Transcript Slide 1

Microfinance: what have we
learned?
Lessons from randomized
experiments
Dean Karlan
Annie Duflo
April 1st, 2009, Cairo
Introduction
• In the recent years, microfinance
has grown tremendously, and
attracted a lot of attention
• Yet:
– It has also attracted detractors
– Many people still are not reached
by financial services
– The poor still have access to a very
limited number of financial
services
• What is the impact of microfinance
on the lives of the poor?
• How can we improve services so
that they reach out to more
people, and help the poor better?
Outline
• Impact
– Consumer credit in South Africa
– “Grameen model” microcredit in India
– Savings in Kenya
• Improving products
• Microfinance and non financial services
• Conclusion and further research
How to measure programme impact?
What would happen to the same person with and without the
program?
Need to find a comparison group…
• Before and after
– Other things going on
• Borrowers and non-borrowers
– Selection bias
• Villages with and without microfinance
– Non random placement
What to do?
How to measure programme impact?
Randomized evaluations: divide your target recipients or villages
randomly into two groups before giving loans
If your sample is large enough, the two groups will be identical on
observables AND non observables
Target Population
Random Assignment
Treatment
Control
Outline
• Impact
– Consumer credit in South Africa
– “Grameen model” microcredit in India
– Savings in Kenya
• Improving products
• Microfinance and non financial services
• Conclusion and further research
Consumer micro-credit in South Africa
• Karlan and Zinman (2008): Randomly encouraged loan officers
to approve some marginal applications
• 3,000 “new” applicants who had no prior borrowing from the
Lender and applied at any of 8 branches over two months
787 marginal clients
Randomizer software
325 Treatment
462 Control
• What is the effect of loans on people who were not getting
loans before?
• Is it beneficial for the lender to lend to “marginal” (borderline)
applicants?
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Consumer micro-credit in South Africa
• Overall effect is significant and positive
• Positive impact on retaining job, and on income
• Less likely to experience hunger, and more positive outlooks on
their prospects and position
• Impact on other aspects of mental health (lower depression
and higher stress)
• Caveats: 6 to 12 month horizons, no long term results
• The marginal loans were profitable, although substantially less
profitable than usual loans.
- Liberalizing screening criteria can benefit both borrowers and lenders
- Benefits of taking controlled risks using randomized
experimentation.
Outline
• Impact
– Consumer credit in South Africa
– “Grameen model” microcredit in India
– Savings in Kenya
• Improving products
• Microfinance and non financial services
• Conclusion and further research
Impact of Micro-credit in India
• What is the impact of microcredit: on business creation;
durable goods purchase; consumption smoothing, etc.
• Spandana: typical “grameen” model microcredit program
• 120 slums in Hyderabad city, randomly divided in two groups
of 60 slums
– Spandana introduced micro-credit in one group, the
“treatment group”, and not in the other group, the
“control group”.
• Despite the presence of other MFIs, take up of credit and
amounts borrowed were higher in treatment slums
Impact of Micro-credit in India
• Positive effects on:
– Durables spending (for business and non business)
– Starting a business
– New businesses more likely to be female-run
• No effect on:
– Total per capita expenditures, spending on food,
education, health and clothing
– empowerment measures (timeline too short?)
• Analysis on subsamples:
– Helpful for testing theory of change
Some positive effects, in particular on chances of starting new
businesses for women
Outline
• Impact
– Consumer credit in South Africa
– “Grameen model” microcredit in India
– Savings in Kenya
• Improving products
• Microfinance and non financial services
• Conclusion and further research
Savings
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Dupas and Robinson (2009), Western Kenya 2006-07
First RCT of the impact of savings on very small businesses
Identified a sample of 185 very poor entrepreneurs
Randomly selected 104 to be given the chance to open
savings accounts in a village bank.
• Follow-up data 6 months later: positive effects on women
– Large increase in savings
– Business investment increased by 40-61%, total expenditures by
15-26%, and their food expenditures by 13-28%
– Less likely to draw down their working capital to deal with
household illness shocks.
Positive impacts of savings on women, no such effects on men
Why can RCTs be useful for
practitioners?
Problem
Solution?
Implementation?
Voluntary?
Safe savings products
Vendors caught in a debt
trap
Commitment
mechanisms?
Financial literacy
Health prevention?
Defaults due to health
events
Insurance?
Independent
insurance?
Bundled product?
Clients often do not invest
in productive purposes
Innovative product
design?
Training?
Outline
• Impact
• Improving products
– The “Grameen loan”: looking inside the black box
– Savings: how to make people save more?
– Marketing: how can it affect take-up?
• Microfinance and non financial services
• Conclusion and further research
Improving products
• How to improve on existing products, and develop
new products in order to:
– Improving outreach
– Improving use of services
– Get the right services to the right people
• RCTs can be used not only to evaluate program
impact,
• But also to experiment on product design in such a
way that we can understand what works and what
does not
Outline
• Impact
• Improving products
– The “Grameen loan”: looking inside the black box
– Savings: how to make people save more?
