfinance. Microfinance aims to democratize global financial markets through new contracts, organizations, and technology. We explain the roles that government agencies and socially-minded investors play in supporting the entry and expansion of private intermediaries in the sector, and we disentangle debates about competing social and commercial firm goals. We frame the analysis with theory that explains why microfinance institutions serving lower-income communities charge high interest rates, face high costs, monitor customers relatively intensively, and have limited ability to lever assets. The analysis blurs traditional dividing lines between non-profits and for-profits and places focus on the relationship between target market, ownership rights and access to external capital.
Emergency (Hand) Loan
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.
FAI Insights: What Is Rigorous Impact Evaluation?
Michael Clemens, Senior Fellow at the Center for Global Development (CGD) and visiting scholar at the Financial Access Initiative and at NYU-Wagner and the NYU Dept. of Economics (Spring 2011), talks about the findings from his research into the UN Millennium Villages.
FAI Video: Jonathan Morduch talks to FAB's Bhagwan Chowdhry
Jonathan Morduch talks to FAB's Bhagwan Chowdhry.
Behavioral Foundations of Microcredit: Experimental and Survey Evidence From Rural India
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 on borrowers. 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 particular contribution of microcredit may thus be to provide helpful structure for borrowers seeking self-discipline.
Can Insurers Improve Healthcare Quality? Brief
Using three indicators of quality, the authors investigate whether microinsurance can help improve the quality of healthcare provided to poor patients. The three indicators are: structure (material and human resources available to patients at healthcare facilities), process (what steps are followed in giving care to patients) and outcome (the effects of the care on a patient’s health status). The find that health insurance status is not significantly associated with better quality care as measured by the three dimensions of quality.
Can Insurers Improve Healthcare Quality? Evidence from a Community Microinsurance Scheme in India
We investigate whether microinsurers can help improve the quality of healthcare, and not just its price. We study Indian patients who had a caesarean section, appendectomy, hysterectomy, or abdominal hernia surgery. We compare indicators of facility’s infrastructure; doctor’s qualification and knowledge; process of care; and patient satisfaction. Two thirds of insured patients contacted the insurer about their choice of provider. They are directed towards facilities that are part of the insurer’s network, which have better infrastructure than non-network facilities. Being insured, however, is not significantly associated with receiving better-quality care, even when controlling for several patient and facility characteristics.
Targeting the Ultra Poor
Can the poorest be reached with finance? "Ultra poor" members of society face a series of constraints and deprivations that distinguish them from the general poor. Limited social networks, chronic malnutrition, and reliance on patronage systems characterize a socioeconomic class that is hard to "bank."
Borrowing to Save: Perspectives from Portfolios of the Poor
It’s not surprising that saving is hard for many of us. We’re impatient, temptations are at hand, and savings devices are seldom ideal. By the same token, it would not be surprising to find that we have a hard time keeping money in the bank. But, puzzlingly, new studies give examples of people withdrawing funds less often than neoclassical economic theory suggests they should (e.g., relative to the simulations of optimal savings in Deaton 1991). And, paradoxically, it is often the same people who had trouble saving who also have trouble drawing down their savings. Some are so reluctant to dis-save that they willingly borrow at expensive interest rates to avoid touching their savings.
Targeting the Ultra Poor
Can the poorest be reached with finance? If yes, there are two main routes. The first option is for institutions to extend existing products and services to even poorer customers. The other is to design independent approaches that target the particular challenges faced by the ultra poor.
Microfinance's Social Impact: Cutting Through the Hype
A presentation for the Microfinance Club of New York.
Microfinance Games
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 experi- mental 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, espe- cially the most risk averse.
Daryl Collins on Portfolios of the Poor: Part 2
Daryl Collins, co-author of Portfolios of the Poor and Senior Associate, Bankable Frontier Associates continues her discussion on implementing lessons from Portfolios of the Poor in South Africa.
Daryl Collins on Portfolios of the Poor: Part 1
Daryl Collins, co-author of Portfolios of the Poor and Senior Associate, Bankable Frontier Associates talks about implementing lessons from Portfolios of the Poor in South Africa.
