Archive for: Financial Access Initiative

Jonathan Morduch, a guest blogger for the Microfinance Blog, is sharing his thoughts about regulating microfinance.

That is indeed the question when regulators so often find themselves playing catch up – trying to figure out if and how something that’s already happening should be supervised.

When it comes to prudential regulation – or safeguarding deposits – the stakes are particularly high. In microfinance, most MFIs aren’t big enough to threaten the health of the financial systems they’re part of if they run into trouble. However, if prudential regulation of microfinance is inadequate – or when it fails – poor customers stand to lose their savings entirely. And the stakes really don’t get much higher than that.

As with other forms of regulation, the basic dilemma is that regulators of microfinance want to ensure the health of financial institutions without creating undue burdens on the institutions, or on themselves. Striking the balance is tricky when experience with regulating financial access and evidence to support hypothetical costs and benefits are so thin.

In his third Policy Framing Note for the Financial Access Initiative, David Porteous sheds some light on why these challenges are so, well, challenging, and describes early experiences with prudential regulation of microfinance in India, Nigeria, the Philippines and Nigeria.

According to the paper, there are two basic ways to integrate microfinance into regulatory frameworks. One is to amend existing regulations; the other is to write new laws that open special “windows” for microfinance. The window approach is appealing, since microfinance is a rather unique animal in the world of financial services. But, as CGAP points out in its 2003 “good practice” guidelines, for the sake of consistency and efficiency, financial regulation really works best when it focuses on activities or functions, not on types of institutions.

In the end, there’s no such thing as off-the-rack regulatory policy, and amending existing regulation to incorporate microfinance just isn’t always doable. Some activities, like mobile banking, are so distinct they simply demand their own sets of rules. What’s more, regulation should always be considered on a country-by-country basis. But paying close attention to early experiences with prudential regulation of microfinance will certainly help policymakers start to make smart choices.

Jake Kendall, Program Officer at the Bill & Melinda Gates Foundation and guest blogger for the Microfinance Blog shares his thoughts on recent research that explores ways to increase savings. 

A key psychological barrier to savings is that the payoff (the future purchase) is remote, whereas the pain of forgoing current consumption is immediate, and therefore more salient. Recent research by two different research teams highlights ways to help clients overcome this barrier.

Dean Karlan and Sendhil Mullainathan of the Financial Access Initiative conducted randomized field experiments in Bolivia, Peru, and the Philippines, in which banks sent clients direct mail or SMS reminders to save. On average, across the three experiments, the authors find that reminding clients to save increases their savings by only 6%.

But as any good marketer knows, how  the reminder to save is communicated makes a big difference. Reminders that refer to a specific savings goal (for example, buying a scooter) connected with a mention of the means to achieve it (for example, making a deposit) were the most effective, inducing 16% more savings than regular reminders in Peru. The authors posit that by making the future payoff to savings more salient in the present, they helped clients overcome the temptation to consume.

Consistent with this theory, the reminders were particularly successful for clients who found it especially difficult to trade rewards in the present  moment for a reward in the future relative to the easier task of trading between a reward that will merely happen soon vs. in the future (which in the literature is referred to as being “time inconsistent”). For these clients, getting any kind of reminder increased savings by 47% relative to clients who didn’t get reminders.

Microfinance institutions (MFIs) often require borrowers to save a certain percentage of their loan with the MFI to act as collateral. Through in-depth interviews with clients of Pro Mujer in Peru, Michael Ferguson of Microfinance Opportunities finds in a separate study that mandatory savings features of some microfinance loan products are highly valued. A majority of clients reported that the mandatory savings requirement helped them commit to reaching their savings goals, and some clients indicated that mandated savings are less painful than other modes of saving because the deposits are lumped in with the loan payments they were already making.

Probably the most pervasive challenge the poor face in saving is that they live too far away and would pay too high a fees to want to deposit their money with a financial institution. The two studies cited above indicate that, beyond lowering transactional barriers, innovations that reduce the salience of the  “painful” part of savings (making the deposits) or increase the salience of the “pleasurable” part of savings (the future purchase) are also important considerations.

Jonathan Morduch, a guest blogger for the Microfinance Blog, is sharing his thoughts about consumer protection.

The 2008 global financial crisis intensified conversations about consumer protection. The financial crisis showed us that overly-liberalized credit markets can lead to overlending by institutions and heavy debt burdens for borrowers.  Not surprisingly, the buzz these days is about “responsible banking.”

But self-regulation may not be enough—and may not be appropriate.  After all, these are the same banks and institutions that created the original problems.  Regulators are thus determining their next steps.

There are always trade-offs in designing regulations, though, and this isn’t the obvious time to be adding extra burdens for already-burdened regulators.  Nor is it clear that imposing extra costs on financial institutions won’t affect their ability to serve poorer and under-served communities.  Our evidence to date suggests the opposite.

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Our recent Financial Access 2009 has the latest and most comprehensive dataset for financial inclusion. In the report we use this data to try and draw the “big picture” in terms of worldwide financial access. Here is what we found:

Globally, there are lots of accounts…
• We estimate that there are 6.2bn deposit accounts, more than one for each of the almost 5bn adults on the planet.
• A little less than 80% of the accounts are in commercial banks with the rest in state run retail banks, cooperatives and credit unions, MFIs, and other alternative financial institutions.
…however, inequality of financial access is high…

• Despite this apparent overabundance, the same estimates tell us that there are approximately 2.9bn unbanked adults in the world, with 2.7bn of them concentrated in the developing countries [Another report put out this week by the Financial Access Initiative uses older data to reach a rough estimate of 2.5bn. It’s nice to see this confirmation of our estimate. Given the margins of error on both estimates, I think we can treat both numbers as basically equivalent.]

…and those living in developing countries have the worst access to savings accounts.
• In developed countries as a whole (defined by the World Bank’s “High Income” category) our estimated rate of bank account ownership is just over 80% of adults (with some countries as high as 98%), whereas in developing countries it is down just below 30% (with some as low as 3%, according to recent household surveys).

In 2008, the Microcredit Summit estimates that MFI’s reached 154m clients worldwide (many of whom do not get deposit account services from their MFIs, which offer credit services only).  For those of us who work in microfinance, the numbers are stark: between 2.7 and 2.5bn unbanked in developing countries, and only 150-200m MFI clients served after many years of effort. There is a yawning gulf between the world as it is, and the world we hope for where financial inclusion is the norm.

Is microfinance really going to fill this gulf? What new institution, policy, approach, technology, etc. is going to bank the other 2.5bn+?