Can Microfinance Save the World? Bruce Wydick Professor of Economics University of San Francisco.

Can Microfinance Save the World?

Bruce WydickProfessor of Economics

University of San Francisco

No, microfinance cannot save the world.

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

KQED Studios, January 2008

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".

Does microfinance make a difference?

Does microfinance make a difference?

Does microfinance make a difference?

Does microfinance make a difference?

Does microfinance make a difference?

Does microfinance make a difference?

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

New Innovations: Kiva.org

New Innovations: Kiva.org

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

Conclusion:•Can microfinance save the world? No, but it can make it a better place.

•Proper way to view microfinance: As a stepping stone.