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About half of the world’s adults lack bank accounts. Most of these “unbanked” are deemed too expensive to serve, or not worth the hassle created by banking regulations. But what may be good business from a banker’s perspective isn’t necessarily what’s best for society. The inequalities that persist in financial access reinforce broader inequalities in the distribution of income and wealth.
About 2.5 billion adults, just over half the world’s adult population, lack bank accounts. If we are to realize the goal of extending banking and other financial services to this vast “unbanked” population, we need to consider not only such product innovations as microfinance and mobile banking but also issues of data accuracy, impact assessment, risk mitigation, technology adaptation, financial literacy, and local context. In Banking the World, experts take up these topics, reporting on new research that will guide both policy makers and scholars in a broader push to extend financial markets.
The contributors consider such topics as the complexity of surveying people about their use of financial services; evidence of the impact of financial services on income; the occasional negative effects of financial services on poor households, including disincentives to work and overindebtedness; and tools for improving access such as nontraditional credit scores, financial incentives for banking, and identification technologies that can dramatically reduce loan default rates.
More than ever, Americans need to be financially savvy. The past few years have shown that mortgages can be complicated, business-cycle downswings severe, and investing far from obvious. And, for many of us, saving is not easy. Creating a successful financial life takes a high level of know-how and stamina. Not surprisingly, efforts to increase financial literacy among Americans have won wide support
This paper puts a corporate finance lens on microfinance. Microfinance aims to democratize
global financial markets through new contracts, organizations, and technology. We explain the
roles that government agencies and socially-minded investors play in supporting the entry and
expansion of private intermediaries in the sector, and we disentangle debates about competing
social and commercial firm goals. We frame the analysis with theory that explains why
microfinance institutions serving lower-income communities charge high interest rates, face high
costs, monitor customers relatively intensively, and have limited ability to lever assets. The
analysis blurs traditional dividing lines between non-profits and for-profits and places focus on
the relationship between target market, ownership rights and access to external capital.
Is credit a human right? Muhammad Yunus, the most visible leader of a global movement to provide microcredit to world’s poor, says it should be. NYU’s John Gershman and FAI’s Jonathan Morduch disagree. In their new paper, Credit is Not a Right, they ask whether a rights-based approach to microcredit will in fact be effective in making quality, affordable credit more available to poor families – and, more importantly, whether it is a constructive step in terms of the broader goal of global poverty reduction. Jonathan Morduch argues his case in this video.
Morduch, J. & Bauchet, J. 2010. Selective Knowledge: Reporting Bias in Microfinance Data. Perspectives on Global Development and Technology.
Answering surveys is usually voluntary, yet much of our knowledge depends on the willingness of households and institutions to answer. In this study, we explore the implications of voluntary reporting on knowledge about microfinance. We show systematic biases in microfinance institutions' choices about which survey to respond to and which specific indicators to report. The analysis focuses on data for 2,072 microfinance institutions from MixMarket and the Microcredit Summit Campaign databases for the years 2004-2006. In general, we find that financial indicators are more often reported than social indicators. The patterns of reporting correlate with the institutions' region of operation, mission, and size. The patterns in turn affect analyses of key questions on trade-offs between financial and social goals in microfinance. For example, the relationship between operational self-sufficiency and the percentage of women borrowers is positive in the Microcredit Summit Campaign data but negative in the MixMarket data. The results highlight the conditional nature of our knowledge and the value of supporting social reporting.
Morduch, J., Collins, D., Rutherford, S. & Ruthven, O. 2009. Portfolios of the Poor: How the World's Poor Live on $2 a Day. Princeton University Press. May South African edition, University of Capt Town Press.
About forty percent of the world's people live on incomes of two dollars a day or less. If you've never had to survive on an income so small, it is hard to imagine. How would you put food on the table, afford a home, and educate your children? How would you handle emergencies and old age? Every day, more than a billion people around the world must answer these questions. Portfolios of the Poor is the first book to explain systematically how the poor find solutions.
