Microcredit - What's it good for?

I just came across an interesting post by Ryan Hahn on the World Bank's Private Sector Development blog, on results from a recently completed CMF-JPAL study written by Abhijit Banerjee, Esther Duflo and others on the impact of microcredit.  The results from the study, which tested the effects of introducing microcredit (specifically from Spandana, a large MFI based in Hyderabad) into a new cluster of slums in Hyderabad, demonstrated that microcredit increased spending on businesses, and improved business outcomes by a statistically significant amount.  As the authors detailed in their conclusion . . .

These findings suggest that microcredit does have important effects on business outcomes and the composition of household expenditure. Moreover, these effects differ for different households, in a way consistent with the fact that a household wishing to start a new business must pay a fixed cost to do so. Existing business owners appear to use microcredit to expand their businesses: durables spending (i.e. investment) and business profits increase. Among households who did not own a business when the program began, those households with low predicted propensity to start a business do not increase durables spending, but do increase nondurable (e.g. food) consumption, consistent with using microcredit to pay down more expensive debt or borrow against future income. Those households with high predicted propensity to start a business, on the other hand, reduce nondurable spending, and in particular appear to cut back on “temptation goods”, such as alcohol, tobacco, lottery tickets and snacks eaten outside the home, presumably in order to finance an even bigger initial investment than could be paid for with just the loan.

At the same time, the effect of the introduction of Spandana microcredit's on non-financial aspects of development, specifically health, education and women empowerment, were statistically negligible.  The time-span was short, about 18 months, and effects in these areas may have a time lag.  Still, many may think these findings, or the lack thereof, are alarming.  Isn't microfinance supposed to help break through many development barriers, including health and education (check out the comments on the World Bank microcredit entry for examples)?

Maybe not.  Maybe having such high expectations for microfinance and microcredit (which is what microfinance basically is today in India, plus some insurance) is unfair.  If borrowers use relatively less expensive credit that comes from MFIs to pay down other higher interest loans (e.g.,  moneylender loans), invest in their businesses and increase their profits, then isn't microcredit serving its purpose?  Can we expect microcredit to affect education and health outcomes when school and health systems likely remain unimproved for these populations?

Financing is one small part of improving livelihoods, and it's important for practitioners and policymakers to keep that in mind.

IFMR Has an Official Blog!

Check it out here.  

Climate Change and Microfinance

Cooking is the main source of food for Indian people, especially in rural areas. In order to cook, almost 45% of the rural population use mud structure chulhahs that use branches, plastic and kerosene.

The World Health Organization (WHO) has estimated that the pollution levels in rural kitchens are 30 times higher than acceptable level. In addition, this article at New York Times mentions that such chulhahs are the main sources of the emissions of soot- also known as black carbon. It indicates that Black Carbon produced from tens of thousands of villages in developing countries is emerging as a major source of global climate change.



It is interesting to understand how cooking over open fires and traditional stoves in rural India is a danger not only to the health of these people, but also to the planet. In addition, poor countries and poorest people living in these countries actually suffer the most of the impact of climate change.

I have been thinking that Micro Finance Institutions can play a bigger role here. I recently read CGAP focus note on “Microfinance and Climate Change: Threats and Opportunities”

It suggests that MFIs can reach these people and lend to households so that they can purchase household size proven energy savings energy. MFIs can also work with the suppliers of household size proven savings devices and can provide credit to households to buy the equipment. Financial services can help customers reduce their carbon emissions by enabling them to switch to energy sources that emit less greenhouse gas.

I am aware that BASIX and Grameen have already started to address some features of climate change. I was just wondering if there is any other MFI that has addressed this issue. If not, why not? After all, poor people suffer the most …………….

Welfare schemes or pocket money for corrupt officials?

One of my colleagues has written a blog expressing his surprise on the low repayment of Indira Awas Yojana loans. It got me reading on the scheme and what surprised me was not that the scheme was actually grant-based, which explains why the beneficiaries don’t “repay”, but that it also has a loan component to it whereby IAY beneficiaries can avail loans from banks and other financial institutions. Interestingly, loans are available for much the same purposes that the grants are disbursed! Further, nothing in the guidelines mentions who repays these loans and what happens if the loan-taker defaults. This prompts two questions: why would someone with access to a grant avail a loan, and why would they repay the loan when there are no deterrents to default? A welfare scheme, such as the IAY, that is both grant-based and credit-based, targeted at a homogenous group of beneficiaries and given for the same purpose, is more susceptible to corruption.

