Betel, Condoms and the Pleasantly Absurd

This morning, while waiting for my hotel room to be cleaned, I picked up the Indian Express and happened upon one of the most heartening and bizarre development stories I have seen. I will let the story speak for itself:

"The government spending crores of rupees on AIDS awareness can take a cue from this man. For, he has done what the government could not. Prasant Swain of Deuligramswar village under Jagatsinghpur police limits, who is running a betel shop in Jagatsinghpur town, has made it a point to give a condom packet free to customers purchasing products worth Rs 2 or more from his shop. This is his way of creating awareness on AIDS. He is even advising the customers to use disposable syringes during blood transfusion and new blades every time they shave to keep the dreaded disease at bay. Swain said he drew inspiration from a ‘pala’ show held to create awareness on AIDS at Jagatsinghpur on the occasion of World AIDS Day recently. He is targeting the rickshaw-pullers, drivers, hotel workers and daily labourers, who are purchasing betel, cigarette and ‘gutkha’ from his shop, as they belong to the vulnerable category."

More power to Mr. Swain, who seems to be doing some brilliant targeting. If I were running the anti-HIV campaign in India, which thankfully I am not, I would make condoms for paanwallahs a central measure in the fight. Forget evaluation, this just makes too much sense.

I would then go on to freely distribute nicorette at wine shops (liquor stores in India) and force companies that contract out the rolling of bidis to women in villages, those who are surely most likely to be anemic, to also give them green vegetables.

India and China: "The Economist" Weighs In

The December 13th edition of The Economist hones in on China and India, to discuss how the global financial crisis will affect their two economies and to take an in-depth look at the two countries. Two areas of focus popped out at me while I was reading, which I briefly detail below:

Differences in How India and China Will Cope with the Economic Slowdown
The first difference is in the countries' economic focus on exports. China’s economy is more export and manufacturing-oriented, which may increase its exposure to western economies’ struggles in the coming months.
“Nobody yet knows how serious the slowdown will be, but in theory a recession in the rich world should hurt India less than other emerging markets: exports amount to only about 22% of India’s GDP, against 37% of China’s.”

The second difference, pointed out in the lead Economist article on China and India, relates to the countries’ political systems. Indians can voice their displeasure, or satisfaction, with political decision-making in the upcoming elections, while concerned Chinese citizens have fewer traditional outlets. This could lead to increasing protests and demonstrations in 2009 within China.
“The country (China) is a statistical haze, but the trade figures for last month—with exports 2% lower than in November 2007 and imports 18% down—were shocking. Power generation, generally a reliable number, fell by 7%. Even though the World Bank and other forecasters still expect China’s GDP to grow by 7.5% in 2009, that is below the 8% level regarded, almost superstitiously, as essential if huge social dislocation is to be avoided. Just this month a senior party researcher gave warning of what he called, in party-speak, “a reactive situation of mass-scale social turmoil”. Indeed, demonstrations and protests, always common in China, are proliferating, as laid-off factory-workers join dispossessed farmers, environmental campaigners and victims of police harassment in taking to the streets.”

Infrastructure is India’s Biggest Handicap
In this article, the Economist focuses on the how India’s inadequate infrastructure is its largest constraint to development. The Economist throws around a lot of statistics, but the reason I highlight this article is it does a great job covering several infrastructure components, including sanitation, energy, transport and education. That said, some stats that caught my eye follow below:
• Sanitation: About 700 million Indians do not have access to a proper toilet
• Power: Last year, demand outstripped supply by 15%
• Education: 96% of children attend school, BUT 50% of ten year-olds cannot read at the basic standard of six year-olds. 60% cannot do simple division.

Enough of my thoughts. Check out the Special Report on India here.

MIX Measures Microfinance

The Microfinance Information eXchange (MIX) just released its 2008 Global 100 Composite Rankings, which ranks microfinance institutions on the basis of profitability, efficiency, outreach, and transparency using information published on MIX Market. The rankings, which MIX admits are still a work in progress, seek to "offer a starting point for analysis of institutions operating in the sector."

Of more than 1,300 MFIs listed on the MIX Market, only 652 made the cut to be rated (based on the fact that they are profitable). Of these, South Asian MFIs took the spotlight, with 6 spots in the top 10, and India took the lead as the only country with more than 10 MFIs in the rankings. Of note, SKS ranked 2nd, having expanded outreach by more than 200% in the last year alone.

The best part is that any MFI can access a tool to determine where they would fall in the rankings.

Quick question

This piece by Joe Nocera basically lauds the RBI for taking crucial steps over the last couple of years in order to avoid a financial crisis in the Indian economy. Going by this piece, its scary to think of what would have happened without RBI's activism in the financial sector.

Related to the points the author makes about securitisation, I wonder how IFMR Trust's Guarantee Company fits into the story. How is the ITGC safeguarding itself from the possible dangers that have caused some of the mightiest jugglers to bite the dust?

