https://link.springer.com/content/pdf/10.2307%2F3343168.pdf

Development as Freedom

In the past decade, microfinance programs have demonstrated that it is possible to lend to low-income households while maintaining high repayment rates--even without requiring collateral. The programs promise a revolution in approaches to alleviating poverty and spreading financial services, and millions of poor households are served globally. A growing body of economic theory demonstrates how new contractual forms offer a key to microfinance success--particularly the use of group-lending contracts with joint liability. For the most part, however, high repayment rates have not translated into profits, and studies of impacts on poverty yield a mixed picture. In describing emerging tensions, the paper highlights the diversity of innovative mechanisms beyond group-lending contracts, the measurement of financial sustainability, the estimation of economic and social impacts, the costs and benefits of subsidization, and the potential to reduce poverty through savings programs rather than just credit. The promise of microfinance has pushed far ahead of the evidence, and an agenda is put forward for addressing critical empirical gaps and sharpening the terms of policy discussion.

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The microfinance promise

The theory of precautionary saving is shown in this paper to be isomorphic to the Arrow-Pratt theory of risk aversion, making possible the application of a large body of knowledge about risk aversion to precautionary saving, and more generally, to the theory of optimal choice under risk In particular, a measure of the strength of precautionary saving motive analogous to the Arrow-Pratt measure of risk aversion is used to establish a number of new propositions about precautionary saving, and to give a new interpretation of the Oreze-Modigliani substitution effect

Precautionary Saving in the Small and in the Large

In the spring of 2003, the Center for Social Innovation at the Stanford Graduate School of Business launched the Stanford Social Innovation Review. Our first “Editors’ Note” defined social innovation as “the process of inventing, securing support for, and implementing novel solutions to social needs and problems.” That same manifesto also described the publication’s unique approach to social innovation: “dissolving boundaries and brokering a dialogue between the public, private, and nonprofit sectors.”

Rediscovering Social Innovation

Microfinance contracts have proven able to secure high rates of loan repayment in the face of limited liability and information asymmetries, but high repayment rates have not translated easily into profits for most microbanks. Profitability, though, is at the heart of the promise that microfinance can deliver poverty reduction while not relying on ongoing subsidy. The authors examine why this promise remains unmet for most institutions. Using a data set with unusually high quality financial information on 124 institutions in 49 countries, they explore the patterns of profitability, loan repayment, and cost reduction. The authors find that institutional design and orientation matter substantially. Lenders that do not use group-based methods to overcome incentive problems experience weaker portfolio quality and lower profit rates when interest rates are raised substantially. For these individual-based lenders, one key to achieving profitability is investing more heavily in staff costs-a finding consistent with the economics of information but contrary to the conventional wisdom that profitability is largely a function of minimizing cost.

/pdf/financial-performance-and-outreach-a-global-analysis-of-1wf4unkl40.pdf

Financial performance and outreach: a global analysis of leading microbanks*

The following sections are included:IntroductionWhy Have ROSCAs Prevailed Alongside MFIs?Demand for Commitment: Can it Be Met by MFIs?The ChallengeConcluding RemarksReferences

Women and Microsavings

Economia de Las Microfinanzas

Poverty is multidimensional In its starkest form, the United Nations Development Annual Reports proxy poverty as combined low levels of income, health, and education Microfinance, on the other hand, addresses directly the income dimension of poverty, and indirectly health and education Specifically, microfinance is generally perceived as a tool for poverty reduction via self-employment for income-generating activities Because the vast majority of poor households live in developing countries, poverty in industrialized countries is often neglected This report focuses on microfinance as a tool for pulling disadvantaged individuals out of poverty in industrialized countries In particular, this report contrasts the experience of two microfinance institutions, namely, that of Credit Alternatif (Credal) in Belgium with that of the Association pour le droit a l’initiative economique (Adie) in France While both institutions started over twenty years ago, microfinance is far more active and outreach in per capita terms is much higher in the latter than in the former First, we find similarities between the two institutions: Both target the socially excluded and unbanked, their presence in the capitals of Belgium and France is strong, both offer “guided” microloans, benefit from government support, and socially responsible investors Second, we encounter very important differences: The distinct historical roots of Credal and Adie, their different trajectories in terms of scale and scope, governance, loan size and maturity structures, average interest rates, geographic coverage, and their very different strategies for outreach growth Third, we draw some lessons from Adie, which can potentially be replicated for microfinance outreach growth by Credal, and by other microfinance institutions operating in Brussels and Belgium Finally, this report concludes by extending the analysis to other urban areas of Europe, where strategic alliances with other financial institutions and the government, and marketing for guided loans and other financial products might prove key to microfinance expansion in industrialized countries

Microfinance for Self-Employment Activities in the European Urban Areas: Contrasting Crédal in Belgium and Adie in France

A new growth approach to poverty reduction

Based on stylized facts and empirical findings, this paper focuses on three questions pertaining microfinance activity and outreach. We argue that there is not robust evidence to sustain the hypotheses that the extent of poverty, the degree of international donor support, and/or high population densities determine microfinance activity and outreach. Instead, until now the "age" of microfinance activity as proxied by the number of years since microfinance was first started in a particular country seems to matter the most when attempting to explain scale, scope and rapid growth of microfinance activity and innovation. This may in turn explain why accelerated microfinance growth is disproportionally concentrated in two relatively small countries, namely, in Bangladesh and in Bolivia. By dispelling those three myths on microfinance, we attempt to guide empirical research in a direction largely unexplored so far. In particular, this paper suggests that: a) current empirical research should systematically control for country-wide age of microfinance industry, and systematically treat Bangladesh and Bolivia as "special cases"; b) further research on these two countries is needed in order to learn about potentially replicable leading-edge innovations, and c) using theory, such as learning-by-doing growth models a la Lucas (1988) can be a step in the right direction. © De Boeck Universite. Tous droits reserves pour tous pays.

Beatriz Armendáriz

Papers

Women and Microsavings

Economia de Las Microfinanzas

Microfinance for Self-Employment Activities in the European Urban Areas: Contrasting Crédal in Belgium and Adie in France

A new growth approach to poverty reduction

Uncovering microfinance myths: Does country-wide age matter?