Consumption Smoothing Across Space: Testing Theories of Risk-Sharing in the ICRISAT Study Region of South India

consumption smoothing, risk sharing, informal insurance, India

The Impact of Microcredit on the Poor in Bangladesh: Revisiting the Evidence

The most-noted studies on the impact of microcredit on households are based on a survey fielded in Bangladesh in the 1990s. Contradictions among them have produced lasting controversy and confusion. Pitt and Khandker (PK, 1998) apply a quasi-experimental design to 1991–92 data; they conclude that microcredit raises household consumption, especially when lent to women. Khandker (2005) applies panel methods using a 1999 resurvey; he concurs and extrapolates to conclude that microcredit helps the extremely poor even more than the moderately poor. But using simpler estimators than PK, Morduch (1999) finds no impact on the level of consumption in the 1991–92 data, even as he questions PK’s identifying assumptions. He does find evidence that microcredit reduces consumption volatility. Partly because of the sophistication of PK’s Maximum Likelihood estimator, the conflicting results were never directly confronted and reconciled. We end the impasse. A replication exercise shows that all these studies’ evidence for impact is weak. As for PK’s headline results, we obtain opposite signs. But we do not conclude that lending to women does harm. Rather, all three studies appear to fail in expunging endogeneity. We conclude that for non-experimental methods to retain a place in the program evaluator’s portfolio, the quality of the claimed natural experiments must be high and demonstrated.microcredit; impact evaluation; Grameen Bank; Bangladesh; replication; mixed-process models

Measuring Vulnerability to Poverty

vulnerability, poverty, poverty measurement, C.te d'Ivoire

Strengthening public safety nets

Helping to reduce vulnerability poses a new set of challenges for public policy. The most immediate challenge is to determine the appropriate role for public action if there should be a role at all. A starting point is the ways that communities and extended families try to cope with difficullties in the absence of government interventions. Coping mechanisms range from the informal exchange of transfers and loans within families and commmunitieis to more structured institutions that enable an entire community to provides protections to their neediest members. The existence of this web of private and nonformal mechanisms pompts a series of questions: Will building public safety nets displace existing mechanisms and offer limited net gain to households? Would it be more effective to strengthen existing mechanisms than creating new ones? Can the private sector and NGOs play larger roles? This paper provides some speculative answers and describes places for public action, as well as its limits.Social institutions. ,Public institutions. ,

Replicating Microfinance in the United States: Opportunities and Challenges

In developing countries, microfinance has been the darling of the development community, and in developed countries, microfinance fits well with Third Ways ideas. What are the challenges and opportunities for the attempt to replicate microfinance in the United States? This paper attempts to sketch some answers. Two factors color much of the discussion. First, compared to the Third World, the structure of the U.S. economy makes the hurdles to starting small-businesses much higher in the United States, and, second, the microenterprise sector itself is much smaller. The two aspects combine to make business training a far more important component in the United States than in the Third World. They also limit potential demand for microfinance and drive up costs. With costs well above revenues, U.S. programs are far from achieving financial self-sufficiency. With continued reliance on donors, U.S. programs will have to work toward justifying their place among other subsidized anti-poverty interventions, including education and community-building initiatives. This suggests that serious, regular cost-effectiveness analyses should become a much higher priority than it has been. Our second broad conclusion is that developing inexpensive saving services for the "unbanked" appears to have greater potential for cost-recovery in the United States, and this could open up opportunities for millions of poor households that are poorly served by existing for- profit and non-profit financial institutions. The current focus on microlending in the US echoes the initial focus on lending in Third World programs, but those programs are increasingly recognizing the importance of also developing facilities for safe, convenient savings.Replication, microfinance, microenterprise, outreach, sustainability, financial education, self-employment, welfare reform, affordable housing, community development

Strengthening public safety nets

Helping to reduce vulnerability poses a new set of challenges for public policy. The most immediate challenge is to determine the appropriate role for public action if there should be a role at all. A starting point is the ways that communities and extended families try to cope with difficullties in the absence of government interventions. Coping mechanisms range from the informal exchange of transfers and loans within families and commmunitieis to more structured institutions that enable an entire community to provides protections to their neediest members. The existence of this web of private and nonformal mechanisms pompts a series of questions: Will building public safety nets displace existing mechanisms and offer limited net gain to households? Would it be more effective to strengthen existing mechanisms than creating new ones? Can the private sector and NGOs play larger roles? This paper provides some speculative answers and describes places for public action, as well as its limits.Social institutions. ,Public institutions. ,

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

This paper draws a link between self-control problems and the contractual mechanisms of microcredit. We use a series of “lab experiments in the field” which were designed to elicit measures of time discounting on a sample of 573 individuals in rural Karnataka, India. Evidence from the experiments were integrated with individual survey data on the economic and financial lives of villagers. One third of participants made choices consistent with hyperbolic preferences (more impatient now than in the future), and would be made better off if they could discipline their time inconsistent preferences. While hyperbolic preferences have been often associated with saving behavior, we describe links to borrowing as well. We find that “hyperbolic” women save a lower share of their savings at home and save less in total levels. Women with hyperbolic preferences are also more likely to borrow--and to do so through microcredit institutions specifically. The finding highlights the role of the fixed and frequent installment schedule ubiquitous in microcredit contracts. While microcredit contracts are celebrated for mitigating informational asymmetries, the evidence suggests that they also offer helpful structure for people with self-discipline problems who seek to accumulate capital but who lack suitable contractual saving devices.banking; : time preference, hyperbolic discounting, loan contracts, microfinance

Do interest rates matter? credit demand in the Dhaka Slums

If the demand for credit by the poor changes little when interest rates increase, lenders can raise fees to cost-covering levels without losing customers. This claim is at the core of sustainable microfinance strategies that aim to provide banking services to the poor while eschewing long-term subsidies, but, so far, there is little direct evidence of this. This paper uses data from SafeSave, a credit cooperative in the slums of Dhaka, Bangladesh, to examine how sensitive borrowers are to increases in the interest rate on loans. Using unanticipated between-branch variation in the interest rate we estimate interest elasticities of loan demand ranging from -0.73 to -1.04. Less wealthy accountholders are more sensitive to the interest rate than (relatively) wealthier borrowers (an elasticity of -0.86 compared to -0.26), and consequently the bank’s portfolio shifts away from its poorest borrowers when it increases the interest rate.microfinance; credit; demand

Microfinance tradeoffs : regulation, competition, and financing

This paper describes important trade-offs that microfinance practitioners, donors, and regulators navigate. Drawing evidence from large, global surveys of microfinance institutions, the authors find a basic tension between meeting social goals and maximizing financial performance. For example, non-profit microfinance institutions make far smaller loans on average and serve more women as a fraction of customers than do commercialized microfinance banks, but their costs per dollar lent are also much higher. Potential trade-offs therefore arise when selecting contracting mechanisms, level of commercialization, rigor of regulation, and the extent of competition. Meaningful interventions in microfinance will require making deliberate choices - and thus embracing and weighing tradeoffs carefully.Access to Finance,Debt Markets,Banks&Banking Reform,Emerging Markets,Rural Finance

Banks and microbanks

Using two new datasets, the authors examine whether the presence of banks affects the profitability and outreach of microfinance institutions. They 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 relying on commercial funding and using traditional bilateral lending contracts (rather than the group lending methods favored by microfinance nongovernmental organizations). The analysis considers 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 it fails to find strong support for these alternative hypotheses.Access to Finance,Debt Markets,Banks&Banking Reform,Microfinance,Economic Theory&Research