One Argument Against Microfinance

Building off a Financial Times article written by Tim Harford last week that criticizes our lack of understanding of how microfinance impacts clients’ livelihoods (which my colleague Sushmita highlighted here), Professor Milford Bateman goes a step further by arguing that heavy investments in microfinance actually hurts local economies.

Bateman starts by discussing the growing microfinance portfolios of commercial banks in Serbia:
“I have recently been working as a consultant in Serbia. Here the foreign-owned commercial banks since 2001 have massively discovered microfinance. From almost zero in 2001, the commercial banks now channel 22 per cent of their total loan portfolio through highly profitable microfinance (household microloans) programmes amounting to almost 12 per cent of gross domestic product.”

From there, Bateman discusses the negative effects that he feels stem from this growing concentration on microfinance, specifically:
• Shortage of funds for small and medium-sized enterprises (SMEs), which can be
damaging because SMEs are a proven route to sustained growth and development
• Accelerated proliferation of informal-sector microenterprises (e.g., kiosks,
shops, subsistence farms) instead of industrial ventures

Bateman extends this argument to other countries, where he feels similar problems arise from overinvestment in microfinance, to the neglect of SMEs and other engines of sustained growth (e.g., Mexico, Bangladesh).

I don’t agree with all of Bateman’s points, but the idea that there could be over-concentration and investment in microfinance makes sense. As Bateman concludes,
“Economics 101 shows conclusively how critical savings are to development, but only if intermediated into growth- and productivity-enhancing projects. If it all goes into rickshaws, kiosks, 30 chicken farms, traders, and so on, then that country simply will not develop and sustainably reduce poverty.”

Bateman’s full article can be found here. Any good arguments against Bateman’s points?

Giving Farmers Direct Entry To Retail Markets

Today, I and a few colleagues spoke with a consultant for Metro Cash and Carry India, a agricultural wholesaler, that triggered my desire to write about the difficulties farmers have getting their produce to the marketplace.

Typically, farmers need to transport their produce to mandis, government-run markets, where government agents buy the produce at set prices. The government agents then transport the produce to larger marketplaces (e.g., metro cities) and sell them at a large premium to kirana stores and small groceries. Along the way, farmers incur several costs, including:
1) Transportation of produce to the government-run mandi (often 20-30km away)
2) Taxes (e.g., in Uttar Pradesh 2% mandi tax to have a place in the market, .5% education tax)
3) Bribes – About Rs. 5 per sack according to farmers in this article on Reliance being pushed out of Uttar Pradesh in 2007

Moreover, this distance from the marketplace, and little choice in finding a buyer for bulk produce, translates into farmers receiving payments for their produce 10-15 times below the price paid by urban consumers. The middlemen are the ones earning a nice profit margin, while the farmers struggle.

Interestingly, some private players, such as Metro Cash and Carry and Reliance Fresh, have begun to compete with the existing mandi system by creating a direct route from rural farmers to urban markets. By getting rid of extra distribution layers and buying produce directly from rural farmers at their doorsteps, farmers and end-consumers benefit too. Farmers get a little more for their produce, 10-20% according to the Cash and Carry consultant I spoke to today, and end consumers often receive similar benefits. According to this IIM Bangalore presentation on improving the agricultural distribution system (html version), tomato prices fell about 20% and cauliflower prices by 10% when Cash and Carry entered Bangalore.

However, there are losers in this game too. Small mom and pop shops stand to struggle against big guns like Reliance and Metro, and middle men such as mandi government agents, would lose out too. Maybe because of this fact some state governments, such as Kolkata, have made life difficult for Reliance and Metro. Metro’s Kolkata store was delayed for almost a year due to the state’s Agricultural Produce Committee’s refusal to issue a key produce license, as mentioned in this article.

I am not an agricultural expert, but I hope that the entry of private players, and their efficient supply chains, into the Indian agricultural system thrives and expands. Farmers make more money by working directly with these companies, and hopefully mandis (which will not go away anytime soon!), will run more efficiently to compete with these new players.

To learn more about Metro Cash and Carry Indian operations, check out the two links below:
Interview with James Scott, Metro’s Asia Regional Operating Officer
Metro’s Website in India

I look forward to other people’s thoughts on this issue. I am sure I left out some important points!

Up & Coming

BusinessWeek listed SKS Microfinance alongside Craigslist and Facebook as one of the five up & coming businesses to keep an eye on. That's pretty serious business. I would just like to point out that Craig Newmark beat Vikram Akula to getting a Facebook Page. And to meeting Barack Obama.

The MicroFinance E-Library: Be Humbled

Looking at the Centre for Micro Finance's new MicroFinance E-Library, put together by CMF’s knowledge management team, made me feel ignorant and over confident. I had thought I was relatively well read about MF, but after examining the variety of case studies, academic papers and toolkits available on the site I have been humbled.

