I would like to tell you about a professional basketball player named Rahul.
Rahul plays for the Kolkata Killers in the Indian Basketball Association (IBA). Players in the IBA make about 40% of their shots.
On average, Rahul takes 3 shots per game and makes 2 of them. This means he has a 67% shot making percentage (quite remarkable). Rahul is almost positive that if he took 20 shots per game, he could make 12. He would thus have a 60% shot making percentage (lower, but still excellent).
Although his shot making percentage would fall, Rahul would be greatly helping the team by taking those extra shots. He would be taking an additional 17 shots and making 9 of them. That would mean that he would be shooting 53% on his extra shots. When compared with the league average that is still awesome.
Stretching the analogy even farther (and this is an analogy), let us say that Rahul takes an enormous amount of pride in the fact that he has a shot making percentage of 67%. When he first came into the league, the media and fans would always say that there was no way he could shoot better than 30%. Rahul was maligned for being too slow and risky with his shot choices. But Rahul proved them wrong! So even though Rahul could better help the team by shooting 60% and taking more shots, he is wary of doing so because shooting 67% has become his identity.
If you haven’t caught on, Rahul is the microfinance industry and his shot making percentage is equivalent to repayment rates.
When people are introduced to microfinance, often the first feature of the sector they are informed of is the amazingly high repayment rates of many MFIs. There is a good reason for this. It was long believed that giving the poor access to credit was bad business because the poor were a horrible credit risk with little collateral to offer. Essentially, that last sentence has been proved incorrect over the last 20 years by the use of various innovative product designs (i.e. dynamic incentives, weekly meeting, group liability…etc).
Still, many MFIs cling to their high repayment rate as a show of their viability. MFIs often speak of their 99% repayment rates as if low levels of default were all that mattered. But repayment is not all that is important. I believe that profitability/sustainability and social impact matter even more (which one is more important is a question for another day). If an MFI has a choice between serving 5,000 people with 99% repayment or 50,000 with 96% repayment, there is certainly no shame in choosing the latter (as long as the MFI continues to provide the same level of service). In fact, they would probably be doing those extra 45,000 people and themselves a lot of good.
This is not to say that extremely high repayment is necessarily a bad thing, but it can mean that an MFI is not taking on enough risk and/or may be putting undue amounts of pressure on those unable to repay in order to maintain the statistic (some consider this a cause of the Andhra Pradesh crisis).
Just as it might help if the media and fans stopped talking about Rahul’s amazing 67% shooting percentage, it might do some good if those reporting on microfinance stopped emphasizing incredibly high repayment. A high repayment rate is only a means; outreach and impact are the ends.
The idea for this entry came from reading the paper “Group Versus Individual Liability: A Field Experiment in the Phillipines” by Xavier Gine and Dean Karlan. Amongst other conclusions, the study finds that the conversion to individual liability from group liability by Green Bank, which currently uses the Grameen model, did not lower repayment rates, but did attract new clients. The research was conducted through a randomized evaluation. http://library.financialaccess.org/pdf/I16_FAI_GroupIndividualLiability.pdf
The following are links to sites that prominently praise the high repayment rates of MFIs. These links are not mean to suggest anything negative about the publishers. They are simply examples:
http://www.investopedia.com/articles/07/microfinance.asp
http://query.nytimes.com/gst/fullpage.html?res=9C07EFDB1E31F93AA35750C0A96E9C8B63&sec=&spon=&pagewanted=4
http://www.cbc.ca/news/background/economy/microcredit.html
http://www.fwa.org/community/microfinance.htm
Saturday 29 March 2008
A Debilitating Hang Up for Microfinance and Rahul
Subscribe to:
Post Comments (Atom)
2 comments:
Nice post. I can't decide if it was your diction, or the basketball analogy, but I could definitely tell it was you. I'm gonna add you to my blogroll. That's an intersting concept, though, getting the MFIs to focus less on the repayment rates. But I feel that it is a strong selling point for getting investors to buy into it, like that Kiva.org site. I feel that I would be more likely to do an individual loan to someone, if there were a 90% chance of repayment versus a 60% chance. At the same time, though, I feel that you make a strong point that the end is not to have the loans repayed, but rather to lift people out of poverty. In which case it doesn't matter if the loan is repayed, as long as the people are out of poverty. (PS-I'm trying to step up my communication to get you to write me back)
Genius.
Post a Comment