– Marketing: how can it affect take-up?
• Microfinance and non financial services
• Conclusion and further research
The Grameen “myth”
Meeting
peers
regularly
Repaying
regularly
Joint liability
The Grameen
loan product
Meeting loan
officer
regularly
Repaying
frequently
Repaying in
small sums
• Which of these features work best?
•Are they all necessary?
• Can some of these loan product features have negative effects on clients?
(joint liability, weekly repayments, etc.)
Individual and joint liability
• Gine and Karlan (2008)
• Joint liability: Claims to improve repayment rates and lower
transaction costs through screening, monitoring, enforcing
and solidarity
• However, could create excessive pressure and discourages
good clients from borrowing
169 existing groups
Random assignment
84 IL
85 JL
• Isolate the effects from moral hazard by “surprising” existing
group liability member, already peer-screened
Individual and joint liability
• No change in repayment rate for pre-existing borrowers
• Higher growth in center size (keeping more pre-existing
borrowers + attracting new ones)
• Even new members (selected under IL) did not have
worse repayment rates
• Limits to immediate policy prescription: would groups be
sustainable if begun under individual liability?
• Experiment #2 in new areas: Still same high repayment.
Smaller groups because of fear of bank employees
Joint liability may not be so essential to MFIs performance, and
may even keep some borrowers away
Changing repayment schedules
• Field and Pande (2008)
• Claim: weekly repayment ensures financial discipline,
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possibility to monitor other clients, trust in loan officers,
commitment device, etc.
However, large transaction costs for both borrowers and
lenders
Weekly repayment may not suit the income flows of
households engaged in certain types of activities
Among 150 newly selected groups, some were randomly
told they have to repay weekly, others monthly
To look at social capital effects of group meetings,
constructed a “social capital lottery”
Changing repayment schedules
• No difference in default rate; weekly clients repay earlier
• Caveat
– Would it be the same with larger loans?
– In addition, little MFI competition + relatively short term impact
• Weekly repayment results in higher social capital (better
knowledge of each other, more interaction outside meetings)
• Weekly clients more likely to give tickets to group members
– More frequent loan group meeting may help promote risk sharing
among group members
• New experiment: 2 months moratorium - negative effect on
payments
MFIs could reduce transaction costs without increase defaults (for
small loans and if no competition); But this may have some trade-offs.
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Outline
• Impact
• Improving products
– The “Grameen loan”: looking inside the black box
– Savings: how to make people save more?
– Marketing: how can it affect take-up?
• Microfinance and non financial services
• Conclusion and further research
Why don’t people save more?
• Poor households have disposable income that they could save
• However, they don’t save as much as they could, or want
• Sometimes, they borrow at very high interest rates for
businesses that don’t grow – although they could get out of
debt by saving more
• Why don’t they save more?
• Could be several reasons
– no safe avenues for savings; want to save but tempted; other
household members take the money; don’t understand returns to
savings..
• If tempted to consume  need products that will help people
save
• If don’t understand  may need financial literacy training
Savings commitment devices
• Maybe people don’t save more because they are tempted to
spend now, or they protect money from other household
members
• Commitment savings devices could be beneficial
• Ashraf, Karlan and Yin (2006 and 2008)
• Philippines: SEED (Save, Earn, Enjoy Deposits) helps clients
save by locking away their money until they reached a selfspecified savings goal (date or amount)
• RCT: 1,800 individuals  900 randomly chosen to receive an
offer to open the SEED account
• Of those offered the account, 28% opened the account
Savings commitment devices
• Strong effect on savings
– after a year: 80% increase, 337 % for those who opened the
account
– after 2.5 years, differences smaller but still there
• After 2.5 years, impact on:
– Self-reported decision making processes within the
household
– Purchase of female-oriented durable goods
• Impact biggest for women with below median decisionmaking power in the baseline
• Bottom line: this specialized account helped women with less
power gain control over household assets
Savings commitment devices were very effective for women who find
it difficult to save, and had a positive impact on empowerment
Reminders
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Savings is “salience challenged” relative to debt
Banks (and lenders) remind us to pay our debts
Banks do not remind us to save
Maybe attention is an issue
In Peru, Philippines and Bolivia, we tested sending
reminders
• We find significant increases in reaching one’s
savings goals
Savings for fertilizers
• Duflo, Kremer, Robinson (2009)
• In Busia (Kenya), low (17%) use of fertilizer
• Why? Know-how, lack of learning externalities, capital
constraints?