This is one of the most wonderful aspects of working in the microfinance sector. As an intervention aimed at poverty that has, in some cases, actually proven to be economically sustainable, it has caught the attention of some of the greatest social entrepreneurs, development economists and journalists working today. Thus there is a wonderfully thorough and readable literature on the subject (perhaps even more than it deserves! But this is for another post). For those who want to explore this literature, I believe that there is probably no better place to go than the E-Library, where the various documents have already been organized for you into easy to comprehend categories.*

The E-Library highlights all of the great articles and studies I have read, and many that I am eager to check out. Here is a list of articles I have read, available on the site, that I highly recommend you give a look, followed by another list of articles, also available at the E-Library, which I am most looking forward to taking a look at on one of those lonely nights.

Recommended:

• Group versus Individual Liability: A Field Experiment in the Philippines
• Does Microfinance Really Help? New Evidence from Flagship Programs in Bangladesh
• What’s Psychology Worth? A Field Experiment in the Consumer Credit Market
• Regulating Transformational Branchless Banking: Mobile Phones and Other Technology to Increase Access to Finance (Focus Note)
• How Do Microfinance Clients Understand their Loans?

Looking Forward to:

• How Rising Competition Among Microfinance Lenders Affects Incumbent Village Banks
• Reply to Jonathan Morduch’s “Does Microfinance Really Help the Poor?”
• Using Repayment Data to Test Across Models of Joint Liability Lending
• What do Microfinance Customers Value?
• Learning from failures in microfinance: what unsuccessful cases tell us about how group-based programs work
• Over-Borrowing and Competition: Are Credit Bureaus the Solution?
• The Transformation of Microfinance in India: Experiences, Options and Future
• New Directions in Development Economics: Theory or Empirics?: A Symposium in Economic and Political Weekly

*I do work for CMF, so please forgive me if this post makes me sound like too much of a company man!

Should MFIs only Focus on Finance?

Earlier this week, my colleague Akhand and I sat down with the CEO of a fast-growing microfinance institution (MFIs) in Northern India. During the conversation, Akhand brought up one of my favorite topics, whether MFIs should be a channel for providing non-financial goods that could benefit low-income clients, such as smokeless chulas and cheaper cell phones (I was a big fan!).

The CEO answered very directly that he wasn’t very interested in direct partnerships with such companies. He said something to effect of “I am all for clean cooking appliances, use of renewable energy and increased cell phone usage among our clients, but I don’t want to tie up with just one company”. Such a partnership/tie-up would mean that his loan officers and operational managers would become responsible for selling a product they knew little about, and there was also the back-end risk of the product not being top quality. What happens if the product does not work properly, will the cell phone or clean cooking stove company treat these customers well? If not, will the MFI’s clients not only be critical of the cell phone company, but also of the MFI? Even though the MFI can make quick money from such partnerships, it may not be in the clients’ best interests.

Going into the conversation, I was a big proponent of initiatives that leveraged MFI distribution channels to provide useful products to their clients (see past blog entries on anti-malarial bednets (BISWA), health insurance (SKS) ).

But, our discussion made me think more critically about the topic. Should loan officers also sell clean cooking stoves, a product they know little about? If a company wants to sell products, shouldn’t they develop their own distribution channels to this target population? Would an MFI tie-up with one clean cooking stove company discourage competition (i.e., other companies from entering a given town or village)?

I still think that microfinance distribution channels should be used in certain instances to distribute low-cost public good products (for instance I still like the anti-malarial bednets idea) and for financial product diversification initiatives (such as savings!). That said, maybe I won’t be as excited about the next MFI/cell phone company tie-up I see, which just happened to be this SKS-Nokia-Airtel partnership.

Social Contacts and Inequality

I spent a good deal of time attempting to come up with a clever intro to this blog post, but I failed.

So lets just move on to the facts:

Ø In the summer of 2008, across 12 villages in Western Orissa, nearly 700 individuals were surveyed on their social contacts (meaning that they were asked to list all people that they speak to about health, money, and issues important to them).

Ø The individuals were randomly sampled, though the sample is weighted towards interviewing those who have a BISWA self help group (SHG) member in their household. BISWA is an NGO-MFI located in the region.

Ø The study found that, for those who report any contact, men have on average 0.4 more social contacts than women, and men and women from households with a BISWA SHG member report more contacts than their fellow villagers that do not have a BISWA SHG member in their household.

Ø Men not only enumerated more contacts, but on average men's contacts also live further from them than women's contacts.

Ø The contacts of respondents from households with a BISWA member live in households that are on average a greater distance from their household (though this does not seem to be statistically significant from the preliminary data).

