Archive for: microcredit

Some time ago, I was on a microfinance panel organized by USAID together with two respected industry leaders:  Shari Berenbach, Director of USAID’s Microenterprise Development Office, and Sam Daley-Harris, the out-going Director of the Microcredit Summit Campaign.  Somebody from the audience told me afterwards: “It was fascinating to hear three such different views” – and I suspect she was just polite enough not to say “totally disconnected.”

A recent déjà-vu moment reminded me of that conversation and the conclusion that I had come around to:  we weren’t that disconnected and probably had the same starting point, but we stressed three different directions of evolution from the original microcredit idea. These three directions are not mutually exclusive.  In fact, from a development perspective they are all required.  We just each stressed one dimension that seemed more plausible or comfortable – perhaps for a combination of reasons such as institutional mandates, philosophical beliefs, and pragmatic biases. Read the rest of this page »

The most rapidly obsolescing part of my book, Due Diligence, is chapter 6, which reviews the statistical evidence of the impact of microfinance on poverty. Since I put the text to bed, working papers have appeared that test microcredit in Mongolia and Bosnia & Herzegovina and microsavings in Malawi and Chile (though the latter is marked “do not cite or circulate”). There’s also the Morocco microcredit study, which I didn’t catch wind of until too late in the book production. Add all these to the trials of microcredit in India and the Philippines and of microsavings in Kenya—the one that initiated this wave of research in 2009—and we have five credit studies and three savings ones. Read the rest of this page »

The word “development” has many meanings—even within the “development community.” For Amartya Sen, the Nobel-winning economist and philosopher, development is freedom. Sen’s “freedom” is not the freedom of libertarians—not merely freedom from interference—but increased agency in one’s life, increased control over one’s circumstances. Many things bestow such freedom: income, education, equal rights, the right to vote.

In conducting the review of the impacts of microfinance that is the core of my book, I found Amartya Sen’s conception of development to be one useful frame for organizing my thinking. If development is freedom, then the question of the impact of microfinance becomes: when does microfinance enhance freedom and when does it restrict it? This question frames many themes: the potential for credit to be exploitative (usury); the transparency, reliability, and flexibility of financial services; the empowerment of women; and how group-based joint liability translates into peer support and peer pressure. I split chapter 7, the one on development as freedom, into two parts: theory and evidence. I’ll share some highlights here. A draft version remains on my blog.

The first theme I tackle is usury. Or at least I try to tackle it: for millennia, philosophers have debated how to judge when a loan’s terms are exploitative, and I fail to end the debate. Many religious traditions contain injunctions against charging any interest. In the face of the manifest impracticality of that rule, the Roman church eventually shifted to the notion of just price. But defining the just price for credit is essentially impossible. One common referent here is profit: the price is too high if there are any profits, or at least if there are excessive profits, however defined. But I cite a CGAP paper by Rich Rosenberg, Adrian Gonzalez, and Sushma Narain, finding that eliminating all profit in microcredit could reduce interest charges by only a sixth. Mainly, microcredit credit is costly for customers to acquire because it is expensive for producers to provide. (According to my analysis of MIX data, after adjusting for inflation, the 50th-percentile rate is about 20% in South Asia and 30–-35% in the rest of the world.)

I do offer one take-home lesson on interest rates. While it is hard to judge levels as good or bad, it is easier to judge trends. Where interest rates are falling, competition is probably empowering consumers at the expense of producers, just as in economics textbooks. A CGAP study by David Porteous of three microcredit markets found that in two—Bolivia and Uganda—microcredit rates had fallen steadily relative to standard commercial rates. In the third, Bangladesh, they did not fall within the study period, but were low to begin with.

Influenced by Portfolios of the Poor I then move to aspects of financial services other than price: transparency, reliability, flexibility. Though not all hot-button issues, these traits could matter at least as much as price for how empowering or otherwise a service is for clients. I find that microfinance institutions could do much better in communicating the costs of their products in way clients can understand. Quoting Annual Percentage Rates (APRs), as emphasized by MFTransparency, would help borrowers comparison shop. More-intuitive measures such as total payments can also help potential borrowers judge how much credit they can afford.

As for reliability, here microfinance excels. Compared to the informal services like loans from relatives, formal microfinance services are dependable. If Pro Mujer tells a woman she can get a new loan if she makes the next 13 payments, she can bank on that. The unfortunate flipside, however, has been inflexibility. Loans may follow rigid 26-week cycles, but husbands don’t fall sick and generate medical bills with such neat regularity. And if you fall behind on payments, the pressure to catch up, from the lenders and from peers, can be intense. That, in my view, is part of the story behind microcredit-linked suicides in India. One leader in breaking the equation between reliability and rigidity has been the Grameen Bank. Its “top-up” feature allows borrowers who have repaid at least half a loan to reborrow the paid balance, making the loans more like lines of credit. It is also one of many established institutions that offers liquid savings accounts. Read the rest of this page »

A number of studies show that around 20 percent of poor people accept a formal loan when offered one from a microfinance institution (MFI). This take-up rate is surprisingly low given ample evidence that poor people do borrow, often from multiple informal sources at a time (family members, friends, employers, moneylenders, etc.).

