[email protected] Flexibility and Discipline in Microfinance November 3, 2011 Carolina Laureti CERMi (UMONS and ULB) Co-Author: Michael Hamp.

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Flexibility and Discipline

in MicrofinanceNovember 3, 2011

Carolina Laureti

CERMi (UMONS and ULB)

Co-Author: Michael Hamp (IFAD)

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Outline

Introduction Methodology Results Conclusions

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Disciplining mechanisms encourage that payments are duly made on time (e.g., savings deposits, loan repayment, insurance premium)

E.g. Frequent and regular payment schedule Screening safer clients (Jain and Mansuri, 2003) Constant monitoring (Armendariz and Morduch, 2010) Reducing the temptation (Fisher and Ghatak, 2010) Increasing attention (Basu, 2008)

Disciplining mechanisms in microfinance should be poor-inclusive and cost-effective

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Flexible products serves for consumption smoothing and coping with shocks Easy-to-access loan from family in case of emergencies (Collins et

al., 2009) Informal sector provide partial insurance for the lower collateral

requirement (Boucher and Guirkinger, 2007) Contingent repayment helps during natural disaster (Shoji, 2010) Flexible loan payments help consumption smoothing (Czura et al.,

forthcoming) Flexible banking account are used for coping with shocks (Prina,

forthcoming)

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Loan with equal and frequent payments

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Loan with grace period

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Loan with varying disbursements and payments

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A shock occurs in time 6

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Repayments are rescheduled after the shock

A shock occurs in time 6

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The PaperResearch question

Poor needs a mix of flexibility and discipline for better money management (Collins et al., 2009).

Research gap: which disciplining mechanisms could be associated to flexible financial products?

Methodology Literature review (donors reports, MFIs websites, articles,

news, mostly on the internet) 9 innovative financial products combining flexibility with

disciplining devices

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The 9 products

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Disciplining mechanisms Information-intensive mechanisms

Intensify direct screening and monitoring of clients (Confianza, SafeSave, BAAC, IASC, Susu+BB)

The sanction

Play on the sanction, e.g. collateral, interest rate, fees for early withdrawal or prepayment (Confianza, Safesafe, BAAC, IASC, VSSU), reward (BRI)

Soft commitments

Support planning, reminders (Mamakiba)

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Costs for the MFIs Direct screening and monitoring Cash flow management Risk of staff fraud Arrears

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Conclusions Flexibility and discipline can match… The focus should be on creating innovative disciplining

mechanisms that works... The “sanction” is a key variable… Future research:

Clients preferences for various mix of flex and discipline Size of the penalty and risk-rationing Operative costs for MFIs. How much? Who pays?