Ø This data could be skewed for a number of reasons, perhaps none of which is more important than the fact that all surveyors were male. Though of course this should have little to no affect on the numbers comparing respondents who come from households with or without a BISWA SHG member.

Now on to my assumptions:

Ø Having more social contacts is good! Knowing and speaking to more people leads to the observation of more diverse opinions and behaviors, and, I think eventually, better outcomes for your own behavior. Of course this not always true (see smoking and gangs), but on the aggregate I believe it is generally positive. Positive knowledge transfers of this sort are discussed in this paper by Tim Conley and Chris Udry, and this article by Nicholas Christakis on the impact of having those in your social network receive medical treatment.

Ø Speaking to people over a larger geographical distance is good! Having access to people who live larger distances from you leads to the observation of more diverse opinions and behaviors, and again, better outcomes.

Ø The facts presented above do not suggest causality. We cannot and should not assume that people who have BISWA SHG members in their household have more contacts because they have a member of their household in a BISWA SHG. It could be easily be the other way around. That those who have more social contacts end up joining SHGs. I easily could be mistaken, but my intuitive belief is that the two compound each other. Having more social contacts makes one more likely to join an SHG and thus gain even more social contacts.

What this all might mean for development policy:

Ø Perhaps NGOs should actively seek to identify those women who are not in SHGs and convince them to join an SHG and encourage the members of an SHG to accept them. But this is fraught with all sorts of problems. Their may be an intrinsic reason why these women are not in SHGs. They may not be cut out for joining a group in which they are expected to take on financial and social responsibility. Perhaps if these women joined an SHG their husbands would be enraged by their newfound mobility and this would be a cause for domestic abuse.

Ø When delivering education campaigns and other public goods, the government and NGOs should actively go door step to door step. We know from previous studies that we have conducted that, in the region in which BISWA operates, those women who are not in SHGs come from poorer households. These are the women and men most in need of knowledge transfers and health products. It may be that to help the poorest and those most lacking opportunity, we must serve them directly. But this strategy could also be flawed because, though I would hope this is not true, it is reasonable to think that these are the women least able to utilize information because of a lack of power within the household, education or motivation.

This leads to a recurring conclusion on this blog. More research is needed! In this case, specifically to understand how interventions impact, not just the entire population, but those who are most disadvantaged. We often focus on equality within nations, but perhaps more focus needs to be directed towards equality within villages.

*Thanks to Patricia Foo for help with this post

A loan from the Camorra: a financial product you won’t refuse

It seems that the global recession and the subsequent tight lending conditions are throwing up all sorts of opportunities for ‘alternative’ lending institutions in the wider economy. The radio programme ‘From Our Own Correspondent’ (bbc) (see podcast FOOC) reported on one group benefiting handsomely from the current turmoil – the Italian mafia. The report comes from Naples, a bustling southern Italian city that sits below the famous and picturesque Mt. Vesuvius – infamous for the people in Pompeii. Of late, the southern mafia (camorra) have never had it so good. Due to the credit drought in Europe, the Italian mafia’s lending activities, have earned them an estimated $200 billion profit this last year – 6% of the country’s GDP.

In the cited example, a businessman needed a 50,000 Euro loan. In the current climate, it would take around 6 months for such a request. From the camorra he received it within 24 hours – albeit in a plastic bag. For this particular loan, they set an interest rate of 4.5% per month with dire consequences if repayment rates are not 100%. They would receive visits from ‘loan officers’ – men sporting fine Italian suits. The study named ‘Crime’s Hold on Business’ (by Confesercenti a small business grouping) mentioned that 180,000 enterprises have turned to the mafia for loans this past year. Further, they estimated that about 150,000 shopkeepers pay the pizzo, or protection money, accumulating the mafia $7 billion a year. It would be interesting to see the methodology of the report and how they got their numbers – unfortunately I can’t find the report online – probably the mafia’s doing…

Nevertheless, to relate this to microfinance, it could be interesting to think about how economic conditions change the prevalence of credit suppliers in the marketplace. Or we could think about the agent’s choice between the flailing traditional lending institutions and the readily available sources of elicit credit. In the microfinance world we might compare the MFI interest rate to the local moneylender and the respective repayment schedules, to determine the efficacy of the decision. The opportunity cost in Naples seems a little different. Despite the threat of swimming with the fishes, businesses are far happier to take the easy money than deal with the difficulties of obtaining formal credit in the current climate. Either this is an indication of the operational efficiencies and the vast market share of camorra or the state of banking sector in Italy – probably a combination of the two. In India the financial downturn and the recent attacks in Mumbai are likely to limit credit further. If the events in Naples are anything to go by, small MFIs may have a tough time and the more informal moneylending institutions might see their business pick up.

