cmf res alliance micro finance

8/8/2019 Cmf Res Alliance Micro Finance

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Microfinance researchfindings: What do we know?


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Outline

Main research issues

Impact

Quality

Debunking the microfinance myths What is psychology worth?

Integrating psychological and socialconstraints

Microfinance plus

Business training example


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Broad sets of questions

Impact of financial services

Can impact be maximized by combining credit withother services?

Quality of financial services: Need to understand

the nature of demand Need to improve product design to

Increase access

Encourage people to make optimal use of financialservices

Reach out to the poorest


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Why is it important to measure

impact? Usual rationale for impact evaluations of development

interventions: allocation of resources

Some interventions still require grants (capacity building) In come countries, current scenario implicitly subsidizesmicrocredit

Social investors should also be interested

Even if clients repay and continue to come, microcredit may notbe beneficial to them (they may not be rational when they makethe decision to borrow)

Repayment rates are good, but drop outs

Micro Finance is subject to political influences and reactionsare very emotional It is not only important to understand final impact, but also to

understand how this happened, and on whom it has the most

impact Impact is not necessarily impact of micro-credit vs nothing, itcan also be the impact of one intervention vs another, or of an

-


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Why can research be useful for

practitioners?

Vendors caught in adebt trap

Safe savings products

Financial literacy

Defaults due to health

events

Health prevention?

Insurance?

Clients often do notinvest in productivepurposes

Innovative product

design?

Business training?

Independent

insurance?

Bundled product?

Voluntary?

Commitmentmechanisms?

Problem Solution Implementation


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Outline


Impact Quality



Microfinance plus



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Impact of micro-credit in

Hyderabad We overall lack evidence on the impact of traditional, Grameen type

micro-credit programs

One of the first randomized evaluations of micro-credit done inHyderabad by J-PAL and CMF at IFMR

Randomized evaluations allow to correctly attribute the direction ofcausality (observed changes were due to the program only)

Preliminary results

Spandana: one of the largest MFIs in India, several products

We evaluated the joint liability product: loan size Rs 10,000 withpossible top-up Rs 2000, group size 10 women, weekly meetings

120 slums in Hyderabad city, randomly divided in two groups of 60slums Spandana introduced micro-credit in one group, the treatmentgroup, and not in the other group, the control group.

Despite the presence of other MFIs, in average households had takenup more credit in the treatment slums - we look at the impact on allhouseholds


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Impact of micro-credit in

Hyderabad No much effect on total per capita expenditure

However, spending on snacks, intoxicants, and gambling ("temptation

goods") and spending on festivals decrease in treatment slums Consistent with microfinance institution acting as savings instruments

Durables spending increases, both for durables used for a businessand durables not used for a business.

Treatment households are more likely to have started a business in thelastyear

A new business is more likely to be female-run in a treatment area

Food spending and spending on education, health and clothing don'tchange

No effect on empowerment measures or happiness

Both could be a time issue, since the timeline was one to two years impactSome positive effects, in particular on wasteful expenditures andchances of starting new businesses for women

=>


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Consumer micro-credit:

background A study by Dean Karlan and Jonathan Zinman in South

Africa

Does consumer finance have positive impact on thepoor?

Note: Money is fungible! And thats OK

Does relaxing any credit constraints benefit marginalborrowers?

Revealed preference logic says it should: a consumer borrowsonly if she will benefit. Behavioral models say not necessarily:preferences and lack of understanding may lead consumers tooverborrow.

Would the lender profit from making these marginalloans?


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Randomly encouraged loan officers to approve somemarginal applications

3,000 new applicants who had no prior borrowing fromthe Lender and applied at any of 8 branches over twomonths

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Consumer micro-credit: design

787 marginal clts

325 Treatment 462 Control

Randomizer software

Compliance for the treatment (approve) group: only 53%actually received a loan

Note that with a randomized evaluation you evaluate theintention to treat, or the impact of having access to the

loan you can then infer the impact on the treated(those who get the loan)


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Consumer micro-credit: results

and policy implications Positive impact on retaining job, and on income

Less likely to experience hunger, and had more positive outlookson their prospects and position

Negativeimpact on other aspects of mental health (depressionand stress)

But the average treatment effect across all economic andsubjective outcomes is significant and positive

Caveats: 6 to 12 month horizons, no long term results

The marginal loans were profitable, although substantially less

profitable than inframarginal loans. Suggests that liberalizing screening criteria can benefit both

borrowers and lenders

Benefits of taking controlled risks using randomizedexperimentation.