Sukhwinder Singh Arora on Portfolios of the Poor
Sukhwinder Singh Arora, co-author of two books Small Customer, Big Market: Commercial Banks in Microfinance (with Malcolm Harper) and The Poor and their Money (with Stuart Rutherford) talks about how the lessons from Portfolios of the Poor help providers design better products.
Value Proposition of Microfinance and Price: Richard Rosenberg Part 3
Richard Rosenberg, consultant to CGAP, continues his discussion of the value proposition of microfinance and how this relates to the price for financial services.
The Value Proposition of Microfinance and Price: Richard Rosenberg on Portfolios of the Poor Part 2
Richard Rosenberg, consultant to CGAP, talks about the value proposition of microfinance and how this relates to the price for financial services.
Key Findings from Portfolios of the Poor with Richard Rosenberg: Part 1
Richard Rosenberg, consultant to CGAP, highlights the biggest findings of Portfolios of the Poor.
Jonathan Morduch on "Portfolios of the Poor": Reimagining Microfinance, Part 2
Jonathan Morduch, co-author of Portfolios of the Poor shares his opinion on what the book tells us about reimagining microfinance.
Jonathan Morduch on "Portfolios of the Poor": Reimagining Microfinance, Part 1
Jonathan Morduch, co-author of Portfolios of the Poor shares his opinion on what the book tells us about reimagining microfinance.
Stuart Rutherford on Portfolios of the Poor: Part 4
Stuart Rutherford, co-author of Portfolios of the Poor, discusses three MFIs that have redesigned their products to more adequately meet the three fundamental challenges poor households face. These challenges are outlined in Part 3 of this video series: Identifying and Meeting the Financial Needs of the Poor.
Stuart Rutherford on Portfolios of the Poor Part 3
Stuart Rutherford outlines the three major challenges Portfolios of the Poor authors continually observed among diarists: 1) extreme poverty is not only about being very poor, but about managing daily expenses with unpredictable earnings and unreliable jobs: 2) the hardships of limited earnings are compounded by emergencies to which the poor are so vulnerable, forcing already-poor households to patch together an adequate level of cash; and 3) low wages and frequent emergencies prevent households from assembling usefully large sums for bigger expenses, such as housing, marriages, and education, etc.
Stuart Rutherford on Portfolios of the Poor: Part 2
Co-author Stuart Rutherford identifies the key lessons from Portfolios of the Poor and highlights misconceptions about the financial practices of poor households that its research helped to correct. Rutherford also answers questions about the diverse and complex saving methods employed by Portfolio diarists.
Stuart Rutherford on Portfolios of the Poor: Part 1
Stuart Rutherford, the founder of SafeSave, talks about the importance of understanding the financial needs of poor customers.
Introduction to Portfolios of the Poor: An Interview with Bob Christen
Bob Christen, director of the Financial Services for the Poor Initiative at Bill & Melinda Gates Foundation, offers a thoughtful introduction to Portfolios of the Poor. Critical to the value of microfinance, he states, is the recognition and understanding of the nuances in the financial lives of the poor: broader financial inclusion can be achieved in ways that extend beyond loans for investment purposes. Portfolios revealed that what poor households need are better ways to manage and save their limited resources. Christen emphasizes that with this awareness, microfinance practioners can design a better generation of financial instruments for the poor, and identifies Portfolios of the Poor as the "guide" to achieve this goal.
William Easterly on Portfolios of the Poor
NYU's William Easterly explains how Portfolios of the Poor gives us a more realistic look at the poor people, and how it changes the perspective on loans for daily consumption.
Yaw Nyarko on Portfolios of the Poor: Research Methodologies
Yaw Nyarko, Professor of Economics at New York University and Director of NYU Africa House, talks about the particulars of the research for Portfolios of the Poor and how it will influence the development of new research trends.
Selective Knowledge: Reporting Bias in Microfinance Data
Answering surveys is usually voluntary, yet much of our knowledge about microfinance depends on the willingness of households and institutions to respond to survey questions. In this study, Financial Access Initiative Managing Director Jonathan Morduch and Jonathan Bauchet explore the implications of voluntary reporting on knowledge about the performance of microfinance institutions, specifically focusing on the MixMarket and Microcredit Summit Campaign databases. They show patterns of systematic biases in microfinance institutions’ choices about which survey to respond to and which specific indicators to report. These patterns in turn affect analyses of key questions on trade-offs between financial and social goals in microfinance. The results highlight the conditional nature of our knowledge and the value of supporting social reporting.