Blatant Self Promotion

I have just finished a case study on the use of smartcards to disburse NREGA wages in Andhra Pradesh. You can find the full report here. For all those who may not have the time to read the full report, here is a very brief recap of the main results:

• The smartcard payment scheme made it more convenient for workers to receive their wages: the wages were delivered more quickly; they travelled less distance to collect their wages; and they spent less time waiting in line at the processing point versus other payment methods
• By collecting the fingerprints of beneficiaries during enrolment, the payment scheme significantly reduced the number of fraudulent (duplicate or non-existent) beneficiaries
• There is significant potential for the smartcards to be used as a tool for delivery of other government benefits and financial services though there are also significant hurdles that must be overcome before this will happen.

I know what you're thinking: this is just another one-off example of well intentioned but misguided technophiles straying too far into the development space and is unlikely to continue functioning for more a year or so and even less likely to be replicated. If that's what you're thinking in this case you'd be wrong. The smartcard payment system which we studied for the report not only led to increased convenience for the end user and reduced leakage for the government, but also appears to be profitable for the technology company leading the project (FINO) as well. In fact, I predict that the use of biometric payment systems to deliver NREGA wages and other government benefits which involve direct cash payments to beneficiaries (e.g. – Indira Awas Yojana, the National Old Age Pension, the new Dhan Laxmi scheme, etc.) which grow exponentially in coming years. Indeed, in the short time since the publication of the report, I have heard anecdotal accounts of several other states which are seeking to experiment with biometric payment systems for delivery of government benefits and technology companies which are seeking to develop biometric payment solutions.

Game Changers or a Whole New Ballgame?

Piggy-backing off one of my colleague Dan's posts at the Microfinance India Conference, this short article by Nancy Barry discusses the need for game changers within India's microfinance landscape. Her argument is that, in an effort scale-out and widen financial inclusion, most Indian microfinance institutions have become loan dispensers that spit out only small amounts of credit; woefully short of the financial (and non-financial) services needed by the poor to truly build assets, value chains and livelihoods. She cites BASIX and SEWA Bank as the gold standard of microfinance models for their emphasis on livelihoods etc.

While I agree that many MFIs hinge their services around small disbursements of credit, my hunch is that India is also the world's biggest incubation tank for different types of financial services (beyond credit), even in spite of the regulatory hiccup regarding savings. From weather insurance to mutual funds, there seems to be innovative microfinance products (including microfinance 'plus') at every turn.

Ms. Barry's argument also echoes the remarks by Professor Murdoch at the recent Innovations in Poverty Action wherein he questioned,

Why are microbusinesses not growing? One of the undeniably truths about microfinance that is obscured by the marketing narrative is that very very few of the businesses started by borrowers ever grow to employ anyone outside the immediate family of the borrower. This is a problem because if the businesses are not growing, there is a hard ceiling on how much both family income can rise and how much community-level impact can be achieved.

I think, as Ms. Barry seems to imply, that this phenomenon is not simply a matter of insufficient credit but coupled by larger issues such as lack of access to supply chains, lack of business training etc. But would we need to change the entire ballgame to help micro-entrepreneurs go from micro to meso? Could we call this microfinance?

For Fear of Confiscation

After reading my colleagues Akhand Tiwari, Anvesha Khandelwhal, and Minakshi Ramji's case study (PDF) on what microfinance clients understand of their loan contracts, I was reminded of a similar situation we have experienced during our surveying in West Bengal. In their study of 350 microfinance clients of SONATA and BSS, Tiwari et al. found that 35 percent of clients believed that their assets would be confiscated if they failed to repay. When presented with a hypothetical scenario of default, 55 percent of clients believed it was acceptable for an MFI to confiscate a client's assets in the face of non-payment.

One of the sections in our survey asks clients to value their household assets. On multiple occasions, our surveyors have found that clients are either reluctant to answer these questions, or systematically undervalue their assets. When we pried further, we found out that clients were fearful that if they failed to repay their loans, the MFI would use the information from our surveys and confiscate their most valuable possessions. How clients came to believe this, I do not know, as the MFI we work with does not employ such coercive practices, but it would only seem to reinforce the findings from the CMF case study.

CGAP Virtual Conference

This post is delayed, but I still wanted to draw attention to the CGAP Virtual Conference: Microfinance and the Financial Crisis that took place from Nov. 18^th-20^th.

The structure and concept of the conference was innovative in itself. I received an e-mail from a coworker, signed up for the conference online, and had access to a variety of perspectives and topics pertaining to the impact that the financial crisis has had on the sector. The virtual conference was an invaluable resource for me as a Research Associate because I could view the insights, anecdotes, questions, and frustrations from people all over the world and people involved in microfinance in various ways. There were representatives from all points of the spectrum; such as, larger organizations like the IFC, independent consultants, newly established MFIs, and people right here in Tamil Nadu like Hand in Hand. Access to such vital information in an informal context was beneficial to all. It was well run, organized, and productive. Whenever someone wrote an e-mail on a topic, it was sent to everyone that had registered. Instead of highlighting all of the major points from the conference, I would urge those who did not hear of it to first check out the initial questions raised to guide discussion : http://www.cgap.org/p/site/c/template.rc/1.26.3807 and to read the summary that was written at the end of the conference: http://www.cgap.org/p/site/c/template.rc/1.26.4301

(look at the sidebar).

