Microfinance:  - PowerPoint Presentation

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Microfinance:  Building Better Products through Randomized Evaluations

Dean KarlanYale University,Innovations for Poverty Action (IPA), Grupo de Análisis para el Desarrollo (GRADE),Financial Access Initiative (FAI)

1Slide2

How do we Reach 1 Billion?Is it flexibility?Is it price?

Is it institutional?What impact can we hope for?Massive untapped market: Why are so many yet to be reached?Slide3

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prolifically The Dream SlideSlide4

1. Impact of finance (versus no finance)2. How to do microfinance better

4Two types of studiesSlide5

Key questions:Flexibility and priceMarket failuresFour examples

Group versus individual liabilityCredit with educationCredit scoringSavings product designTheme: Making the research speak to the practitioner.Plan5Slide6

Why despite our best efforts are so many not reached?Is it flexibility?Is it price?Is it institutional (organization structure, financing, human resource policy, etc.)?Can we rule out lack of impact?

Flexibility? Price?6Slide7

Cash flows do not match cash flow needs in many cases.FarmersFluctuation in incomeIs it fear?

Afraid of not having money to repay (irony: this is a GREAT client! she is so trustworthy that she won’t even take out a loan due to her fear of going into default!)Lack entrepreneurial skills to expand businessFears peer punishmentWhat product designs can alleviate these concerns? Savings? Insurance?Is It Flexibility?7Slide8

Strikingly little evidence on price.The “old” line: price does not matterRecent work challenges this:Dehejia, Montgomery & Morduch from BangladeshKarlan and Zinman from South Africa

Clearly, elasticity of demand depends on a lot:CompetitionBusiness opportunitiesFinancial literacyFraming of offer (this can matter more than price)Is It Price?8Slide9

Market FailuresThree basic questions for understanding credit markets and formulating policy:

Are there market failures, and can we specify more precisely what is happening (adverse selection, moral hazard, etc.)?“Observing Unobservables” with Zinman finds evidence of both What innovations can solve these market failures?Joint liability?“Group versus individual liability” with Xavier Gine finds no differenceCredit bureaus?work by deJanvry, McIntosh and Sadoulet in Guatemala

Dynamic incentives? Working, and in progress

Better screening? Credit scoring?

Can other non-credit interventions matter?

Teaching Entrepreneurship, with Martin Valdivia, GRADE-Peru

What is the welfare improvement from solving these market failures?

Little data on this… earlier work from Bangladesh (Pitt &

Khandker

) and India (Burgess &

Pande

) say yes, but identification and micro-data always a severe challenge.Slide10

Group/Individual Liability, Philippines and BoliviaJoint work with Xavier Giné, World Bank

Credit with Education, PeruJoint work with Martin Valdivia, GRADECredit Scoring, South Africa and PhilippinesJoint with Jonathan ZinmanSavings Product DesignPeru, India and the PhilippinesJoint with Sendhil Mullainathan and Jonathan ZinmanFour Examples10Slide11

Microfinance is typically seen as a solution to credit market failures faced by the poorGroup liability, a feature found in many micro loans, is perceived as a key innovation that has contributed to this successe.g.: Grameen, FINCA,

AccionGroup versus Individual Liability11Slide12

Yet, in recent years, many micro-lenders have expanded rapidly using individual liabilityIn turn, this has motivated other lenders that were using group liability to shift to individual liability

Motivation12Slide13

Green Bank of Caraga in the Philippines170 joint liability Grameen-style centers80 randomly assigned to convert to individual liability centers, but weekly meetings remained intact (“treatment”)90 randomly assigned to remain as-is, under joint liability

Group versus Individual Liability13Slide14

Screeningfuture study (a little here)Monitoring + Enforcementthis study removed these peer incentivesNote: we have not eliminated shame or reputation protection from process

Group versus Individual Liability14Slide15

Outcomes:No change in repaymentNo change in savingsNo change in allocation of time by credit officersHigher client retentionHigher number of new members joined

Current paper has one year results2.5 year results showing same Main Results15Slide16

Evidence of monitoring effects

Both baseline and new clients in converted centers remember less about other members’ defaultsEvidence of selection effects New clients in converted centers are less likely to predict defaults of other members correctly.