Grameen II and Portfolios of the Poor
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 began 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. These new features were a shift from beliefs underpinning the original Grameen model, which emphasized the need for loans over savings, expectations that loans would be used only for micro-entrepreneurial investment, and the necessity of a strict repayment regiment. The research in Portfolios of the Poor includes sets of financial diaries collected from Grameen clients both before and after these changes, from 1999-2005.
Take-up: Why Microfinance Take-up Rates Are Low & Why It Matters
If you listen to the strongest pitches for microfinance, you would imagine that everyone offered microfinance would leap at the chance to be a customer. Yet this is not so. Evidence shows that it’s usual that under half of eligible households participate in microfinance. Moneylenders are still in business, and many individuals in develop- ing countries still rely primarily on family and friends to meet their needs for money. This is not necessarily a bad thing: informal sources of credit provide a useful way to finance profitable investments or respond to life events. But it shows that the demand for existing microfinance institutions and products can’t be taken for granted.
Three-Country Analysis: Portfolios of the Poor
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, spending, 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.
Understanding Price: Portfolios of the Poor, How the World’s Poor Live on $2 a Day
The financial diaries provide insight into the prices poor households paid for financial instruments, and the logic behind their financial decisions. Researchers revealed that surviving on small, irregular, and unpredictable earnings often generates financial behaviors that at first seem counter-intuitive-such as paying or borrowing to save. Through the financial diaries approach, (see the “Research Methodology” Briefing Note) researchers were forced to confront assumptions and take a fresh look at understanding the price of microfinance-paying close attention to what price means to poor households, the cost financial institutions assume in lending to the poor, and the universal tension between the impatience to meet financial demands today, and the desire to save for the future.
Borrowing to Save: Perspectives from Portfolios of the Poor Brief
When it is difficult to save, those who manage to build up a lump sum are reluctant to draw down on it. In fact, they are often so loathe to touch their savings that they willingly borrow at expensive interest rates. While the phenomenon of borrowing while saving is puzzling from the standpoint of traditional economics, it’s a regular feature in the financial diaries described in Portfolios of the Poor: How the World’s Poor Live on $2 a Day. This brief describes simultaneous borrowing and saving, and provides evidence for an explanation rooted in the difficulty of rebuilding savings. This evidence leads to another seeming contradiction—why high interest rates on loans may in fact be a desirable attribute for some borrowers.
Creating Better Portfolios: Core Financial Products for the Poor
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-surveys that track penny by penny how households manage their money (see Research Methodologies Briefing Note). The stories of these families are often surprising and sometimes inspiring. Most poor households do not live hand to mouth, spending what they earn in a desperate bid to keep afloat. Instead, they rely upon an array of complex tools, and lead active financial lives because they are poor, not in spite of it. They create “portfolios” that leverage both informal networks and formal institutions to address their immediate and long-term needs.
How Do the Poor Deal with Risk?
This brief offers insight into the ways poor households manage risks. Based on the financial diaries research outlined in Portfolios of the Poor: How the World’s Poor Live on $2 a Day (see the "Research Methodologies" Briefing Note), 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.
Portfolios of Bangladesh’s Poor
The Portfolios of the Poor financial diaries in Bangladesh span 1999-2005. As well as giving a unique insight into the challenges faced by poor households, they show how the households interact with the uniquely saturated and rapidly growing microfinance industry in the country. Unlike many studies of microfinance that feature poor Bangladeshi households, these financial diaries depict the entire financial picture, showing how they use microfinance alongside the many informal financing mechanisms and the few formal services available to the poor.
Research Methodologies: A Closer Look at the Research behind Portfolios of the Poor
Portfolios of the Poor offers new thinking about how the world’s poorest communities manage their financial lives. To uncover these intimate details, researchers designed a study in which they interviewed poor households twice a month over the course of a year, and recorded the details of how they lived their financial lives. These “financial diaries” encompass data from nearly 250 households in Bangladesh, India, and South Africa, and reflect a mixed-research methodology that is systematic in data collection while simultaneously captures the complexity of people’s lives.