One general parallel I would like to draw between the impact of the financial crisis on microfinance and larger institutions in the financial market is the basic requisite that organizations, of all sizes and objectives, should continuously strive to improve and identify the optimal way in which they can cater to their clients. This will improve not only their own sustainability, but will mitigate the larger scale repercussions on individuals who have less or no control over the resources diverted to them in a market that has proved to be extremely volatile at times. Although the financial crisis was detrimental to many, we must take it as an opportunity to question whether institutions actually have this objective in mind. As Chancellor Merkel said in the wake of the crisis, governments must "redirect the markets so they serve the people, and not ruin them". To reiterate, institutions in any sector must also push for this initiative and this is especially the case with microfinance because to many, this industry symbolizes how businesses can engage in poverty alleviation whether or not profit is involved. This conference was a constructive step in this endeavor. Many questions and points were raised to understand the role of each player in meeting the needs of clients whatever their specific objective may be and an overarching consideration was savings: “The most immediate concern is how the global liquidity contraction will affect the cost and availability of funding to non-deposit taking MFIs. Money from both domestic and international banks is tighter, slower, more conservative and more expensive. Anecodotal evidence cites rate increases from 1% to 4% in Latin America and South and Central Asia, with some banks pulling out altogether.” Also, “The strongest message from the conference was that deposit taking MFIs are well-insulated from refinancing risks. The many savings-led African institutions have little need for external funds”

It was also widely stated that institutions can best identify and meet the needs of clients if the aim is incorporated to all levels of operations: “Advice to MFIs from conference participants included: increase reserves, cut back on growth and focus on portfolio quality, make sure loan officers are informed and attentive to clients needs, and communicate early and often with lenders and investors.” But, some of this advice goes beyond just MFIs; not surprisingly, we are witnessing many institutions that are tightening credit and accumulating savings. As Diana Henriques wrote in her article, Unlike Consumers, Companies are Piling Up Cash, in March, 2008 in the NY Times: “But, with the debt-burdened American consumer cutting back, wouldn’t the risk of a recession decline if companies with overstuffed wallets took their cash out and spent it?

Emphatically not, said Professor Stulz. Research strongly suggests that companies are holding more cash because they need it to operate more safely in a risky environment, he said.”

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.

Letters to a Young Actuary

Being as that I work on a randomized evaluation of an index-based rainfall insurance product in Ahmedabad, Gujarat, and seeing as that there haven't been any payouts from the policies over the last three years, it is perhaps fair to say that the promise of rainfall insurance -- at least among SEWA members in Gujarat -- appears to be swiftly on the wane.

In some ways, no payouts over three years is perhaps not too surprising, given that this insurance is meant to cover 'catastrophic situations' and it looks like the districts in which we work (Ahmedabad, Anand and Patan) haven't had too bad a run of late.

That said, to any actuaries designing such policies or organizations interested in implementing such a policy, I'd like to share a couple of observations that have come out of focus groups with farmers, field visits, analyzing the data and just thinking about the effectiveness of this product in aiding household risk management:

1.) Variability of rainfall across time: One really needs to factor in different activities in the cycle of agricultural productivity in to the policy, i.e. sowing, the growth period, harvesting and so forth. At present, policies tend to insure against cumulative amounts of rainfall which, of course, doesn't take in to account excess/deficits in the amount of rainfall during certain periods (e.g. too little water during sowing or the growth phase is undesirable, just as too much water during harvest is undesirable).

One farmer compared cumulative measurements of rainfall to receiving 5 liters of milk in one day – 5 liters is plenty of milk, but it’ll go bad in 3 days, so what’s the point? (thanks to Sakhi Vyas for translating this in light of my non-existent Gujarati)

2.) Variability of rainfall across space: At present, contracts are typically written contingent on district-level measurements of rainfall. There is perhaps a good actuarial reason for this -- or perhaps it is just the unavailability of data at a finer level -- but either way, the variability of rainfall within districts is nothing short of remarkable. For example, we work in two talukas in Ahmedabad (Sanand and Daskroi) in which there was a difference of 400mm of cumulative rainfall in the last monsoon. This, in turn is about the 10 year average rainfall for Santalpur taluka in Patan, another taluka in which we work.

If folks want to make this work, private industry should work with the government to set up more geographically precise measurements of rainfall, or else, the basis risk -- the risk that the data on which claims are contingent upon bears no semblance to the the reality experienced by the claimant -- exists to such an extent as to make the policy near farcical. Perhaps contracts can be written contingent on taluka/tehsil level measurements of rainfall?

