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.
Publications
Viewing publications by category: Briefs
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.
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.
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.