The authors report on the yearlong "financial diaries" of villagers and slum dwellers in Bangladesh, India, and South Africa--records that track penny by penny how specific households manage their money. The stories of these families are often surprising and inspiring. Most poor households do not live hand to mouth, spending what they earn in a desperate bid to keep afloat. Instead, they employ financial tools, many linked to informal networks and family ties. They push money into savings for reserves, squeeze money out of creditors whenever possible, run sophisticated savings clubs, and use microfinancing wherever available. Their experiences reveal new methods to fight poverty and ways to envision the next generation of banks for the "bottom billion."
Morduch, J. & Karlan, D. 2009. Access to Finance. Handbook of Development Economics, Volume 5. Amsterdam: Elsevier. 2009.
Morduch, J., Cull, R. & Demirguc-Kunt, A. 2009. Microfinance Meets the Market. February Journal of Economic Perspectives 23(1), Winter: 167-192.
In this paper, we examine the economic logic behind microfinance institutions and consider the movement from socially oriented nonprofit microfinance institutions to for-profit microfinance. Drawing on a large dataset that includes most of the world's leading microfinance institutions, we explore eight questions about the microfinance "industry": Who are the lenders? How widespread is profitability? Are loans in fact repaid at the high rates advertised? Who are the customers? Why are interest rates so high? Are profits high enough to attract profit-maximizing investors? How important are subsidies? The evidence suggests that investors seeking pure profits would have little interest in most of the institutions we see that are now serving poorer customers. We will suggest that the future of microfinance is unlikely to follow a single path. The recent clash between supporters of profit-driven Banco Compartamos and of the Grameen Bank with its "social business" model offers us a false choice. Commercial investment is necessary to fund the continued expansion of microfinance, but institutions with strong social missions, many taking advantage of subsidies, remain best placed to reach and serve the poorest customers, and some are doing so at a massive scale. The market is a powerful force, but it cannot fill all gaps.
Morduch, J. & Jonston Jr., D. 2008. The Unbanked: Evidence from Indonesia. October World Bank Economic Review 22(3): 517-537.
To analyze the prospects for expanding financial access to the poor, bank professionals assessed 1,438 households in six provinces in Indonesia to judge their creditworthiness. About 40 percent of poor households were judged creditworthy according to the criteria of Indonesia's largest microfinance bank, but fewer than 10 percent had recently borrowed from a microbank or formal lender. Possessing collateral appeared as a minor determinant of creditworthiness, in keeping with microfinance innovations. Although these households were judged able to service loans reliably, most desired small loans. Calculations show that the bank, given its current fee structure and banking practices, would lose money when lending at the scales desired. So, while innovations have helped to extend financial access, it remains difficult to lend in small amounts and cover costs.
The urgency of reducing poverty in the developing world has been the subject of a public campaign by such unlikely policy experts as George Clooney, Alicia Keyes, Elton John, Angelina Jolie, and Bono. And yet accompanying the call for more foreign aid is an almost universal discontent with the effectiveness of the existing aid system. In Reinventing Foreign Aid, development expert William Easterly has gathered top scholars in the field to discuss how to improve foreign aid. These authors, Easterly points out, are not claiming that their ideas will (to invoke a current slogan) Make Poverty History. Rather, they take on specific problems and propose some hard-headed solutions.
Morduch, J. & Collins, D. 2008. Banking Low-Income Populations: Perspectives from South Africa. Insufficient Funds: Savings, Assets, Credit and Banking Anomg Low-Income Households. New York: Russell Sage.
Morduch, J. & Durlauf, S., Blume, L. 2008. Micro-Credit. New Palgrave Dictionary of Economics Second Edition. Palgrave Macmillan. 2008.
Written by 1506 eminent contributors, this new edition of The New Palgrave Dictionary of Economics retains many classic essays of enduring importance and contains 1,872 articles. Published in eight print volumes and for the first time in online format, this is the definitive scholarly reference work for a new generation of economists.
Morduch, J., Cull, R. & Demirguc-Kunt, A. 2007. Financial Performance and Outreach: A Global Analysis of Leading Microbanks. Economic Journal, February 2007, Vol. 117, Issue 517, pp. F107-F133.
