Microfinance Must Reads

"There is nothing intrinsically sinful about pawnbroking or intrinsically holy about microloans. What matters is the effect on the clients. And to our discredit, we don’t really know what that effect is."

This excerpt, from a must-read article in this weekend's edition of the Financial Times, sums up the need for centers (or centres) such as CMF, J-PAL, and IPA. Sadly though, the article (and Dean Karlan, founder of IPA and principal investigator for many of CMF's studies) deplores the dearth of research thus far but fails to mention that these centers are trying their hardest to fill the gaps. As has been mentioned so many times before in this blog, randomized evaluations take time. CMF, an infant at a mere three years, will only begin releasing results from initial RCTs in the next year or two--including long-awaited results of a comprehensive impact evaluation of microfinance in Hyderabad. But we're trying.

In the meantime, CMF also conducts shorter studies on pressing issues facing the sector, such as interest rates. The article notes that "competition works best when customers know what they’re paying and what they’re paying for, which is why lenders in the US have been required for the past 40 years to disclose their interest rates in a standardised format." CMF Research Associates recently completed a study that tried to make sense of the concept of financial literacy by examining the understanding of loan contracts and interest rates by microfinance clients. They found that clear information about interest rates may not be enough. Instead, the majority of small borrowers in the study's sample conceptualized their loans in terms of duration and weekly instalments, and most could not identify their annualized interest rates. Read the entire study or a summary of the results. More than anything, the study shed light on the continued need to define the elusive concept of financial literacy through, yes, more research.

And lastly, since we're already on the subject, this diary follows an economist's week-long adventure in training homeless mothers the ins and outs of financial literacy--complete with a fuzzy hat.