One explanation for why there is not more demand for formal microcredit is that the product is not flexible in its design. As highlighted in the recent CGAP paper,  Latest Findings from Randomized Evaluations of Microfinance, one of the most common design features for microcredit has recently come under scrutiny, namely the group liability model pioneered by Muhammad Yunus. The group liability approach matches borrowers into lending groups and makes every group member responsible for full repayment of all loans. With this approach, the MFIs turn borrowing into a public act.  Such scrutiny works to discourage default, yet development experts increasingly question whether group liability is necessary. The primary concern is that the model causes clients who can put credit to good use to avoid formal loans exactly because they don’t want the shoulder risk from their neighbors. Group liability also punishes good borrowers with higher borrowing costs, while not-so-good borrowers—whether they earn that designation through will or circumstance—make off with the cash.

Those questions have encouraged researchers and microfinance institutions to experiment with the traditional group liability design to see if it is really necessary. This work largely aims to understand how group liability works to keep default in check, and if that quality can be uncoupled from the group approach and applied in a way that is more flexible for the client. Latest Findings from Randomized Evaluations of Microfinance highlights one of the first studies conducted to assess whether group liability was really necessary to ensure repayment. Using a randomized controlled trial, economists Dean Karlan, from Yale, and Xavier Giné of the World Bank found that clients of Green Bank in thePhilippines did not default more often when offered individual liability loans. Not only that, the bank found it easier to recruit new clients for individual liability loans. Read the rest of this page »

Poor families in the informal economy need access to financial services as much as wealthier households, if not more so. Their income and expense streams are more irregular, and they have less of an economic cushion to begin with. Yet an estimated 2.7 billion working-age adults globally at the base of the economic pyramid have no access to formal financial services and, instead, have to rely on informal financial mechanisms that are typically incomplete, less reliable, and considerably more expensive. Read the rest of this page »

Our field made good progress last year. Building on the success and the experience to date, and learning from new challenges and insights, we started executing against a broader vision of financial inclusion: A vision that reaffirms the basic tenet that the right access to the right formal financial service helps households, microbusinesses, and the economy as a whole and a vision that recognizes that financial services are not an end in and of themselves but ultimately must improve household welfare. Access to formal financial services needs to give poor families a broader range of choices to build assets, smooth consumption, manage risks, and as a result make them better off than when they have to use the traditional, informal alternatives that are often limited, unreliable, and costly. Read the rest of this page »

Every time I learn a new word, suddenly it is everywhere. On billboards, coming out of the TV anchor’s mouth, and sometimes even on the back of the box of my favorite cereal. This is exactly what is happening to me now with “clients.”  Of course, I’ve known what the word means for a long time.  But all of a sudden, everyone is talking about putting clients first, making sure we have client focus, and being client-centric. Read the rest of this page »

I run a microfinance institution (MFI). It was born of the strong conviction that market forces can help solve social issues.

Having worked earlier in the formal financial sector, I am acutely aware that the market is a double-edged sword: the benefits of price discovery, innovation, and customer centricity can sometimes be undone by an excessive focus on profit. Recognizing this, our approach was to design our MFI—Janalakshmi—in a two-tier structure: a non-profit company Read the rest of this page »

Time for the hard questions
Microfinance is at a critical juncture, and as we reflect on how we got here, I suggest that we challenge ourselves to ask:  What makes us different from what was previously done through the ages, since coins were first established as a medium of exchange? And how do we maintain what’s different and avoid slipping into the well-worn paths that emerge when we examine the history of usury?

Making loans to the poor has always been a commercial activity, but one that was generally shunned by the broader society. It was an activity of usurers, and one did not fraternize with usurers. Today, it is an activity of pawnshops and payday lenders, and they don’t get awarded Nobel Prizes.

Should we as a field transition into more commercial approaches to lending?  If so, how do we avoid becoming indistinguishable from modern day usurers? Read the rest of this page »

CGAP has just published a study that Jessica Schicks and I have written on over-indebtedness among microborrowers. The paper is not exactly bedtime reading: I’m slightly embarrassed to say that it runs to 43 pages. So some readers may feel like the third grade student whose book review began, “This book told me more about whales than I wanted to know.”

It’s been an interesting exercise to go back over the paper’s detailed discussion and cull out a few conclusions that feel important enough to highlight in a blog. The first big message has to do with the question in this blog’s title. After many years of enviable repayment performance, serious default problems have broken out in recent years in Morocco, Nicaragua, Bosnia/Herzogovina, Pakistan, and Andhra Pradesh in India. Some of this default is probably “strategic”—borrowers who could easily repay take advantage of political or other situations to stop making payments. But much of the default appears to be due to over-indebtedness.  (Without going into the complications of defining “over-indebtedness,” let’s just say for now that it refers to borrowers who can’t repay their loans without serious difficulty. Note that this is a client-centered definition, and that it implies that borrowers can still be over-indebted even if they manage to pay off their loans.) Read the rest of this page »