An Introduction to Impact Evaluations with Randomized Designs
Randomized experiments are increasingly popular ways 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, and it’s not surprising that they dominate clinical research in medicine.
Reimagining the Unbanked: Perspectives from South Africa
Attempts to broaden financial access in poor communities usually take one of two directions. The first is providing credit to small- scale microenterprises, an idea pioneered by Bangladesh’s Grameen Bank. The second involves fostering long-term saving for education, housing, or other worthy goals. But low-income families usually have a more fundamental financial need, one that families often pay dearly for: basic, reliable ways to manage cash flow.
La mitad del mundo no tiene servicios financieros
Durante el último cuarto de siglo, el movimiento de las microfinanzas ha llevado a una expansión global de servicios financieros para los pobres del mundo. La Campaña de la Cumbre de Microcrédito, un grupo de defensa líder, contó 154 millones clientes en todo el mundo a finales de 2008. Eso es impresionante, pero es sólo un comienzo en relación con la demanda insatisfecha. Los expertos coinciden en que la demanda insatisfecha de financiación es grande, pero el número exacto (o incluso un número aproximado, pero creíble) ha sido difícil de precisar, con estimaciones que van desde quinientos millones de personas a tres mil millones.
Microfinance Tradeoffs: Regulation, Competition, and Financing
We describe important trade-offs that microfinance practitioners, donors, and regulators navigate. Drawing evidence from large, global surveys of microfinance institutions, we find a basic tension between meeting social goals and maximizing financial performance. For example, non-profit microfinance institutions make far smaller loans on average and serve more women as a fraction of customers than do commercialized microfinance banks, but their costs per dollar lent are also much higher. Potential trade-offs therefore arise when selecting contracting mechanisms, level of commercialization, rigor of regulation, and the extent of competition. Meaningful interventions in microfinance will require making deliberate choices – and thus embracing and weighing tradeoffs carefully.
Jonathan Morduch on microlending
Financial Access Initiative managing director Jonathan Morduch talks about measuring the impact of microlending.
Access to Finance: Chapter 2, Handbook of Development Economics, Volume 5
Expanding access to financial services holds the promise to help reduce poverty and spur economic development. But, as a practical matter, commercial banks have faced challenges expanding access to poor and low-income households in developing economies, and nonprofits have had limited reach. We review recent innovations that are improving the quantity and quality of financial access. They are taking possibilities well beyond early models centered on providing “microcredit” for small business investment. We focus on new credit mechanisms and devices that help households manage cash flows, save, and cope with risk. Our eye is on contract designs, product innovations, regulatory policy, and ultimately economic and social impacts. We relate the innovations and empirical evidence to theoretical ideas, drawing links in particular to new work in behavioral economics and to randomized evaluation methods.
The Impact of Microcredit on the Poor in Bangladesh: Revisiting the Evidence, Brief
Microcredit is commonly credited with reducing poverty, empowering women, and delivering other important impacts, particularly to extremely poor house- holds. Rhetoric, however, has outpaced evidence. Empirical studies are scarce, and existing ones have been influential despite a lack of thorough scrutiny. In this paper, David Roodman and FAI managing director Jonathan Morduch attempt to replicate the two most-noted studies on the impact of microcredit, both based on survey data from Bangladesh collected in the 1990s. Pitt and Khandker (PK, 1998) find that microcredit raises household consumption, especially when lent to women. Khandker (2005) concurs and goes further to say that microcredit has more of an impact on the extremely poor than on the moderately poor. Morduch (1998) finds no evidence for impact on consumption levels, but does find that microcredit. decreases the volatility of consumption. This paper shows that the evidence for impact is weak in all of these studies. But, significantly, it doesn’t find that microcredit causes harm, and it doesn’t prove that the impacts commonly attributed to microcredit—like reducing poverty and empowering women—do not exist. Rather, this paper shows that it’s hard to draw much from these data—and that better answers will need to come from other data sets using other methods.
Does Regulatory Supervision Curtail Microfinance Profitability and Outreach?
