Product innovation for the poor

This policy brief reviews evidence and draws lessons regarding the role of microfinance for income and consumption smoothing by the poor, and highlights potential areas for product innovation by the microfinance sector to address the demand for financial services for income and consumption smoothing.... MFIs, especially if they seek to benefit the poor, should concentrate more effort on services that can mitigate risks. A number of innovative MFIs offer financial products that respond to risks, such as flexible saving, services that permit prompt withdrawals, consumption credit, and even explicit health and life insurance.Microfinance Evaluation. ,Microenterprises Finance. ,Financial institutions. ,Credit. ,Insurance. ,Income. ,Poverty alleviation. ,Finance Developing countries. ,

Considerations in the placement and outreach of microfinance organizations

Governments, policymakers, and donors attach a great deal of importance to poverty outreach—the extent to which MFIs serve poor and disadvantaged locations—when evaluating microfinance institutions (MFIs). With the above considerations in mind, IFPRI undertook a study of the service placement of three major NGOs in Bangladesh: the Association of Social Advancement (ASA), the Bangladesh Rural Advancement Committee (BRAC), and Proshika Manobik Unnayan Kendra (PROSHIKA).Evaluation. ,Non-governmental organizations Bangladesh. ,Finance Developing countries. ,Poor Bangladesh. Microenterprises Bangladesh Finance. ,

Targeting the poor and smallholder farmers: empirical evidence from Malawi

This paper develops low cost, reasonably accurate, and simple models for improving the targeting efficiency of development policies in Malawi. Using a stepwise logistic regression (weighted) along with other techniques applied in credit scoring, the research identifies a set of easily observable and verifiable indicators for correctly predicting whether a household is poor or not, based on the 2004-05 Malawi Integrated Household Survey data. The predictive power of the models is assessed using out-of-sample validation tests and receiver operating characteristic curves, whereas the model’s robustness is evaluated by bootstrap simulation methods. Finally, sensitivity analyses are performed using the international and extreme poverty lines. The models developed have proven their validity in an independent sample derived from the same population. Findings suggest that the rural model calibrated to the national poverty line correctly predicts the status of about 69% of poor households when applied to an independent subset of surveyed households, whereas the urban model correctly identifies 64% of poor households. Increasing the poverty line improves the model’s targeting performances, while reducing the poverty line does the opposite. In terms of robustness, the rural model yields a more robust result with a prediction margin ±10% points compared to the urban model. While the best indicator sets can potentially yield a sizable impact on poverty if used in combination with a direct transfer program, some non-poor households would also be targeted as the result of model’s leakage. One major feature of the models is that household score can be easily and quickly computed in the field. Overall, the models developed can be potential policy tools for Malawi.Malawi, poverty targeting, proxy means tests, out-of-sample tests, bootstrap, Food Security and Poverty, Research Methods/ Statistical Methods, I32, C15,

Placement and outreach of group-based credit organizations

Bangladesh has witnessed major strides in providing financial services to the rural poor. These services are provided largely through innovative group-based credit programs of several nongovernmental organizations. The implicit but widespread assumption has been that they are indeed placed in special poverty-stricken areas. Is this assumption valid? If not, what factors actually affect programs' placement across communities? This paper uses an unique thana-level data set to analyze the placement of three group-based credit programs in Bangladesh. Analysis of branch placement indicates that, unlike commercial banks, nongovernmental institutions do respond to general conditions of poverty. However, it appears that NGO services are located more in poor pockets of relatively well-developed areas than in remoter, less-developed regions. Client density of the established branches, however, did not exhibit such a feature and actually tended to be better in less advantageous locations.Credit. ,Financial institutions. ,Rural poor. ,

Factors affecting repayment rates in group-based lending

Lending is a risky enterprise because repayment of loans can seldom be fully guaranteed. The failure of a large number of state-sponsored agricultural development banks in many developing countries was due, among other things, to their inability to ensure good repayment rates among their borrowers. In the context of providing credit to the rural asset-poor, what is being increasingly called for is institutional innovation that combines prudent banking principles with effective screening and monitoring strategies that are not based on physical collateral (such as land). One important innovation has been the formation of borrower groups and the use of group responsibility and peer monitoring as the core principles guiding financial transactions. The authors cite successful endeavors including Grameen Bank in Bangladesh, SANSA in Sri Lanka and Credit Solidaire in Burkina Faso and, in Thailand, the Bank for Agriculture and Agricultural Cooperatives, and examine the factors affecting repayment rates.Banks and banking Africa. ,Agricultural credit. ,Rural credit Developing countries. ,Grameen Bank. ,Cooperative societies. ,Financial institutions Management. ,Burkina Faso. ,Thailand. ,Sri Lanka. ,Bangladesh ,

Distribution, growth, and performance of microfinance institutions in Africa, Asia, and Latin America