The IAY, like most other government schemes, is riddled with corruption. Intended beneficiaries, SC, ST and BPL categories, need to appeal to block officers, usually through a village tout, to include their names in the list of applicants, and also to the cashier for release of money. Similarly, a little “pocket money” can be given to buy silence for non-repayment of loans. In a book titled “Consumerism, Crime and Corruption” MG Chitkara quotes Chanakya, “money misappropriated by government officials from state funds is as hard to ascertain as it is to find out how much water a fish has drunk from a pond”. While Chanakya lived and wrote several centuries ago, what he said holds true to this date. Most of India’s welfare schemes have been prone to corruption, not just for poor implementation but also for poor design and lack of clarity of objectives.

From the department of unrealistic expectations

Headline from a Nigerian daily: Poverty level still high despite the over 800 [Microfinance Institutions]

Is corruption becoming technologically savvy?!

In the run up to the elections there were a couple of newspaper articles mentioning that the Election Commission in Andhra Pradesh had frozen SHG bank accounts to prevent political parties from infusing money. Political parties are known to distribute liquour, cash and durable goods like television and radio sets to garner votes and derive electoral dividends. This election saw them keeping step with the rural population. SHGs are a significant vote bank and political parties can reap several votes by influencing them.

Bank accounts, biometric readers and smart cards have been hailed as the means to prevent middlemen from appropriating wages (from NREGS and other schemes, SHG loans, etc). This was perhaps the first time that bank accounts were used to channelise illicit flow of funds. So while we have been preoccupied with preventing leakages and ensuring benefits reach the end-beneficiary, have we given enough consideration to inflows?

The Logic of Aid Allocation

Bill Easterly takes issue with the logic behind the creation of the Millennium Challenge Corporation, a new US aid agency, in a recent blog post:

So a few years ago, some World Bank research found that “aid works {raises economic growth} in a good policy environment.” This study got published in a premier journal, got huge publicity, and eventually led President George W. Bush (in his only known use of econometric research) to create the Millennium Challenge Corporation, which he set up precisely to direct aid to countries with “good policy environments.”

Unfortunately, this result later turned out to fail the data mining tests. Subsequent published studies found that it failed the “new data” test, the different time periods test, and the slightly different specifications test.

All good points, but Dr. Easterlty overstates the case that the primary motivation for the creation of the MCC was the Burnside and Dollar result that aid works in good policy environments. The other main argument for the MCC was that it would, potentially, create a set of incentives for countries to pursue good policies. I don't claim to know what went on inside former president Bush's and his advisors' heads when they decided to create the MCC, but if you take their statements at face value, the potential incentive effect played a much larger role in their thinking. (Check out Bush's original speech announcing the creation of the MCC -- the word "reward" is used multiple times while the Burnside and Dollar result is only alluded to in passing.)

Not that the incentive argument is that compelling either, but then again, you have to allocate aid on the basis of something, right? At least adhering to a strict set of rules reduces the degree to which aid is allocated on the basis of foreign policy priorities which, I think, is a good thing.

Here comes the Gennext Moneylender

This blog is by CMF Intern Binit Rath who is working on a Business Correspondence study:

If you are a regular follower of India media, one thing would strike you - the incessant talk about gennext personalities. These babalogs are projected as the future messiahs of the particular field. It may be Rahul Gandhi and Sachin pilot of Politics or Gautam Gambhir of cricket . The all-knowing anchors and columnists have analyzed and dissected these genext personalities to the very last atom and molecules in various talk shows & news analysis.

What about the gennext moneylenders? Are they going to be same as their older counterparts who had enjoyed virtually monopoly or still enjoying in some parts of world or they are the new dinosaurs who would be crushed by the benevolent and great force of micro finance? When I think of money lender the picture of one famous Oriya actor comes to mind. This guy has played the villainous role of money lender in as many movies I can remember. So my feelings towards this particular class has something to do with the great acting skills of this famous actor rather than any personal experience.

A recent visit to Chidambaram’s home town helped to understand the implementation of FINO's BC model introduced me to the actor's real-life counterpart and challenged my conventional thinking on moneylenders.The FINO agent who was accompanying us to interact with various microfinance clients took me to a man who introduced himself as one of the customers of FINO smart card service under the business correspondent (BC) model.

But there was one difference between this person and others whom we met. He seemed to be more affluent than the other clients and claimed to own 2 shops and 2 acres of agricultural land, which happens to be way above average in this locality. We asked this man on his intention to take credit this BC scheme; his confident "NO" made me bit confused and it was in stark contrast to our most of respondents who were very eager to avail a loan facilities now or some time in future. He explained that he is using the smart card for its convenience of small savings rather than anything else.