3.) Crop-specific water requirements: It probably makes sense to have crop-specific policies http://www.blogger.com/img/blank.gif, because different crops have different water requirements, and these are published by the FAO. I suppose the competing tension would be to make the policy simpler, but I honestly think the difficulties with selling insurance to rural consumers are in how people think about probabilities and payoffs; farmers are very well acquainted with different water requirements for crops and I imagine this would be quite intuitive to explain.

4.)Keeping policy-holders informed: At present, I don't think we do a good enough job of keeping farmers informed of the amount of rainfall, or the amounts needed for a payout, resulting in confusion, apathy and in many cases, anger.

Moreover, most small and marginal farmers seem to take their cue for rainfall predictions from the Gujarati calenders that publish panchang/astrological based rainfall predictions, rather than the vacillations of the Indian Meteorological Department.

To counter this, I think we should find way (perhaps cellphone, tv and/or radio) to send accurate rainfall data (the same that is used to determine payouts), as well as find a way to publicly display information regarding payouts (i.e. amounts of rainfall required for payouts, and how to calculate payouts). Or else, we are left with word-of-mouth explanations of these which probably change over the course of a three month monsoon period and lead to unrealistic hopes and expectations.

If anyone has any further ideas, I'd be glad to get your views.

Not Quite a Gandhian RCT

Living in Ahmedabad, one often sees tributes to Mahatma Gandhi and the Salt march / Dandi march that began from the Sabarmati ashram where he was based. While the Dandi march was an act of civil disobedience against the salt tax imposed by the British, evidently the diets of the poor can greatly benefit from a few doses of iodized salt (pardon the non-sequitur).

Nicholas Kristof, an op-ed columnist for the New York Times, writes today about the potential benefits of providing iodized salt to the poor in areas where it is lacking in their diet. Evidently, 1/3 of the world doesn't get enough iodine:

"When a pregnant woman doesn’t have enough iodine in her body, her child may suffer irreversible brain damage and could have an I.Q. that is 10 to 15 points lower than it would otherwise be. An educated guess is that iodine deficiency results in a needless loss of more than 1 billion I.Q. points around the world."

As an example, evidently 3/5 Pakistani schoolchildren have an iodine deficiency. Perhaps J-PAL should put this on their map of evaluating low-cost interventions to yield significant improvements in education and health outcomes? It seems like a pretty low-cost intervention to deliver over a number of years, although perhaps one of the difficulties may be in tracking respondents over many years in order to evaluate the benefits.

Can Access to Information Improve Governance?

For the past two months, I have had the pleasure of coordinating a project examining the impact of information on voting behavior among poor residents of Delhi. This project is a randomized trial run by J-PAL Professors Abhijit Banerjee and Rohini Pande.

The main goal of this project is to evaluate the impact of providing objective information on MLA (MLAs are state-level legislators) candidates to low-income voters on voting behavior and public perception of politicians and the political process in general. Collaborating with consultants and NGO experts, we designed a three-phase objective information campaign. The first phase of the campaign was a door-to-door module that aimed at educating voters about the responsibilities of their MLA (such as allocating development funds, overseeing municipal agencies, etc). The door to door campaign also educated voters on the actual mechanics of voting, such as what types of identity proof are acceptable and how to determine voter eligibility. In the second phase of the campaign, we collaborated with the Dainik Hindustan (a major Hindi newspaper) to publish a series of articles delivering objective information on sitting MLAs and major party candidates. For sitting MLAs, we provided data on how they allocated their development funds (each MLA receives 2 crore every year to spend on the development of their constituency), as well as information on their attendance and participation in Vidhan Sabha (legislative assembly) meetings. This data was compiled by Satark Nagarik Sangatham (SNS), a Delhi-based NGO. For all major party candidates, we also provided information on their criminal history, personal assets, and education, which we compiled from affidavits available under the Right to Information Act. We then coordinated a mass distribution of these newspapers featuring objective information in randomly selected treatment areas. In the third and final phase of the campaign, our NGO workers went around treatment neighborhoods and ran community discussions focusing on the data presented in the newspaper to and door-to-door campaign to reinforce and provide context for the information.

The treatment for this project was done at a polling station level: each individual polling station corresponds to a neighborhood of about 1000 voters (roughly 400 households). We identified a sample of 400 slum-area polling stations across ten assembly constituencies of Delhi, and randomly selected half to receive the information campaign (all three phases). The other half served as a control group. Our impact evaluation will compare outcomes between voting patterns in treatment and control polling stations. To help tease out differential program effects across demographic groups and generally provide some context to the voting data, we are also running a post-election survey in treatment and control polling stations. This survey is currently underway and votes are being counted, and we are looking forward to the arrival of this data for analysis.