How many microfinance institutions (MFIs) exist in the developing world? What are their current performances? In 1999, an International Food Policy Research Institute (IFPRI) team on microfinance conducted a survey on MFIs in Asia, Africa, and Latin America in order to offer a new in-depth analysis on the distribution and performances of MFIs at the international level. A systematic sampling has been adopted through the contacting of international NGOs and networks supporting various MFIs. The information has been complemented by a review of publications and technical manuals on microfinance. The database of MFIs from 85 developing countries shows 1,500 institutions (790 institutions worldwide plus 688 in Indonesia) supported by international organizations. They reach 54 million members, 44 million savers (voluntary and compulsory savings), and 23 million borrowers. The total volume of outstanding credit is $18 billion. The total savings volume is$12 billion, or 72 percent of the volume of the outstanding loans. MFIs have developed at least 46,000 branches and employ around 175,000 staff. The IFPRI database underlines the presence of a multitude of MFIs that, except in unstable countries, are widespread, with no forgotten regions. MFIs are very diverse in terms of lending technologies and legal status, which allows room for innovation, but they remain highly concentrated. The data are analyzed by type of MFIs and by geographic regions. The results presented give an overview of the current development of MFIs and offer a benchmark for comparisons.Microenterprises Finance. ,Financial institutions. ,

To Target or Not to Target? The cost efficiency of indicator-based targeting

This paper assesses the cost efficiency of indicator-based targeting. Using household survey data from Malawi, we examine whether an indicator-based targeting of the poor is more target- and cost-efficient than the currently used mechanisms for targeting agricultural subsidy programs in the country. There is compelling evidence in favor of targeting Malawi’s poor based on the newly developed system. An indicator-based targeting system appears to be more target- and cost-efficient than the 2000/01 Starter Pack and the 2006/07 Agricultural Input Subsidy Program (AISP). While the Starter Pack and the AISP transferred about 50% of total transfer, under an indicator-based system, about 73% of transfers are delivered to the poor. Likewise, under an indicator-based system, the costs of leakage are cut down by more than 50% compared to Starter Pack and AISP. This work is prospectively relevant for Malawi as its policy makers reflect on improving the efficiency of the country’s pro-poor development programs. Likewise, the research can be applied in other countries with similar targeting problems.Malawi, poverty targeting, validation tests, cost efficiency, development policy, Agricultural and Food Policy, Community/Rural/Urban Development, Food Security and Poverty, Political Economy, Research Methods/ Statistical Methods, C01, C13, I32,

Rural financial services for poverty alleviation

For poor rural families in developing countries, access to credit and savings facilities has the potential to make the difference between grinding poverty and an economically secure life. Well-managed savings facilities permit households to build up funds for future investment or consumption. Credit enables them to tap finances beyond their own resources and to take advantage of profitable investment opportunities. Credit and savings also serve as insurance for the poor. In rural areas of developing countries, short-term loans or past savings are often used to provide basic necessities when household incomes decline temporarily — after a bad harvest or between agricultural seasons, for example....Successful financial outreach to the rural poor requires institutional innovations that reduce the risks and costs of lending small amounts of money. So far, most innova-tions in microfinance have come from nongovernmental organizations (NGOs) that do not have commercial profit as their principal objective. By taking fresh approaches, these new microfinance institutions have penetrated rural financial markets and serviced an underclass of borrowers in a way that was unimaginable some 20 years ago....One important lesson that is becoming increasingly clear: there is no single institutional blueprint for success.Rural credit Developing countries. ,Rural poor. ,Savings and investment Developing countries. ,Households Economic aspects. ,Financial institutions. ,Non-governmental organizations. ,Microfinance Evaluation. ,Banks and banking. ,FCND ,

The Impact of Access to Credit on the Adoption of hybrid maize in Malawi: An Empirical test of an Agricultural Household Model under credit market failure

A substantial amount of the literature has reported on the impact of access to credit on technology adoption, and many studies find that credit has a positive impact on adoption. However, most existing studies have failed to explicitly measure and analyze the amount of credit that farm households are able to borrow and whether they are credit constrained or not. They overlooked the fact that credit access can be a panacea for non-adoption only if it is targeted at households that face binding liquidity constraints. Guided by the frame work of a household model under credit market failure, this paper aims at investigating the impact of access to credit on the adoption of hybrid maize among households that vary in their credit constraints. The data used in the study is from Malawi collected by the International Food Policy Research Institute (IFPRI).Using the direct elicitation approach, households are classified into constrained and unconstrained regimes. We start by estimating the probability of being credit constrained, followed by an estimation of the impact of access to credit for the two categories of households (credit constrained and unconstrained), while accounting for selection bias. The impact of access to credit is estimated using a switching regression in a Double-Hurdle model. Results reveal that while access to credit increases adoption among credit constrained households, it has no effect among unconstrained households. Results also show that factors that affect adoption among credit constrained households are different from those that that affect adoption among unconstrained household. Landholding size, for example, has opposite effects on adoption in the two regimes of households. The policy implication is that microfinance institutions should consider scaling up their credit services to ensure that more households benefit from it, and in so doing maize adoption will be enhanced.credit constraints; double-hurdle; hybrid maize; adoption; Malawi

Informal markets

In most developing countries, it is the private, informal markets that the rural poor have traditionally turned to service their financial needs. Why have these institutions succeeded in providing services to the poor when formal institutions have not? Do these informal institutions provide any lessons that bigger formal institutions could use? What are their basic limitations? Answers to such questions indicate important direc-tions for public policy.Rural poor Developing countries. ,Financial institutions. ,Microenterprises Finance. ,Informal sector (Economics) Developing countries. ,FCND ,