Microfinance promises to reduce poverty by employing profit-making banking practices in low-income communities. Many microfinance institutions have secured high loan repayment rates but, so far, relatively few earn profits. We examine why this promise remains unmet. We explore patterns of profitability, loan repayment, and cost reduction with unusually high-quality data on 124 institutions in 49 countries. The evidence shows the possibility of earning profits while serving the poor, but a trade-off emerges between profitability and serving the poorest. Raising fees to very high levels does not ensure greater profitability and the benefits of cost-cutting diminish when serving better-off customers.
Morduch, J. 2006. Micro-Insurance: The Next Revolution? To be included in What Have We Learned About Poverty?, edited by Abhijit Banerjee, Roland Benabou, and Dilip Mookherjee. Oxford University Press.
This essay focuses on the design of insurance products for poor customers. Several promising innovations are described: credit life insurance, health insurance partnerships, and weather insurance. Each was created to serve populations that were previously unserved, and workable institutional solutions are emerging. The next step must be to shift from the question of what creates workable institutions to the question of how to refine designs to best serve low-income populations. In doing so, current approaches must be reassessed in order to most improve clients’ lives and to avoid doing unintended harm.
Morduch, J. & Armendariz de Aghion, B. 2005. The Economics of Microfinance. Harvard University. MIT Press: Cambridge.
The microfinance revolution, begun with independent initiatives in Latin America and South Asia starting in the 1970s, has so far allowed 65 million poor people around the world to receive small loans without collateral, build up assets, and buy insurance. This comprehensive survey of microfinance seeks to bridge the gap in the existing literature on microfinance between academic economists and practitioners. Both authors have pursued the subject not only in academia but in the field; Beatriz Armendáriz de Aghion founded a microfinance bank in Chiapas, Mexico, and Jonathan Morduch has done fieldwork in Bangladesh, China, and Indonesia. The authors move beyond the usual theoretical focus in the microfinance literature and draw on new developments in theories of contracts and incentives. They challenge conventional assumptions about how poor households save and build assets and how institutions can overcome market failures. The book provides an overview of microfinance by addressing a range of issues, including lessons from informal markets, savings and insurance, the role of women, the place of subsidies, impact measurement, and management incentives. It integrates theory with empirical data, citing studies from Asia, Africa, and Latin America and introducing ideas about asymmetric information, principal-agent theory, and household decision making in the context of microfinance. The Economics of Microfinance can be used by students in economics, public policy, and development studies. Mathematical notation is used to clarify some arguments, but the main points can be grasped without the math. Each chapter ends with analytically challenging exercises for advanced economics students.
Morduch, J. 2004. Consumption Smoothing Across Space: Tests for Village-Level Responses to Risk. Stefan Dercon, ed., Insurance Against Poverty. Oxford University Press.
In the important and topical area of insurance and risk, this book proposes new forms of insurance for developing economies. Thorough, up-to-date thematic papers and case studies, development assessments and policy analyses from a broad scope of disciplines.
Achieving both profitability and strong social performance is the ultimate promise of microfinance. It is not impossible, but neither is it easy and few microlenders are there yet. Ten years ago it had been hoped that achieving both goals would simply be a matter of raising interest rates on loans. If borrowers were willing to pay, say, 50% interest per year for a loan, rather than 30%, the microlender’s profits would see an immediate boost, and, it was hoped, the well-being of clients would not be seriously hurt. Both parts of the claim are true up to a point, but increasing interest rates too high can bring financial and political difficulty and risk undermining social impacts.
This book evaluates alternatives in widening insurance and social protection provision - including sustainability and poverty effects, in thematic papers and case studies, development assessments, and policy analyses.
Morduch, J. & Armendariz de Aghion, B. 2004. Microfinance: Where Do We Stand? Chapter included in Charles Goodhart, editor, Financial Development and Economic Growth: Explaining the Links. Basingstoke, Hampshire, UK: Palgrave Macmillan.
The most successful economies have the best working financial markets. While causation obviously runs in both directions, current research has increasingly emphasized the role of finance in promoting growth. Here seven leading financial economists explore the links between financial development and growth. The book seeks to answer the question of the role of finance in promoting sustainable growth and in the reduction of poverty, for example via micro-financial institutions.
