International Development

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.

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.

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.

Why Finance Matters

Why Finance Matters
Science, vol. 332, 10 June 2011: 1271-1272.

Jonathan Morduch
06/01/2011

Roughly one-half of the world’s adults, about 2.5 billion people, have neither a bank account nor access to semiformal financial services such as “microcredit,” the growing practice in developing nations of providing small loans, typically less than US$500, to self-employed people. But what if they did? Muhammad Yunus, the 2006 Nobel Peace Prize winner and founder of Bangladesh’s Grameen Bank, a pioneering microcredit institution, argues that this lack of financial access means that the poor, especially poor women, can’t obtain the loans they need to build their businesses and get on a path out of poverty. The idea has taken hold: In 2009, for instance, Grameen Bank served 8 million customers; its average loan balance was just $127. Worldwide, microcredit advocates now claim more than 190 million customers. Proof of concept, however, is not proof of impact. Recent studies have found that some efforts to provide small loans have produced surprisingly weak results, and in this issue, Karlan and Zinman provide more evidence that we need to rethink microcredit. Their findings, from a randomized evaluation of microcredit lending in the Philippines, adds to a handful of recent results that suggest that microcredit’s effectiveness has been overstated by studies that selectively focus on success stories.

Does Regulatory Supervision Curtail Microfinance Profitability and Outreach?

Does Regulatory Supervision Curtail Microfinance Profitability and Outreach?
World Development 39(6): 949-965, June 2011

Cull, Robert; Asli Demirgüç-Kunt; and Jonathan Morduch
06/01/2011

We combine two datasets to examine whether the scale of an economy’s banking system affects the profitability and outreach of microfinance institutions. We find evidence that competition matters. Greater bank penetration in the overall economy is associated with microbanks pushing toward poorer markets, as reflected in smaller average loans sizes and greater outreach to women. The evidence is particularly strong for microbanks that rely on commercial-funding, use traditional bilateral lending contracts (rather than group lending methods favored by microfinance NGOs), and take deposits. We consider plausible alternative explanations for the correlations, including relationships that run through the nature of the regulatory environment and the structure of the banking environment, but we fail to find strong support for these alternative hypotheses.

Microfinance and Social Investment

Microfinance and Social Investment
Annual Review of Financial Economics, vol. 3, ed. Robert Merton and Andrew Lo. 2011: 407-434.

Conning, J. & Morduch, J.
04/08/2011

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.

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