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Outline


Impact Quality


Social constraints

Microfinance plus


Conclusion and future research needs


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Changing repayment schedules:

background Frequent (weekly) repayment is believed to be one of the most

important premises, in addition to group lending, for successful micro-

credit programs.- Financial discipline, possibility to monitor other clients, trust in loan

officers, commitment device

However, large transaction costs for both borrowers and lenders.

Weekly repayment schedules may not suit the income flows ofhouseholds engaged in certain types of activities.

According to economic theory, less rigid repayment schedules shouldnot increase default/delinquency and may encouragelonger terminvestments

CMF, Rohini Pande and Erica Field (Harvard) and VWS are testingthis hypothesis by experimenting with new repayment schedules

Weekly vs. monthly Repayment schedules with a two-months moratorium


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Changing repayment schedules:

research design Research design

That way we know that both groups are entirely comparable, andthat differences between both groups will not be due to selection

We compare both groups across a loan cycle (transaction data,

and household survey)

150 groups newlyselected

Lottery

55 weekly 95 monthly

32 weeklymeetings

63 monthlymeetings


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Preliminary results and policy

implications Weekly repayment results in higher social capital (better knowledgeof each other, more interaction outside meetings)

People who repay monthly have to work more hours the day before

they repay, and are more likely to borrow from husbands or groupmembers to repay However this did not result in any difference in default rate Clients tend to prefer monthly schedules (51% of weekly clients, 71%

of monthly clients 37% and 16% for weekly) weekly clients alsorepay earlier

MFIs can potentially reduce their transaction costs through lessfrequent repayment schedules without significantly increasing theirrates of default

Context: first time loan clients with loans no greater than Rs. 4,000,and in districts with little MFI competition + relatively short termimpact

Exploring the social capital effects

Need to study the selection effect Need to experiment with more repayment schedules (flexible) Product design experiments

15


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The Joint liability innovation

Can do better than do better than conventional banking contractsincertain contexts

Members of a community may know more about one another (eachothers types, actions and states) than an outside institution such asa bank

A major source of market failure in credit markets is that a bankcannot apply financial sanctions against poor people who default ona loan In most societies, restrictions on the application of non-financial sanctions

(violence etc.)

Poor peoples neighbors, on the other hand, may be able to impose powerfulnon-financial sanctions at low cost

An institution that gives poor people the proper incentives to useinformation on their neighbors and to apply non-financial sanctions

to delinquent borrowers can out-perform a conventional bank.


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Joint liability: a myth?

After all, not all major microfinance banks use these.Bank Rakyat Indonesia uses collateral in addition to

dynamic incentives.

Xavier Gine, Dean Karlan, Philippines

Group liability vs. individual liability

Randomized experiment

Conversion to individual liability does not change therepayment rate for pre-existing borrowers, and alsoleads to higher growth in center size by both keepingmore pre-existing borrowers and attracting new ones.

This result was about monitoring need to do the sameto test selection effects


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Outline


Impact Quality



Microfinance plus



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An example of effect of

psychology Sendhil Mullainathan, Dean Karlan: What's Psychology

Worth? A Field Experiment in the Consumer Credit Market

Randomly chosen interest rates. Psychological features independently randomized.

Consistent with standard economics, the interest ratesignificantly affected loan take-up.

However, the psychological features also significantly affectedtake-up.

On average, any one psychological manipulation has the

same effect as a one half percentage point change in themonthly interest rate

The psychological features do not appear to draw inmarginally worse clients, nor does the magnitude of the

psychological effects vary systematically with income oreducation.


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Outline


Impact Quality



Microfinance plus


P h l i l d i l


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Psychological and social

constraints In theory, a savings product without commitment device should be more

attractive

If agents are completely rational and withdraw savings only when they reallyneed it

However, some individual are time inconsistent, i.e they are more impatientnow than later, and might not use their savings as optimally as they wouldhave wanted to

Savings commitment devices can help individuals protect themselves abouttheir desire to consume now

Can also be more attractive to women than to men because it is difficult forwomen to keep money from husband or family members

In theory could have effects on women empowerment

Indeed it is not clear in theory that transfers of income aloneto women canimprove their status in the household.