Morduch, J. 2004. The Grameen Bank Rethinks Microcredit. (In Japanese), Ajiken World Trend 106 (7) (Institute of Developing Economies, Chiba), June.
Morduch, J. & Rutherford, S. 2003. Microfinance: Analytical Issues for India. India's Financial Sector: Issues, Challenges and Policy Options. Edited by Basu, Priya. Oxford University Press.
Poor households face many constraints in trying to save, invest, and protect their livelihoods. They take financial intermediation seriously and devote considerable effort to finding workable solutions. Most of the solutions are found in the informal sector, which, so far, offers low-income households convenience and flexibility unmatched by formal intermediaries. The microfinance movement is striving to match the convenience and flexibility of the informal sector, while adding reliability and the promise of continuity, and in some countries it is already doing this on a significant scale. Getting to this point - reaching poor people on a massive scale with popular products on a continuous basis - has involved rethinking basic assumptions along the way. One by one, the keywords of the 1980s and 1990s - women, groups, graduation, microbusinesses, and credit - are giving way to those of the new century - convenience, reliability, continuity, and a flexible range of services. We describe the elements that we feel have contributed most and that are most relevant for India.
Morduch, J., Hashemi, S. & Littlefield, E. 2003. Is Microfinance an Effective Strategy to Reach the Millenium Development Goals? Focus Note No. 24. Washington, DC: Consultative Group to Assist the Poor. July.
The United Nations' Millennium Development Goals (MDGs) have galvanized the development community with an urgent challenge to improve the welfare of the world's neediest people. This paper reviews the mounting body of evidence showing that the availability of financial services for poor households is a critical contextual factor with strong impact on the achievement of MDGs. Evidence from the millions of microfinance clients around the world demonstrates that access to financial services enables poor people to increase their household incomes, build assets, and reduce their vulnerability to the crises that are so much a part of their daily lives.
Morduch, J. & Haley, B. 2003. Microfinance and Poverty Reduction: What is the Bottom Line? In Exclusion et Liens Financiers. Lyon: Centre Walras.
Morduch, J. & Sharma, M. 2002. Strengthening Safety Nets from the Bottom Up. Development Policy Review 20 (5), November, pp. 569-88.
This paper describes ways to build public safety nets to complement and extend informal and private institutions. It demonstrates that the most effective policies will combine both transfer systems that are sensitive to existing mechanisms and new institutions for providing insurance and credit and for generating savings.
Morduch, J. & Sicular, T. 2002. Rethinking Inequality Decomposition, with Evidence from Rural China. Economic Journal 112 (476), January 2002, 93-106.
We examine inequality decompositions by income source and describe a general, regression-based approach for decomposing inequality. The approach provides an efficient and flexible way to quantify the roles of variables like education and age in a multivariate context. We illustrate the method using survey data from China. The empirical results demonstrate how sharply different conclusions can emerge for different decomposition rules. We explain how these differences reflect the treatment of equally-distributed sources of income, and we discuss implications for how results from inequality decomposition are interpreted. Copyright Royal Economic Society 2002
Morduch, J. 2002. Replicating Microfinance in the United States: Opportunities and
Challenges. (with Mark Schreiner) Chapter 1 of Replicating Microfinance in the United States, edited by Jim Carr and Zhong Yi Tong. Baltimore: Woodrow Wilson Center/Johns Hopkins University Press.
Microfinance was pioneered in the developing world as the lending of small amounts of money to entrepreneurs who lacked the kinds of credentials and collateral demanded by banks. Similar practices spread from the developing to the developed world, reversing the usual direction of innovation, and today several hundred microfinance institutions are operating in the United States.
Replicating Microfinance in the United States reviews experiences in both developing and industrialized countries and extends the applications of microlending beyond enterprise to consumer finance, housing finance, and community development finance.
This book reviews experiences in both developing and industrial countries and extends the applications of microlending beyond enterprise to consumer finance, housing finance, and community development finance, concentrating especially on previously underserved households and their communities.
Morduch, J. & Sicular, T. 2001. Risk and Insurance in Transition: Perspectives from Zouping County, China. Chapter 8 in Community and Market in Economic Development, Oxford University Press, edited by Professors Masahiko Aoki and Yujiro Hayami.
