Can Microfinance Save the World? Bruce Wydick Professor of Economics University of San Francisco.
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Transcript of Can Microfinance Save the World? Bruce Wydick Professor of Economics University of San Francisco.
Can Microfinance Save the World?
• What is microfinance?
• Personal experience
• Why don’t free markets provide credit to the poor?
• Growth of microfinance
• What drives high repayment rates?
• Does it help alleviate poverty?
• New issues in microfinance
What is microfinance?
• Movement with origins in Bangladesh
• Muhammad Yunus—Why doesn’t economic theory work for the poor?
• Beginning of Grameen Bank, 1976…
• http://www.youtube.com/watch?v=YxpTFwQx-A8
What is microfinance?• Many very small loans to the poor ($10 up
to $10,000+)
• Typically weekly, bi-weekly, monthly installments
• Loans go for small-scale entrepreneurial activity
• Usually for existing businesses, skills
• Urban, rural areas
• Allow the poor to participate in capitalism
Personal Experience• Dominican Republic 1988, Costa Rica 1989
• Berkeley Dissertation
• Dozen or so research articles related to group lending, impact of microfinance, credit information systems
Growth of Microfinance:• As of January 1, 2007, 133,030,913 households reportedly reached with microfinance, up from 13,478,000 reported in 1997. (Microfinance Summit)
• 92,922,574 were among the poorest when they took their first loan.
• 85.2 percent (79,130,581) are women entrepreneurs.
• Assuming 5 persons per family, the 92.9 million poorest clients reached affected some 464,612,870 family members.
What is responsible for growth in microfinance?• Not because of proof that it reduces
poverty
• Appealing to all ends of political spectrum!
What is responsible for growth in microfinance?• Not because of proof that it reduces
poverty
• Appealing to all ends of political spectrum!
Liberals:Empowers WomenReaches PoorestPro-ArtesianBenign on Environment
Pragmatists:Requires little/no subsidyLess costly than a revolutionNon-controversial
Conservatives:Not a handout, welfareIncentives for workProperty rights basedPro-Capitalism
The Political Spectrum
What makes credit markets unique?•In some markets we have full information…
•Asymmetric Information in other types of transactions
• Problem of Adverse Selection
• Problem of Moral Hazard
• Strong theoretical basis for intervention in credit markets
• (See S&L crisis, sub-prime mortgage crisis.)
Underlying reason why the poor are denied credit!
What about repayment rates?• Typically very high, 95-99% if best
practices followed.
• Some problems• government programs with giveaways
• correlated shocks to areas
• poor portfolio management
What drives high repayment rates?1. Skilled use of loan officers
Branch OfficeBranc
h Office
MAIN OFFICE
Branch Office
Branch Office
Branch Office
What drives high repayment rates?2. Group Lending
Branch Office
Branch Office
(Jointly Liable Groups)
Helps address:Adverse SelectionMoral HazardAdministrative Costs
Can Social Cohesion be harnessedas collateral for loans?
What drives high repayment rates?3. Dynamic Incentives
$ $ $ $ $ $ $ $$Problem: What happens when there are multiple lenders?
Does microfinance make a difference?
• This is a more difficult question than one might think…
Several problems:
• Self-selection bias
• Non-random program placement
• Measuring long-term effects (problem with experiments)
How do we measure microfinance program impact? (Crummy Ways)• "Super Naïve" method: Ask people if
program is helping them.
•"Naïve" method: Survey non-borrowers vs. borrowers
•"Still Pretty Lousy Method": Compare Old vs New borrowers
•"Sophisticated, but Still Pretty Lousy Method": Use matching models and propensity scoring to obtain a control group.
How do we measure microfinance program impact? (Better Ways)• Use "Difference-in-Differences" method on
treated and untreated groups (Problem: require baseline surveys)
• Use an "Instrumental Variable" to achieve identification of impacts; correlated with uptake but not impact. (Problem: a good IV is often hard to find.)
• Run a "Randomized Field Experiment" in which treatment groups are randomly offered credit. (Problem: hard to hold off borrowers from credit)
•Use "retrospective data" focused on the probability of fundamental events to a household; borrowed from finance "event studies".
New Innovations: Credit Information Systems• Problem with too many microfinance
lenders
•Difficult to ascertain debt load of a new borrower
•Need credit information system: Allows lenders to view both positive and negative information about borrowers.
•Greatly facilitated by the Web.
New Innovations: Credit Information Systems• Implemented a field experiment in Guatemala to test the effects of a credit information system among microfinance providers. • Involves installation of hardware and software used for the credit bureau between March 2002 and January 2003 in 39 branch offices of microfinance institution in Guatemala. • Had significant effect on both delinquent payments and defaults.
0
24
68
Pe
rcen
tage
s
-10 -5 0 5 10Months from rollout
> 2 mos delinquent Defaulted
Rollout: Changes in Default
New Innovations: Kiva.org
Name: Virginia Chiquito
Business Name:
Gabinete de Belleza
Location: Guayaquil, Ecuador
Primary Activity:
Beauty Salon
Loan Requested:
$1,000.00
Repayment Term:
10 months - repaid monthly
Loan Use: Invest in furniture for the shop
Date Posted:
May 7, 2007
Date Funded:
May 9, 2007
Disbursal Date:
May 12, 2007
Loan Ended:
Mar 12, 2008
New Innovations: Kiva.org
l
Name: Victor Cisse
Business Name:
1169 -imcec thies
Location: THIES, Senegal
Primary Activity:
Manufacturing
Loan Requested:
$950.00
Repayment Term:
12 months - repaid monthly
Loan Use:Purchase of leather and hides to strengthen stock
Date Posted:
Mar 12, 2008
Date Funded:
Mar 13, 2008