For microfinance institutions, particularly those aiming to take deposits, an advantage of regulation is that it allows semi-formal institutions to evolve more fully into banks. But complying with regulation and supervision can be costly, creating potential trade-offs. World Bank researchers Robert Cull and Asli Demirgüç-Kunt and FAI managing director Jonathan Morduch examined the balance between the benefits and costs of regulatory supervision, with a focus on institutions’ profitability and outreach to small-scale borrowers and women. The authors analyzed data on 245 of the world’s largest microfinance institutions, with newly-constructed data on their prudential supervision. Regression analysis showed that supervision does not have a significant impact on profitability: microfinance institutions subjected to more rigorous and regular super- vision are not less profitable compared to others. However, this type of supervision is associated with larger average loan sizes and less lending to women, suggesting that it does have a significant impact on outreach.
Does Microfinance Regulation Curtail Profitability and Outreach?
Regulation allows microfinance institutions to evolve more fully into banks, particularly for institutions aiming to take deposits. But there are potential trade-offs. Complying with regulation and supervision can be costly, and we examine implications for the institutions’ profitability and their outreach to small-scale borrowers and women. The tests draw on a new database that combines high-quality financial data on 245 of the world’s largest microfinance institutions with newly-constructed data on their prudential supervision. OLS regressions show that supervision is negatively associated with profitability. Controlling for the non-random assignment of supervision via treatment effects and instrumental variables regressions, we find that supervision is associated with substantially larger average loan sizes and less lending to women than in OLS regressions, though it is not significantly associated with profitability. The pattern is consistent with the notion that profit-oriented microfinance institutions absorb the cost of supervision by curtailing outreach to market segments that tend to be more costly per dollar lent.
Microfinance Meets the Market
Microfinance institutions have proved the possibility of providing reliable banking services to poor customers. Their second aim is to do so in a commercially-viable way. We analyze the tensions and opportunities of microfinance as it embraces the market, drawing on a data set that includes 346 of the world’s leading microfinance institutions and covers nearly 18 million active borrowers. The data show remarkable successes in maintaining high rates of loan repayment, but the data also suggest that profit- maximizing investors would have limited interest in most of the institutions that are focusing on the poorest customers and women. Those institutions, as a group, charge their customers the highest fees in the sample but also face particularly high transactions costs, in part due to small transactions sizes. Innovations to overcome well-known problems of asymmetric information in financial markets were a triumph, but further innovation is needed to overcome the challenges of high costs.
From Microfinance to m-Finance
In some countries it can take years to get a new telephone line installed. In 1990, there were just 10 telephone lines installed for every 1000 people in the Philippines. In Kenya, the ratio was 7 per thousand. In India, 6 per thousand. Compare that with the United Kingdom with 441 lines per thousand in 1990, or the United States with 545. For decades, public sector telephone companies in developing economies seldom had incentives or budgets to rapidly expand land line networks, and the private sector has had even less motivation to serve the costly-to-reach.
The Unbanked: Evidence from Indonesia
Why do so many poor households lack access to finance? Are the unbanked creditworthy? Largely not interested in borrowing? The answers are at the heart of ongoing debates around the deepening of financial systems We examine household-level data from 1438 households in six provinces in Indonesia. All households, whether or not they were presently borrowing, were assessed by bank professionals to judge creditworthiness. About 40 percent of poor households were judged creditworthy, but only 14 percent had recently borrowed. Possessing collateral was a minor determinant of creditworthiness. Despite depictions of widespread pent-up demand for loans, about half of creditworthy poor households report being averse to taking on debt. Loans for small business were desired, but respondents often highlight broader household needs, including paying for school fees, medical treatment, and home repair.
Smart Subsidy for Sustainable Microfinance
“Smart subsidy” might seem like a contradiction in terms to many microfinance experts. Worries about the dangers of excessive subsidization have driven microfinance conversations since the movement first gained steam in the 1980s. From then on, the goal of serving the poor has been twinned with the goal of long-term financial self-sufficiency on the part of micro banks: aiming for profitability became part of what it means to practice good microfinance.
Income Smoothing and Consumption Smoothing
Two observations are essential to understanding the market structure of most low-income economies. First, many markets do not exist and, of those that do, many work imperfectly. Second and more optimistically, a wealth of behavioral and institutional responses often emerge to fill in the holes left by market failures. . .