International Development

How Microfinance Really Works

How Microfinance Really Works
The Milken Institute Review

Morduch, Jonathan
01/01/2013

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. This is the opening for microfinance and also its challenge. Microlending has been sold as a practical means to get capital into the hands of small-scale entrepreneurs who can then earn their way out of poverty. The idea appeals to our impulse to help people help themselves and to our conviction that bottom-up development depends on the embrace of the market. By eschewing governments and traditional charities, the sector promises to sidestep the bureaucracy and inertia that have hobbled other attempts to expand the opportunities of the poor.

Banking The World

Banking The World
The MIT Press

(eds.) Cull, Robert, Asli Demirgüç-Kunt and Jonathan Morduch
12/01/2012

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.

Performance Measurement and Evaluation Systems: Institutionalizing Accountability for Governmental Results in Latin America

Performance Measurement and Evaluation Systems: Institutionalizing Accountability for Governmental Results in Latin America
In S. Kushner & E. Rotondo (Eds.), Evaluation voices from Latin America. New Directions for Evaluation, 134, 77–91.

Cunill-Grau, N., & Ospina, S. M.
06/08/2012

Results-based performance measurement and evaluation (PME) systems are part of a global current in public administration. In the Latin American context, this trend is also a reflection of the broader processes of reform of the latter half of the 20th century, including the modernization of public administration, as well as broad processes of decentralization and democratization, both of which are dimensions of development in Latin America, regardless of the political and ideological orientation of specific governments. This chapter documents the development of such evaluative approaches to organizational quality and raises some issues for further discussion.

Policy Instruments for Sustainable Development at Rio +20

Policy Instruments for Sustainable Development at Rio +20
Journal of Environment and Development, June 2012

Maria Damon and Thomas Sterner
04/30/2012

Twenty years ago, governments gathered for the United Nations Conference on Environment and Development in Rio de Janeiro. The “Rio Declaration” laid out several principles of sustainable development, including the central role of policy instruments. In this article, we take stock of where we stand today in implementing sound and effective environmental policy instruments throughout the world, particularly in developing and transitional economies. We argue that, as our experience with market-based environmental policies has deepened over the past two decades, so has the ability to adapt instruments to complicated and heterogeneous contexts—but we are only just beginning, and the need to be further along is dire. One key factor may be that economists have not yet meaningfully accounted for the importance of political feasibility, which often hinges on risks to competitiveness and employment, or on the distribution of costs rather than on considerations of pure efficiency alone.

Behavioral Foundations of Microcredit: Experimental and Survey Evidence from Rural India

Behavioral Foundations of Microcredit: Experimental and Survey Evidence from Rural India
American Economic Review 102 (2), April 2012: 1118-1139.

Bauer, Michal; Julie Chytilová; and Jonathan Morduch
04/01/2012

We use experimental measures of time discounting and risk aversion for villagers in south India to highlight behavioral features of microcredit, a financial tool designed to reduce poverty and fix credit market imperfections. The evidence suggests that microcredit contracts may do more than reduce moral hazard and adverse selection by imposing new forms of discipline on borrowers. We find that, conditional on borrowing from any source, women with present-biased preferences are more likely than others to borrow through microcredit institutions. Another particular contribution of microcredit may thus be to provide helpful structure for borrowers seeking self-discipline.

Do interest rates matter? Credit demand in the Dhaka Slums

Do interest rates matter? Credit demand in the Dhaka Slums
Journal of Development Economics, 97(2): 437-449

Dehejia, Rajeev; Heather Montgomery and Jonathan Morduch
03/01/2012

“Best practice” in microfinance holds that interest rates should be set at profit-making levels, based on the belief that even poor customers favor access to finance over low fees.  Despite this core belief, little direct evidence exists on the price elasticity of credit demand in poor communities.  We examine increases in the interest rate on microfinance loans in the slums of Dhaka, Bangladesh.  Using unanticipated between-branch variation in prices, we estimate interest elasticities from -0.73 to -1.04, with our preferred estimate being at the upper end of this range. Interest income earned from most borrowers fell, but interest income earned from the largest customers increased, generating overall profitability at the branch level. 