I don’t know what prompted me, but I just asked him “Do you lend money to people in this locality”? His positive reply increased my curiosity and excitement. But I was not happy - he was not my typically villainous looking person, but rather possessed a smiling and affable countenance. So the happiness of seeing a money lender was not there as he was not the money lender whom I had imagined. On probing further what came to light is that on average he holds something around 30-40 K outstanding loans per month with an interest rate at 2.5 % per month.

In spite of having so many loans outstanding, he in fact takes loan form IOB once in a year. He sees this as a working capital loan for the cultivation of his agricultural lands. He promptly repays this loan after the harvest season. His logic was that there was no need to invest his savings on agriculture as he would recover it very soon. He never seemed to have faced any difficulties on getting loan for the same.

One thing surprised me is about the astute accounting and financial knowledge of this person. Even if I am sure he doesn’t know the theory but he seems to follow the main theory of accounting that says never mix business account with personnel expense account. So in sum, he uses smart card to deposit proceeds from daily business and subsequently withdraws depending on business requirement. For agriculture he doesn’t make any capital expenditure from his own savings, rather he prefers to take working capital loan which he can repay from business returns. He uses his other surplus capital on money lending activities where he can get on average 20 % more interest than any saving bank account.

So one thing struck me, he is not the typical money lender but rather a common man like everybody else in the locality. The only difference is that he is more affluent and knows his finance pretty well and uses his surrounding environment to get maximum return on his investment. In fact he may be the gennext money lender - who in fact doesn't match with my stereotyped money lender picture from Oriya films. Is he good for society?? You can take the call on that.

Also another thing that struck me from the field visit is the acute need for a small convenient saving product among the already banked and so called well off people.

Carpe Diem for Social Performance in India?

Some of CMF's staff had the good fortune recently of sitting down with Mr. N Srinivasan, one of India's most seasoned microfinance consultants and author of last year's State of the Sector Report (he will author the report this year as well). One of the many topics we chatted about was social performance and its emergence as a hot topic within the global sector. As a well-written article in Microfinance Insights describes:

"Intended as the capacity of an institution to translate its social mission into practice and achieve its social goals, Social Performance Management (SPM) could be likened to the Corporate Social Responsibility (CSR) of microfinance. In reality, however, SPM and assessment in microfinance is intended as a more proactive concept (i.e. “do good” rather than simply “do not harm”)."

I've heard that many microfinance institutions have struggled to implement and internalize the indicators social performance experts have generated for practitioners; perhaps the costs are high for overhauling certain procedures and for changing well-work infrastructure.

I wonder however, if we have a serendipitous moment upon us in India for the internalization of social performance indicators (if, we first agree that social performance indicators are useful). As dozens of microfinance NGOs aim to transform themselves into Non Bank Financial Companies (NBFC), they are experiencing operational and managerial transformations. In these malleable moments, it might be high time to incorporate social performance metrics and indicators as the entire organization would be transforming.....

What do you all think?? What are your thoughts on social performance in general?

More on Loan Usage

If you have enjoyed the discussions on this blog about loan usage, you should definitely check out this article in the latest Microfinance Insights written by CMF's knowledge guru, Alex Kobishyn. The thought provoking article uses survey data from a number of CMF studies to look at how the poor use credit and whether microcredit and microentrepreneurship should truly be synonymous.

Gender and Microfinance Impact

From the point of view of the microfinance community, the hierarchy of philanthropy goes something like this:

1) Give a man a fish and he eats for a day.

2) Teach a man to fish and he eats for the rest of his life.

3) Teach a woman a bit about financial planning, give her a loan to purchase a fishing rod and not only does she eat for the rest of her life, but you have not been patronizing and others can be served with the interest paid by this woman on the loan.

Wonderfully appealing, but I think we may have been a little hasty in entirely dropping the “man.”

On the Grameen Foundation’s website they explain they focus on giving credit to women because “Women have proven to be the best poverty fighters. Experience and studies have shown that they use the profits from their businesses to send their children to school, improve their families’ living conditions and nutrition, and expand their businesses.” Although I do believe that those working for Grameen actually believe this statement, the evidence for its truth of is tenuous.

I believe the more accurate explanation for the focus on distributing loans to women is one based on a sound business decision by microfinance institutions (MFIs), not one focused on fighting poverty. It is simply that women are more likely to repay. This is conventional wisdom in the microfinance sector, and Aghion and Morduch cite a number of cases in which women have shown to be more compliant in this paper.

As I have mentioned on this blog before, I often find that the microfinance community conflates high repayment rates with success and high impact. Extremely high repayment rates may in fact be a sign that customers are taking on very little risk and that the loans are going towards low risk-low reward projects, rather than the high risk-high reward businesses that badly need funding.