Social network

Mostly no change. Some small evidence of fewer side-loans (insurance?) in converted centers.

Less money spent on parties (but no change in prob of a party)

Auxiliary Results

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Evidence of mechanisms of screening & monitoring.But they do not add up and lead to default!Why?Perhaps not enough time (2.5 yrs

showing the same)Perhaps simply not economically significantConclusion17Slide18

Design of New Areas (ongoing)Next Steps in Philippines

Stay

New areas

Group

Individual lending

Converted to individual liability after 1st cycle

Stay

Control

Existing groups

Converted to individual liability

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FINCA Peru: Clients wanted trainingFreedom from Hunger and Atinchik developed materials239 village banks in Lima and Ayacucho

138 randomly assigned to receive credit with education (“treatment”)101 randomly assigned to remain as-is, receiving credit only (“control”)Study lasted ~two yearsFINCA Peru19Slide20

Impact on MFIRepayment increasedClient retention increased 10%Reciprocity? or improved business outcome?

Business processesInvested profits back in businessKeeps records from businessImplemented innovations in their businessClient outcomesIncrease in average sales up 16%Increase in worst-month sales up 28%No increase in employmentFemale children more likely to attend schoolFINCA Peru Outcomes20Slide21

Win-winMore efficient screening, arguably better decision-making (needs testing)Study impact on marginal borrowers!Implementing this in Philippines, and potentially Peru

Looking for more places: replication criticalCredit Scoring21Slide22

Is screening too rigorous?What is the impact of lending to those not being reached currently?Lender uses credit scoring + subjective decision-making by branch managerUnrejected in real-time rejected

clientsSurveyed them 6-12 months laterCredit reports collected 2 years laterProfitable for lender to lend to themSouth Africa Experiment22Slide23

Positive impact on employment, wages and hunger7 percentage point reduction in poverty levelRemember: CONSUMER lending

Impact23Slide24

Example of replicationPrior study in Philippines (SEED)Commitment to not withdraw can help increase savingsNew studies: How do we get people to deposit!Peru, India and the Philippines

Behavioral Savings24Slide25

Series of ideas from psychology & economics:Attention (reminders)Mental accounting (puzzles, photos, framing, goals)Gains versus losses

Incentives (i-rate, bonuses)Habit formation (timing of deposits/reminders)Goal: Tease out crucial mechanismsGenerate evidence from multiple settingsBehavioral Savings25Slide26

Price (interest rates)Credit bureausde Janvry, McIntosh & Sadoulet

in GuatemalaLoan terms and frequencyField and Pande in IndiaLoan sizeMexico, PhilippinesLinks to formal insurance Hospitalization, health, life, rainfall, cattle insuranceReturns to capitalMcKenzie and Woodruff in Sri Lanka and MexicoLaundry List26Slide27

Ethics and Resources (some more serious thoughts…)Are all interventions unambiguously good? If not, is it ethical to intervene in the lives of the poor without knowing your impact?

Is it ethical to spend resources on treatments that are not proven (and that could have been spent elsewhere)?Let’s not underestimate the power, and thus the responsibility, we have. We must know what works and what does not.Slide28

What proportion of a budget should one spend on monitoring and evaluation?MUST separate monitoring from evaluationDifferent denominators.Remember why you do both:Monitoring: check operational and institutional efficiencyEvaluation: know how to spend future money

Monitoring: Think % of project expensesEvaluation: Think % of future expenses28Core Impact Studies:Resource QuestionSlide29

Thank you!www.poverty-action.org

www.financialaccess.orgwww.povertyactionlab.orgdean.karlan@yale.edu29