Notre façon de voir la pauvreté [How we see poverty]

Notre façon de voir la pauvreté [How we see poverty]
FACTS, Special Issue 4 (Lutte contre la pauvreté), January 2012: 14-19.

Jonathan Morduch
01/01/2012

How we think about poverty is colored by how we measure it. For economists, that often means seeing poverty through quantities measured in large, representative surveys. The surveys give a comprehensive view, but favor breadth over depth. Typical economic surveys are limited in their ability to tease out informal activity, and, while they capture yearly sums, they offer little about how the year was actually lived by families. Year-long financial diaries provide a complementary way of seeing poverty, with a focus on week by week choices and challenges. The result is a re-framing of poverty and its relationship to money, calling for greater attention to financial access and a broader notion of how finance matters.

Green Growth in the Post-Copenhagen Climate

Green Growth in the Post-Copenhagen Climate
Energy Policy 39(11)

Maria Damon and Thomas Sterner
11/01/2011

Global climate change stands out from most environmental problems because it will span generations and force us to think in new ways about intergenerational fairness. It involves the delicate problem of complex coordination between countries on a truly global scale. As long as fossil fuels are too cheap, climate change policy will engage all major economies. The costs are high enough to make efficiency a priority, which means striving toward a single market for carbon—plus tackling the thorny issues of fairness.

Hopes for a grand deal were mercilessly shattered at Copenhagen in December 2009 and in other recent UNFCCC meetings, with the result that “green growth” is promoted as an alternative path. Indeed, green growth is clearly the goal, but it is no magic bullet. The world economy will require clear and rather tough policy instruments for growth to be green—and it is naïve to think otherwise. Growth, green or not, will boost demand for energy and coal is normally the cheapest source. The magnitude of the challenge is greater if we also consider the problems related to nuclear (fission) energy and, in some instances, to bioenergy (such as its competition for land that may be essential for the poor). This paper discusses some necessary ingredients for a long-term global climate strategy. As we wait for the final (and maybe elusive) worldwide treaty, we must find a policy that makes sense and is not only compatible with, but facilitates the development of such a treaty.

Not so Fast: The Realities of Impact Investing

Not so Fast: The Realities of Impact Investing
America's Quarterly

Jonathan Morduch
09/01/2011

At the beginning of 2010, the Indian microfinance sector was a hotspot for impact investors. The promise of impact investing could be seen in the number of investors lining up to participate in the IPO of SKS Microfinance. 

SKS had ballooned from 603,000 borrowers in fiscal year 2007 to 6.8 million in fiscal year 2010.  Most were women in South Indian villages. The founder of SKS, Vikram Akula, had been saluted by Time and the World Economic Forum, and his Harvard-published memoir told the story of an “unexpected quest to end poverty through profitability.” 

But by 2011, the Indian microfinance sector was mired in bad press and political controversy.  Newspapers accused lenders of putting poor villagers in debt and causing suicides. State-level legislation in late 2010 capped interest rates and scared away equity investors.  Borrowers ceased to repay, and SKS’s share price plummeted, dipping below 200 rupees in late August 2011 (from an IPO price of 985 rupees in August 2010). As summer 2011 ended, BASIX—a pioneering competitor of SKS-- very publicly searched for funding to stay afloat.

Both the achievements and challenges in India hold lessons for impact investors. 

Impact investing has been widely touted, with microfinance as a leading example.  The temptation to attract capital by promising macro-impact at a micro-cost is difficult to resist—and India continues to be one of the most important and innovative microfinance markets. But getting the equation right is more complicated than most advocates admit.

Here are seven lessons on challenges, risks and realities drawn from three decades of microfinance ups and downs.

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