• Series of experiments show that 1) fertilizer is profitable,
and 2) knowledge both about know-how and returns are
a factor in adoption
• However, still more than half the farmers do not use
fertilizer
• Piloted and evaluated SAFI: Savings and Fertilizer
Initiative
Savings for fertilizers
SAFI: the farmer is visited right after harvest (when farmers
have money), and offered the option of purchasing a voucher
for fertilizer. The NGO then delivers the fertilizer at the time of
planting
Increased
price
SAFI after harvest
No SAFI
50% subsidy,
free delivery
No subsidy,
free delivery
X
X
• SAFI increases take-up (40% vs. 21%)
• The effect was similar to effect of subsidy
 Getting the timing of products right can be key
X
Outline
• Impact
• Improving products
– The “Grameen loan”: looking inside the black box
– Savings: how to make people save more?
– Marketing: how can it affect take-up?
• Microfinance and non financial services
• Conclusion and further research
Marketing: South Africa experiment
• Bertrand, Karlan, Mullainathan, Shafir and Zinman
(2008-9)
• Experiment with a lender to measure sensitivity to
price for borrowers
– Randomly vary interest rates offered to people when
sending marketing letters
– Also randomly vary various marketing features such as a
woman’s photo on the letter, complicated vs simple
explanation of loan contract, etc.
• Photo of a woman: same value to men as dropping
the interest rate by 1/3.
Selling weather insurance in India
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Cole, Gine, Tobacman, Topalova, Townsend and Vickery (2008)
Low take-up of weather insurance:  Why?
Test effect of price and liquidity constraints
Also test effect of other factors suggested by psychology:
financial education, trust in the selling agent, marketing
messages
• Endorsement of the household visit by a local NGO
representative increases take up by 10 percentage points
amongst households familiar with the NGO
• The act of conducting a household marketing visit also affects
take-up
Marketing that takes into account psychological and cultural
constraints of clients can increase take-up of products
Outline
• Impact
• Improving products
• Microfinance and non financial services
– Business training
– Financial literacy
• Conclusion and further research
Business training
• Microfinance’s promise to the poor is that access
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to credit and banking services will improve their
economic opportunities
Can the poor adequately take advantage of such
opportunities given low skills, education levels,
social mobility and access to information?
Returns to business training and financial literacy
could be high
• But can one teach basic entrepreneurship skills, or
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are they fixed personal characteristics?
Karlan and Valdivia (2008): study with FINCA Peru
Business training in Peru
• Some microcredit groups assigned to receive the “treatment”
• 30 to 60 minute entrepreneurship training sessions during their
weekly or monthly banking meeting over one to two years
• Improved business knowledge, practices and revenues.
• Improved client retention rates for the MFI
• Gains outweighed the costs => microfinance “plus” might make
business sense
• Larger effects found for those that expressed less interest in
training => demand-driven “market” solutions may not be the
best strategy
• More studies needed, also of what are the best ways to
implement such trainings, and with non clients as well.
Outline
• Impact
• Improving products
• Microfinance and non financial services
– Business training
– Financial literacy
• Conclusion and further research
Financial literacy training
• So far no rigorous study has shown significant impacts of
financial literacy training
• India, weather insurance experiment: a short module teaching
farmers the concept of insurance and of millimeters increase
take-up has no effect
– But module was very short
• Verdict still out
• Perfect example of where randomized trials can be done
easily to help answer a hot topic in consumer and
entrepreneurial finance
• We need more experiments on financial literacy training
Why can RCTs be useful for
practitioners?
Problem
Solution?
Implementation?
Voluntary?
Safe savings products
Vendors caught in a debt
trap
Commitment
mechanisms?
Financial literacy
Health prevention?
Defaults due to health
events
Insurance?
Independent
insurance?
Bundled product?
Clients often do not invest
in productive purposes
Innovative product
design?
Business training?
Outline
• Impact
• Improving products
• Microfinance and non financial services
– Business training
– Financial literacy
• Conclusion and further research
Summary
• Take-up of MFI loans is lower than is often predicted
– Suggests that microcredit is not for everyone and that
new product designs are needed
• Microcredit does have impacts, and different impacts on
different people
• Need to understand when and for whom credit is good, when
and for whom it may actually be bad.
• Microfinance ≠ Microcredit
– Savings
– Insurance
– Training
• Nudge in the field
– The way options are given can influence choices made.
– Voluntary restricting of choice can be good
o Spousal/familial/community constraints, as well as self-control
Making research useful for practitioners
• For all these evaluations we tell you not to generalize, and
that we need more research before having an answer…
• So what to do?
• Replicate evaluations in multiple settings
– We can learn from one evaluation, but we can learn much more about
what to do after replicating similar interventions in multiple settings
– Targeting the Ultra Poor – Ford Foundation and CGAP
– Interest rate sensitivity
– Savings product tests
– Microcredit
• Need several projects around one theme
– E.g repayment schedules, savings commitment products
• Database of results – even negative ones!
Further research needed
• There are still some important outstanding questions
about microfinance
• What services and combination of services work best,
and for whom?
• What is the impact of access to an integrated suite of
financial services?
• Gender issues: is there differential return to capital for
women and for men? Is impact of credit different for
both? Do men and women face different constraints to
savings?
• How will technology transform access to savings
products, and poor households’ financial behavior?