International Development

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.

Borrowing to Save

Borrowing to Save
Journal of Globalization and Development 102 (2), December 2010.

Jonathan Morduch
12/01/2010

Poor families often borrow even when they have savings sufficient to cover the loan. The practice is costly relative to drawing down one’s own savings, and it seems particularly puzzling in poor communities.  The families themselves explain that it is easier to repay a moneylender than to “repay” oneself, an explanation in line with recent findings in behavioral economics.  In this context, high interest rates on loans can help instill discipline.  While workable, the mechanism is hardly optimal; options could be improved through access to a contractual saving device that helps savers rebuild assets after a major withdrawal.

Childhood Obesity: public health impact and policy responses

Childhood Obesity: public health impact and policy responses
"Global Perspectives on Childhood Obesity: Current Status, Consequences and Prevention" Debasis Bagchi, Editor. Sept-2010

Kersh, R. & Elbel, B.
09/17/2010

Understanding the complex factors contributing to the growing childhood obesity epidemic is vital not only for the improved health of the world's future generations, but for the healthcare system. The impact of childhood obesity reaches beyond the individual family and into the public arenas of social systems and government policy and programs. Global Perspectives on Childhood Obesity explores these with an approach that considers the current state of childhood obesity around the world as well as future projections, the most highly cited factors contributing to childhood obesity, what it means for the future both for children and society, and suggestions for steps to address and potentially prevent childhood obesity.

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