This book explores the role of community in facilitating the transition to market relationships in economic development, and in controlling and sustaining local public goods such as irrigation, forests, grazing land, and fishing grounds. Previously it was customary to classify economic systems in terms of varying combinations of state and market control of resource allocation. In contrast, this book recognizes community as the third major element of economic systems. This new approach also departs from the conventional view that markets and community norms should be treated as mutually exclusive means of organizing economic activity, instead clarifying the situations in which they may become complementary. Further discussion focuses on the conditions under which management of local commons can, and should, be delegated to local communities rather than subjected to the control of central government.
Morduch, J. 2000. Sibling Rivalry in Africa. American Economic Review (AEA, Papers and Proceedings) 90 (2), May 2000, 405 - 409.
This article uses data on young teenagers to investigate how sibling composition affects schooling outcomes in South Africa and Tanzania. The results, while not estimated very precisely, establish additional evidence of positive associations between school completion and the number of sisters a child has (controlling for the total number of siblings), but the evidence from South Africa shows that they are not general findings. The estimates are conditional on the given family structure, and of course, family structure may not be fully exogenous to schooling choices.
Morduch, J. 2000. Microfinance Beyond Group Lending. with Beatriz Armendariz de Aghion. The Economics of Transition 8 (2) 2000: 401-420.
Studies the mechanisms that allows microfinance programs to successfully penetrate new segments of credit markets. Repayment rates from low-income borrowers; Microfinance in transition economies; Non-refinancing threats; Features of microfinance credit contracts.
Morduch, J. & Sicular, T. 2000. Politics, Growth, and Inequality in Rural China: Does it Pay to Join the Party? Journal of Public Economics 77 (3), September 2000, 331 - 346.
Presents survey data of the household incomes of local officials in northern China and their relation to market liberalization, increases in consumer demand and the provision of local public goods. Description of the rank-and-file bureaucrats; Political status in rural China; Survey data and economic setting; Effects of political variables on income levels; Analyses; Economic reform.
Morduch, J. 2000. Reforming Poverty Alleviation Policies. published in Economic Policy Reform: The Second Stage, edited by Professor Anne Krueger, University of Chicago Press.
In the world today, about one billion people live on less than one dollar per day, and about two to three billion live on less than two dollars per day (World Bank 1997). Thirty years ago, the numbers looked very different. Broad-based economic growth in populous countries like China and Indonesia has substantially reduced rates of absolute poverty. In Indonesia, for example, the fraction of the population below the poverty line fell from 58 to 17 percent between 1972 and 1982, and in Brazil the fraction fell from 50 to 21 percent between 1960 and 1980 (World Bank 1993a). Similarly, China boasts a reduction in rural poverty from 31 to 7 percent between 1978 and 1995, a decrease by 185 million people. These changes have left a growing concentration of world poverty in slow-growth areas of South Asia and Africa.
Morduch, J. 2000. The Microfinance Schism. World Development, 28 (4), April 2000, 617 - 629.
Presents a study on win-win proposition, a principle of good banking, by leading microfinance advocates which can alleviate poverty through microfinance institution. Logic of the win-win proposition; Advantages of financial sustainability; Limits of the proposition.
Morduch, J. 1999. The Microfinance Promise. Journal of Economic Literature, Dec 1999, Vol. 37 Issue 4, p1569, 46p.
The article presents information about a set of financial institutions in underdeveloped countries which are striving to alleviate poverty by providing financial services to low-income households. These institutions, united under the banner of microfinance, share a commitment to serving clients that have been exclude from the formal banking sector. Almost all of the borrowers do so to finance self-employment activities, and many start by taking loans as small as $75, repaid over several months or a year. Only a few programs require borrowers to put up collateral, enabling would-be entrepreneurs with few assets to escape positions as poorly paid wage laborers or farmers. The programs point to innovations like "group-lending" contracts and new attitudes about subsidies as keys to their success. Group-lending contracts effectively make a borrower's neighbors co-signers to loans, mitigating problems created by informational asymmetries between lender and borrower. Neighbours now have incentives to monitor each other and to exclude risky borrowers from participation, promoting repayment even in the absence of collateral requirements.
