Can Microfinance Save the World?

1. Can Microfinance Save the World? Bruce Wydick Professor of Economics University of San Francisco

2. No, microfinance cannot save the world.

3. Can Microfinance Save the World? What is microfinance? Personal experience Why don’t free markets provide credit to the poor? Growth of microfinance What drives high repayment rates? Does it help alleviate poverty? New issues in microfinance

4. What is microfinance? Movement with origins in Bangladesh Muhammad Yunus—Why doesn’t economic theory work for the poor? Beginning of Grameen Bank, 1976… http://www.youtube.com/watch?v=YxpTFwQx-A8

5. KQED Studios, January 2008

6. What is microfinance? Many very small loans to the poor ($10 up to $10,000+) Typically weekly, bi-weekly, monthly installments Loans go for small-scale entrepreneurial activity Usually for existing businesses, skills Urban, rural areas Allow the poor to participate in capitalism

7. Personal Experience Dominican Republic 1988, Costa Rica 1989 Berkeley Dissertation Dozen or so research articles related to group lending, impact of microfinance, credit information systems

8. Growth of Microfinance: As of January 1, 2007, 133,030,913 households reportedly reached with microfinance, up from 13,478,000 reported in 1997. (Microfinance Summit) 92,922,574 were among the poorest when they took their first loan. 85.2 percent (79,130,581) are women entrepreneurs. Assuming 5 persons per family, the 92.9 million poorest clients reached affected some 464,612,870 family members.

11. What is responsible for growth in microfinance? Not because of proof that it reduces poverty Appealing to all ends of political spectrum!

12. The Political Spectrum What is responsible for growth in microfinance? Not because of proof that it reduces poverty Appealing to all ends of political spectrum! Liberals: Empowers Women Reaches Poorest Pro-Artesian Benign on Environment Pragmatists: Requires little/no subsidy Less costly than a revolution Non-controversial Conservatives: Not a handout, welfare Incentives for work Property rights based Pro-Capitalism

13. What makes credit markets unique? In some markets we have full information… Asymmetric Information in other types of transactions Problem of Adverse Selection Problem of Moral Hazard Strong theoretical basis for intervention in credit markets (See S&L crisis, sub-prime mortgage crisis.) Underlying reason why the poor are denied credit!

14. What about repayment rates? Typically very high, 95-99% if best practices followed. Some problems government programs with giveaways correlated shocks to areas poor portfolio management

15. Branch Office Branch Office Branch Office What drives high repayment rates? 1. Skilled use of loan officers MAIN OFFICE Branch Office Branch Office

16. Can Social Cohesion be harnessed as collateral for loans? (Jointly Liable Groups) What drives high repayment rates? 2. Group Lending Branch Office Branch Office Helps address: Adverse Selection Moral Hazard Administrative Costs

17. $ $ $ $ $ $ $ $ $ What drives high repayment rates? 3. Dynamic Incentives Problem: What happens when there are multiple lenders?

18. Does microfinance make a difference? This is a more difficult question than one might think… Several problems: Self-selection bias Non-random program placement Measuring long-term effects (problem with experiments)

19. How do we measure microfinance program impact? (Crummy Ways) "Super Naïve" method: Ask people if program is helping them. "Naïve" method: Survey non-borrowers vs. borrowers "Still Pretty Lousy Method": Compare Old vs New borrowers "Sophisticated, but Still Pretty Lousy Method": Use matching models and propensity scoring to obtain a control group.

20. How do we measure microfinance program impact? (Better Ways) Use "Difference-in-Differences" method on treated and untreated groups (Problem: require baseline surveys) Use an "Instrumental Variable" to achieve identification of impacts; correlated with uptake but not impact. (Problem: a good IV is often hard to find.) Run a "Randomized Field Experiment" in which treatment groups are randomly offered credit. (Problem: hard to hold off borrowers from credit) Use "retrospective data" focused on the probability of fundamental events to a household; borrowed from finance "event studies".

21. Does microfinance make a difference?

22. Does microfinance make a difference?

23. Does microfinance make a difference?

24. Does microfinance make a difference?

25. Does microfinance make a difference?

26. Does microfinance make a difference?

27. New Innovations: Credit Information Systems Problem with too many microfinance lenders Difficult to ascertain debt load of a new borrower Need credit information system: Allows lenders to view both positive and negative information about borrowers. Greatly facilitated by the Web.

28. New Innovations: Credit Information Systems Implemented a field experiment in Guatemala to test the effects of a credit information system among microfinance providers. Involves installation of hardware and software used for the credit bureau between March 2002 and January 2003 in 39 branch offices of microfinance institution in Guatemala. Had significant effect on both delinquent payments and defaults.

30. New Innovations: Kiva.org

31. New Innovations: Kiva.org

32. New Innovations: Kiva.org

33. New Innovations: Kiva.org

34. New Innovations: Kiva.org l

35. Conclusion: Can microfinance save the world? No, but it can make it a better place. Proper way to view microfinance: As a stepping stone.