Although we cannot make any rigorous claims about program impact until we get the data, the time I have spent in the field has been fascinating and informative in its own right. I would like to take the time to discuss some of the insights and mysteries this project has elucidated with the readers of this blog.

One of the things that struck me the most when I went around with our fieldworkers was the passionate and emotional response that many slum-dwellers had to the information that we were providing. In some areas where the condition of local development was particularly abysmal, residents went so far as to say that “If that bastard MLA comes around asking for votes this time were going to thrash him.” What was particularly interesting for us was that the information did not generate a universally anti-incumbent sentiment – people’s perceptions of their representatives seemed to be highly correlated with the amount of development that had occurred in the locality. It was a general consensus of the field staff that they were providing information that the public really wants to have. This suggests that there is tremendous potential for “pro-active” information delivery campaigns. SNS, one of the NGOs we worked with, has been a strong local advocate of information delivery through regular public hearings and meetings. Delhi Election Watch, a nonpartisan think tank, has developed a SMS based initiative that disseminates candidate-specific information through mobile phones, an idea that seems to have great potential. Jaago Re, perhaps the most prominent voter awareness movement in India, is also pursuing the active delivery of information.

Another interesting feature of slum voting in India is the prevalence of vote-buying. All of the major parties are actively involved in the distribution of goods (cash, alcohol, and clothing being the most popular) in exchange for votes. This is such a common feature of elections that slum-dwellers tend to speak quite openly about it. I had many interesting discussions with people on this topic, and the general consensus seemed to be that although people generally understand that their own well-being is correlated with the quality of their politicians, they lack the discipline and self-control to resist the temptation of these bribes when they are offered. In economic speak, voters are dynamically inconsistent: they are willing to accept bribes in the present even when they are in the bigger picture acting against their own self-interest. The fact that many voters are conscious of this inconsistency suggests that triggering behavioral change by simply trying to educate them about the real costs of bad governance would probably be difficult. One potential way to mitigate the effects of vote-buying is to emphasize to voters that their individual ballot is a secret, and that however many parties give them liquor, sarees, and cash, they should still vote for the one that they feel would be best for local development. This is however complicated by the fact that many elected MLA’s have a tendency to “punish” localities that do not support them in elections by denying them development funds. I would be interested in hearing readers suggestions of how to mitigate the negative impacts of vote buying on governance outcomes.

The other main thing that struck me about slum voters was their overwhelming commitment to vote, in spite of what seemed like a deep disillusionment with the political process. A very large proportion of people I interacted with expressed the notion that all politicians are generally corrupt and uninterested in the problems of the poor, yet literally all of them voiced a commitment to vote. When I asked them why they felt compelled to vote, most simply replied that “It’s my right to vote and I’m going to.” The perceived lack of benefit to political participation in general is therefore quite perplexing in light of this. The notion that the disenfranchised are more active political participants is widely accepted borne out by statistics – poor areas almost always have dramatically higher voter turnout than rich ones in Delhi.

This post has already turned out much longer than I anticipated, so I hope readers will continue this discussion from here on. I look forward to presenting our empirical results once they are ready…

From the Field: New Microfinance Podcasts

At the Centre for Micro Finance (CMF), we recently started a podcast series to provide a new avenue for understanding and relating to our research. For the first two podcasts, my colleague Dan Kopf goes on-site to Kolkata to interview two CMF research associates and learn more about their projects, and how they are running in the field.

The first podcast is with Jyoti Mukhopadhyay, who works with MIT professors Esther Duflo and Abhijit Banerjee. Together with these professors, Jyoti oversees a study that is testing the effectiveness of a program at Bandhan, a microfinance institution based in Kolkata, to improve the economic situation of the “ultra-poor” (people living on less than Rs. 50 (~US$1) a day). As Jyoti explains, the three main phases for programme participants are the following:
• Grants of Rs. 5,000 (~US$100) to begin a small enterprise (hopefully!)
• Beneficiaries are allotted a fund to help cover health expenditures
• 24 months of regular business training

Through the podcast, you get to learn how the project is working on the ground, early results and Jyoti’s thoughts on the initiative.

In the second podcast, Dan interviews Emmerich Davies about a project with Village Welfare Society (VWS), which examines the influence of repayment frequency on microfinance clients' household welfare and delinquency rates, and social connections between microfinance client groups. Emmerich works with Harvard professors Rohini Pande and Erica Field on the project, and these professors have written a paper on initial results. My favorite part of the podcast was learning more about how the the lottery is used to test social connections.

Enough from me. Check out the podcasts, which are both about 10 minutes long, by clicking the links below. We are still working on streaming the audio, which should be functional in the next month or so. Enjoy!
• Interview with Jyoti about Bandhan’s Ultra-Poor Programme
• Interview with Emmerich about VWS’ experimentation with repayment schedules