There is even some evidence that men may be more likely to use funds towards business expansion than women, and with higher returns to capital. A fascinating study authored by de Mel, McKenzie and Woodruff, gave cash or kind grants to small business owners in rural Sri Lanka. The authors found through different methods of calculation, “the mean real returns to capital are estimated to be just over 11 percent per month for males, and slightly negative but not significantly different from zero for females.” The design of the study split the grants between those of about 100 dollars and 200 dollars. Men invested a hugely larger amount of this smaller grant than women, but strangely women, on average, invested slightly more of the larger grant (I don’t know what to make of this). This study is not looking at loans, but simple cash grants that did not call for repayment, so it is not entirely comparable to MF, but these results are also worth consideration from microfinanciers.

There are a number of possible reasons for why men may be more successful with these grants, but I find most compelling the argument that the lack of mobility and freedom for women may cause them to have less profitable business opportunities.

Although I am not sure how much it adds to the discussion, I thought I would present some of the preliminary data from a study I am now working on in Western Orissa. In this survey we are interviewing households in Western Orissa located in villages in which the NGO/MFI BISWA currently has operations. The interviewed households were randomly selected from the 2002 BPL/APL census.

In a sample of 744 household, 470 (64%) of these households claim to have at least one outstanding loan. In these HHs, the loan with the highest initial loan size was taken in the name of a man 71% of the time and 29% of the time by a woman. In the survey, we ask households to list up three purposes for which this largest loan was used. The following data represents the proportion that each of the following categories make up of loan usages mentioned.

Loan Usages	Men	Women
Repay Old Debt	1.86%	9.66%
Health	19.26%	13.07%
Education	2.55%	1.70%
Business	42.23%	39.77%
HH Consumption	31.79%	32.39%
Other	2.32%	3.41%
# of Observations	333	136

We do not know how efficiently these loans were used or even if the men and women were telling us the truth, but once again there is clearly no evidence here that women are using loans in a way that would make them better “poverty fighters” than men.

This entry is not intended to entirely dismiss the benefits of lending to women. There is surely some empowering impact for many women to help that family access needed funds. And of course, economic development is not the be all end all. If increasing lending to men leads to worsening disparities in freedoms between the genders, than it may not be worth any of the possible efficiency gains.

**** Many people I have spoken to have argued that women who take loans from microfinance organizations immediately pass them onto their husbands. I do not take on this issue because I am unaware of any data on the subject. Does anybody know of any?

A fresh look at IAP

Anyone who's dabbled in the social enterprise space is quite familiar with smokeless/improved cook stoves.  For years, NGOs and social entrepreneurs have struggled to bring a product to market that is acceptable to (largely) rural households at a price point they can both afford and are willing to pay.  While the  initial thrust behind this was a desire to reduce families', and in particular women's, exposure to indoor air pollution, a recent article in the NYT highlights the connection - black carbon - between the cooking habits of the rural poor in many developing countries and climate change.  (Also see Raj Kundra's related post here on the Acumen Fund blog.)

 

Improved cook stoves may have the potential to significantly reduce indoor air pollution and decrease black carbon emissions associated with rural cooking practices.  (While I know they exist, I haven't seen the emissions reduction profiles of the leading improved chulas on the market.) However, it seems like there may be other options that have been overlooked.

 

Social entrepreneurs are increasingly finding that the BoP are - not surprisingly - more willing to pay for products and services that have aspirational value associated with them. For cooking in India, LPG is the gold standard; middle class, upper middle class, and the uber wealthy in India all have LPG cook stoves in their homes.  Additionally, across rural India, where the supply chain reaches, LPG is the cooking fuel of choice for those who can afford it. 

 

While I'm a strong supporter of renewable energy and generally don't support increased reliance on fossil fuels, at first blush it seems like putting LPG in the homes of the BoP would be one way to accomplish the dual goals of simultaneously: 1) reducing indoor air pollution and 2) eliminating black carbon emissions associated with cooking (climate scientists please correct me if I'm wrong here).  With LGP you avoid the tough tasks of demand aggregation and customer education - people already want LPG in their homes.

 

What would it take to do this? First, you'd have to grapple with how to re-tool LPG public distribution system/supply chain  to ensure it reliably reached deep corners of rural India. Second, you'd have to re-structure the LPG subsidy to ensure it was within the financial reach of the BoP.  (Obviously, you'd also want to take a hard look at the cost, feasibility,  as well as  environmental and geopolitical implications of a large uptick in LPG use.)

 

Tinkering with the  public distribution system and a public subsidy surely lack the flare and appeal of new technologies and social enterprise. However, this approach - or one similar to it - might be worth a closer look.