What’s the impact of microfinance? Read highlights from the Microfinance and Innovation Conference

The Microfinance Impact and
Innovation Conference
was held October 21-23 in New
York City
, and was sponsored by the Financial
Access Initiative
, Innovations
for Poverty Action
, Abdul
Latif Jameel Poverty Action Lab
, Moody’s Investors Service,
Deutsche Bank and CGAP.
The opening remarks were given by Linda Huber, Executive Vice President and CFO
of Moody’s Investors Service. This was followed by  Jonathan
, managing director of FAI and professor of public policy and
economics at NYU Wagner. He stressed the
importance of changing the way we think about poverty by using innovative
strategies and measuring real impacts. “Donors,” he noted, “are busy trying to
build institutions and they have missed the opportunity to understand the poor.”

Jody Rasch of Moody’s Investors Service then explained the
new initiative at Moody’s to establish a social performance rating system of microfinance
. With knowledge not only about their financial returns, but
also about such items as customer service and protection among other various
measures of success, Moody’s social ratings will enable investors to look
critically at the MFIs before making an investment.

Abhijit Banerjee of MIT and the Jameel Poverty Action Lab
was a speaker on the panel and commented that in 50 years we may look back on
microfinance and think that its greatest contribution was not poverty
alleviation but rather getting businesses and corporations interested in the
lives of the poor.

Jonathan Bauchet, a PhD candidate at NYU Wagner, presented
his findings from his research of the program “Targeting the Ultra Poor,” an
asset transfer program implemented in India. Up to date information of
these projects can be found here: www.cgap.org/graduation.
He, as well as most of the other researchers, found mixed results in the short
run. Working with an NGO on the ground, he found that after the asset transfer
(usually a cow or goat), households shifted away from agricultural daily labor
and towards income from livestock. While this had the positive effect of making
households less affected by fluctuations in other sources of income, social
measures like children’s schooling did not significantly increase. The NGO
implementing the program did, however, make the participants aware of social
services available to them by the local government and informed them of who
they should contact with various problems. Bauchet’s paper will soon be
available on the FAI Web site.

Dean Ellen Schall opened the second day of the conference by
recognizing the work of Professor Jonathan Morduch and Caitlin Weaver Lowder,
FAI’s deputy managing director.

The second day of the conference focused on the question: What don’t we
know about microfinance? Christopher Dunford of Freedom from Hunger
pointed out that recent trials have cast doubt on the impact of microfinance.
At the same time, research demonstrates that “lots of people are getting in
over their heads” and struggling with over-indebtedness, which can cause them
to make great sacrifices in order to repay loans.

Abhijit Banerjee pointed out that even successful borrowers
do not show great business growth, as they continue to hire few people and take
out the same size loan. In response to these issues, David Roodman of the
Center for Global Development suggested that microfinance interventions should
not be limited to simply financial tools, but should incorporate non-financial
services to protect consumers and help them make the most of opportunities.

Watch a video of Professor Jonathan Morduch’s closing statements, and let us know what you think about the future of microfinance.

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How the Bottom Billion Get By on $2 a Day (Hint: It Takes Savvy)

MANY OF US HAVE a mental picture of the world’s so called Bottom Billion — or 40 percent of the planet — as a desperate, hand-to-mouth population. And that’s understandable, considering that one of the most common poverty thresholds in developing countries is an income of $2 a day — what many people in developed countries might pay for a latte.

But those who take the time to read the new book “Portfolios of the Poor: How the World’s Poor Live on $2 a Day,” written in part by economist Jonathan Morduch of NYU Wagner, are likely to come away with a far better understanding of the financial lives of the world’s poor — and the notion that their financial lives are, in fact, surprisingly complicated.

The book, newly published by Princeton University Press, has particular relevance for the development and anti-poverty community, and tackles the fundamental question of how the poor make ends meet. The work is based on the financial diaries of more than 250 families in Bangladesh, India, and South Africa compiled from bi-weekly interviews over the course of one year. 

On May 7, 2009, Morduch launched the book — which he wrote and researched with Daryl Collins, Stuart Rutherford and Orlanda Ruthven– at an event cosponsored by New York University’s Africa House and the Financial Access Initiative, a research consortium that Professor  Morduch heads. Other participants included Professor Rogan Kersh, associate dean at Wagner, Matthew Bishop, chief business writer/American business editor for The Economist, Bill Easterly, NYU professor of economics and author of “The White Man’s Burden,” and Yaw Nyarko, NYU professor of economics and director of Africa House.

The book refutes the assumptions people often make about the very poor, such as that they fail to plan for the future or save for a rainy day. The opposite is true. In their case, necessity is the mother of financial savvy — which, as Easterly noted (and The Economist.com reported) far exceeds that of some of the celebrities and aid workers who speak on their behalf. “Portfolios of the Poor” finds that the poor are active money managers. People in South Africa, for example, participated in informal, locally operated savings club, in part to help them fight the temptation to spend in the short-term or because they lacked access to traditional banking. Other households, as in Bangladesh, used shopkeeper credit, saved with a money guard, accepted interest free loans from relatives and friends, and relied upon remittances.

In addition, the authors found that the poor don’t usually earn a steady $2 a day as many might imagine. Rather, the book reports that the more typical income stream at the lowest economic strata includes many unpredictable highs and lows, also a lack of  basic financial tools to help them manage those ups and downs.
Morduch and Collins shared stories about Hamid and Khadeja, a Bangladeshi couple who earned only $70 a month but were active money managers. Another voluntary financial diarist, Pumza, a sheep intestine vendor in South Africa, never knew how much she would sell on a daily basis, and was forced to use informal and often unreliable financial tools to address her irregular cash flows. Still another interviewee, Nomsa, an elderly South African woman supporting her five grandchildren on a government old-age grant of $115 a month, managed to save $40 a month using informal mechanisms.

In other words, the poor are doing all they can with what they have. They are saving, borrowing, managing risk and looking toward the future. But they could do more with better financial tools. It’s not financial savvy they lack, but access to financial services

To some, such as Easterly, who made brief remarks, “Portfolios of the Poor” shows that the microfinance strategy to alleviate poverty has limitations in its current incarnation, since the carefully amassed anecdotal evidence of the book shows that micro-loans are used for day-to-day living purposes rather than entrepreneurship.

The book puts forth new ways to think about poverty; broaden the scope of microfinance to deliver loans for general purposes; enable savings; add meaningful consumer protections; and ultimately create the next generation of banks for the “bottom billion.” Through the ongoing work of Morduch and the Financial Access Initiative (www.financialaccess.org) a new, 21st century vision for microfinance may evolve, grounded upon a careful review of its notable successes, potentially expanded use (as in insurance), and limitations. Enlarging our understanding of the real lives of the poor is an important first step .