Morduch, J. 1999. Between the Market and State: Can Informal Insurance Patch the Safety Net? World Bank Research Observer, 14 (2), August 1999, 187 - 207.
Examines use of informal insurance arrangements in households of low-income countries. Relationship between household consumption and income; Ways in dealing economic hardships; Systems of reciprocal transfers; Role of public policy in reducing economic vulnerability; Overview on microcredit, insurance and employment guarantee schemes.
Morduch, J. & Anand, S. 1999. Poverty and the 'Population Problem'. Population and Poverty in Developing Countries, Massimo Livi-Bacci and Gustavo de Santis, eds., Oxford University (Clarendon) Press.
Morduch, J. 1999. The Role of Subsidies in Microfinance: Evidence from The Grameen Bank. Journal of Development Economics, 60, October 1999, 229-248.
Focuses on the role of subsidies in microfinance as evidenced by the Grameen Bank of Bangladesh. Difficulties in maintaining high repayment rates; Role of the bank in alleviating poverty; Recognition of the myriad benefits that have been attributed to program participation.
Morduch, J. 1998. Poverty, Economic Growth, and Average Exit Time. Economics Letters 59, 385-390.
Morduch, J. Garg, A. 1998. Sibling Rivalry and the Gender Gap: Evidence from Child Health Outcomes in Ghana. Journal of Populations Economics 11 (4), December 1998, 471 - 493.
When capital and labor markets are imperfect, choice sets narrow, and parents must choose how to ration available funds and time between their children. One consequence is that children become rivals for household resources. In economies with pro-male bias, such rivalries can yield gains to having relatively more sisters than brothers. Using a rich household survey from Ghana, we find that on average if children had all sisters (and no brothers) they would do roughly 25-40% better on measured health indicators than if they had all brothers (and no sisters). The effects are as large as typical quantity-quality trade-offs, and they do not differ significantly by gender.
Bravo, D., Godoy, R. & Morduch, J. 1998. Technological Adoption in Rural Cochabamba, Bolivia. Journal of Anthropological Research 54, 351-371.
Morduch, J. & Stern, H. 1997. Using Mixturn Models to Detect Sex Bias in Health Outcomes in Bangladesh. Journal of Econometrics 77 (1), March, 259-276.
Many interesting economic hypotheses entail differences in behaviors of groups within a population, but analyses of pooled samples shed only partial light on underlying segmentations. Finite mixture models are considered as an alternative to methods based on pooling. Robustness checks using t-regressions and a Bayesian analogue to the likelihood ratio test for model evaluation are developed. The methodology is used to investigate pro-son bias in child health outcomes in Bangladesh. While regression analysis on the entire sample appears to wash out evidence of bias, the mixture models reveal systematic girl-boy differences in health outcomes.
Morduch, J. Klibanoff, P. 1995. Decentralization, Externalities, and Efficiency. Review of Economic Studies 62, April 1995, 223-247.
In the competitive model, externalities lead to inefficiencies, and inefficiencies increase with the size of externalities. However, as argued by Coase, these problems may be mitigated in a decentralized system through voluntary coordination We show how coordination is limited by the combination of two factors: respect for individual autonomy and the existence of private information. Together they imply that efficient outcomes can only be achieved through coordination when external effects are relatively large Moreover, there are instances in which coordination cannot yield any improvement at all, despite common knowledge that social gains from agreement exist This occurs when external effects are relatively small, and this may help to explain why coordination is so seldom observed in practice. When improvements are possible, we describe how simple subsidies can be used to implement second-best solutions and explain why standard solutions, such as Pigovian taxes, cannot be used. Possible extensions to issues arising in the structure of research joint ventures, assumptions in the endogenous growth literature, and the location of environmental hazards are also described.
Morduch, J. 1995. Income Smoothing and Consumption Smoothing. Journal of Economic Perspectives 9(3), Summer 1995, 103-114.
Examines the ways in which farm households in developing countries may self-insure, with a particular emphasis on the idea that farm households may seek to smooth their consumption by altering their methods of production. Quantifying the importance of risk; Consumption smoothing and risk; Income smoothing; Simplicity and complexity in low-income economies.