Marginal increases in income given to women may be bargained over in thesame way as existing income, and are therefore not guaranteed to lead to gainsin bargaining power.

What ma be more im ortant than rovidin access to additional sources of


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Savings commitment devices

Ashraf, Karlan and Yin (2006 and 2008): Study in the Philippines toevaluate a product (SEED) designed to help clients save by locking

away their money until they reached a self-specified savings goal (dateor amount)

Randomized Control Trial: 1,800 individuals were randomly assigned toeither receive an offer to open the SEED account (treatment) or not

(control) Of those offered the account, 28% opened the account

Strong effect on savings (after a year: 80% increase, 337 % for thosewho opened the account) -- after 2.5 years, differences between the

treatment and control groups smaller but still there Women who are time inconsistent (impatient now, but patient for

future trade-offs) are 15.8 percentage points more likely to take up.Result not true for men, which suggests intra-household control issues

going on Men and women could be equally time inconsistent, but women,

because of their financial responsibilities (women control the finances in


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Singlewomen more likely to take up. Most unmarried womenlive in extended households - suggests familial control issues

for single women needing to find a mechanism to maintainsavings outside the control of the household head

After 2.5 years, look at the impact of this commitment savings

product on both self-reported decision making processeswithin the household and the subsequent householdallocation of resources

Significant increase in womens decision-making power within

the household, particularly for women who have belowmedian decision-making power in the baseline

Increase of the purchase of household-oriented durable

goods: this specialized account helped women to gain controlover household assets


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Consistent with Dupas and Robinson (2008): women in Kenya weremore likely to take up a savings product with no interest and expensive

withdrawal Impact of the product on investment and ability to face shocks was high

for women (no impact on men), suggesting that they faced large,negative private returns on the money they save informally

Could be because women may have present-biased preferences, orbecause they may face constant demands on their income at home -suggestive evidence which suggests that both factors may be at work

In another study in the Philippines, joint-account offer had negative

impact on take-up for poor women, confirming that intra-householddecision making factors play an important role in affecting demand, andthat women demand products that give them control

Commitment savings products in womens name, by giving women

control and restricting access, have an effect on savings and womenempowerment

=>


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Outline


Impact Quality



Microfinance plus



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Business training

Karlan and Valdivia (2008): Can one teach basic entrepreneurshipskills, or are they fixed personal characteristics? Original micro-credit

idea: only financial constraints RCT with FINCA in Peru: impact of adding business training (FFH

module ) to a group lending program for female microentrepreneurs.

Treatment groups received 30 to 60 minute entrepreneurship training

sessions during their normal weekly or monthly banking meeting overone to two years

The treatment led to improved business knowledge, practices andrevenues.

The program also improved repayment and client retention rates for themicrofinance institution (gains outweighed the costs) so microfinanceplus might make business sense

Larger effects found for those that expressed less interest in training

=> demand-driven market solutions may not be as simple as chargingfor the marginal cost of the services. Maybe need free trials


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Outline


Impact Quality



Microfinance plus



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References

Spandana evaluation:

http://ifmr.ac.in/cmf/research/ieumc.html Commitment savings:

http://research.yale.edu/karlan/downloads/SEED.pdf

http://research.yale.edu/karlan/downloads/Female_Empowerment_v15.pdf

Delivery financing product:

http://ifmr.ac.in/cifd/project1.htm

Business training:

http://research.yale.edu/karlan/downloads/TeachingEntrepreneurship.revision.final.pdf
http://ifmr.ac.in/cmf/research/ieumc.htmlhttp://research.yale.edu/karlan/downloads/Female_Empowerment_v15.pdfhttp://research.yale.edu/karlan/downloads/Female_Empowerment_v15.pdfhttp://ifmr.ac.in/cifd/project1.htmhttp://ifmr.ac.in/cifd/project1.htmhttp://research.yale.edu/karlan/downloads/Female_Empowerment_v15.pdfhttp://research.yale.edu/karlan/downloads/Female_Empowerment_v15.pdfhttp://ifmr.ac.in/cmf/research/ieumc.html

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