Showing papers on "Microfinance published in 2003"

Microfinance and poverty - evidence using panel data from Bangladesh

Abstract: Micro-finance supports mainly informal activities that often have low market demand. It may be thus hypothesized that the aggregate poverty impact of micro-finance in an economy with low economic growth is modest or nonexistent. The observed borrower-level poverty impact is then a result of income redistribution or short-run income generation. The author addresses these questions using household level panel data from Bangladesh. The findings confirm that micro-finance benefits the poorest and has sustained impact in reducing poverty among program participants. It also has positive spillover impact, reducing poverty at the village level. But the effect is more pronounced in reducing extreme rather than moderate poverty.

Is microfinance an effective strategy to reach the Millennium Development Goals

Abstract: Web: www.cgap.org Introduction The United Nations’ Millennium Development Goals (MDGs) have galvanized the development community with an urgent challenge to improve the welfare of the world’s neediest people. Donor agencies are orienting their programming around the attainment of the MDGs and are mobilizing new resources to reduce hunger and poverty, eliminate HIV/AIDS and infectious diseases, empower women and improve their health, educate all children, and lower child mortality.1 The MDGs are framed as concrete outcomes in the areas of nutrition, education, health, gender equity, and environment. Thus work in these specific areas will be a large part of any development strategy driven by the MDGs. But decades of experience has shown that progress in these areas is powerfully affected by other factors in the broader context, such as a functioning government, physical security, economic growth, and basic infrastructure (for example, transportation). This paper reviews the mounting body of evidence showing that the availability of financial services for poor households (“microfinance”) is a critical contextual factor with strong impact on the achievement of the MDGs. Microfinance, and the impact it produces, go beyond just business loans. The poor use financial services not only for business investment in their microenterprises but also to invest in health and education, to manage household emergencies, and to meet the wide variety of other cash needs that they encounter. The range of services includes loans, savings facilities, insurance, transfer payments, and even micro-pensions. Evidence from the millions of microfinance clients around the world demonstrates that access to financial services enables poor people to increase their household incomes, build assets, and reduce their vulnerability to the crises that are so much a part of their daily lives. Access to financial services also translates into better nutrition and improved health outcomes, such as higher immunization rates. It allows poor people to plan for their future and send more

Microfinance in Northeast Thailand: Who Benefits and How Much

Abstract: Summary This paper evaluates the outreach and impact of two microfinance programs in Thailand, controlling for endogenous self-selection and program placement. Results indicate that the wealthier villagers are significantly more likely to participate than the poor. Moreover, the wealthiest often become program committee members and borrow substantially more than rank-and-file members. However, local information on creditworthiness is also used to select members. The programs positively affect household welfare for committee members, but impact is insignificant for rank-and-file members. Policy recommendations include vigilance in targeting the poor, publicly disseminating the program rules and purpose, and introducing and enforcing eligibility criteria.

Microfinance and Poverty: Evidence Using Panel Data from Bangladesh

Abstract: Micro-finance supports mainly informal activities that often have low market demand. It may be thus hypothesized that the aggregate poverty impact of micro-finance in an economy with low economic growth is modest or nonexistent. The observed borrower-level poverty impact is then a result of income redistribution or short-run income generation. Khandker addresses these questions using household level panel data from Bangladesh. The findings confirm that micro-finance benefits the poorest and has sustained impact in reducing poverty among program participants. It also has positive spillover impact, reducing poverty at the villate level. But the effect is more pronounced in reducing extreme rather than moderate poverty. This paper - a product of Rural Development, Development Research Group - is part of a larger effort in the group to analyze the impact of targeted programs on the poor.

Do Microfinance Programs Help Families Insure Consumption Against Illness

Abstract: Families in developing countries face enormous financial risks from major illness both in terms of the cost of medical care and the loss in income associated with reduced labor supply and productivity. We test whether access to microfinancial savings and lending institutions helps Indonesian families smooth consumption after declines in adult health. In general, results support the importance of these institutions in helping families to self-insure consumption against health shocks.

Lending technologies, competition and consolidation in the market for microfinance in Bolivia

Abstract: Innovations in lending technologies and market saturation have made La Paz, Bolivia one of the most rapidly changing and competitive microfinance markets in the world. Two lenders stand out: the pioneer BancoSol, which first profitably expanded the loan market with group liability loans, and the later entrant Caja Los Andes, which offered individual liability loans using costlier screening. Using a simple model of credit market competition with moral hazard and adverse selection we analyse how the terms of loan contracts were adapted to changes in competition and how borrowers' incentive to remain diligent and repay loans was affected. Hypothesized behaviour derived from the model is tested and shown to be consistent with empirical evidence from loan records and a household survey. Copyright © 2003 John Wiley & Sons, Ltd.

Further evidence on the link between finance and growth : an international analysis of community banking and economic performance

Abstract: The authors contribute to both the finance-growth literature and the community banking literature by testing the effects of the relative health of community banks on economic growth, and investigating potential transmission mechanisms for these effects using data from 1993-2000 on 49 nations. Data from both industrial and developing nations suggest that greater market shares and efficiency ranks of small, private, domestically-owned banks are associated with better economic performance, and that the marginal benefits of higher shares are greater when the banks are more efficient. Only mixed support is found for hypothesized transmission mechanisms through improved financing for small and medium enterprises or greater overall bank credit flows. Data from developing nations are also consistent with favorable economic effects of foreign-owned banks, but unfavorable effects from state-owned banks.

Consultative Group to Assist the Poorest (CGAP)

Abstract: The Consultative Group to Assist the Poorest (CGAP) was set up at the World Bank as a three-year initiative (1995-1998) to increase the quality and quantity of sustainable microfinance institutions (MFIs) serving the poor.1 As a consortium of donor agencies and microfinance practitioners working together to bring microfinance into the mainstream, CGAP acts as a service provider to the microfinance industry by catering to the needs of three stakeholders, namely the MFIs, donor agencies, and the microfinance industry. CGAP serves these stakeholders through learning and dissemination of best practices, by helping to set up supportive policies for microfinance activities, by coordinating donor initiatives, and by channeling funds to broaden and deepen the outreach of MFIs serving the poor. Acting as a clearinghouse for the transmission and dissemination of information for the microfinance industry, CGAP adopts variety of information dissemination tools. Best practices in microfinance and other related information is shared among the stakeholders through conferences, seminars, technical guides, and portals, along with several other publications and documents. Training sessions, workshops, and seminars on technical advice and exchange promote active participation of member donors and microfinance practitioners. Furthermore, applicability of technical tools such as financial statement disclosure guidelines, appraisal formats, and poverty assessment tools help enforce accountability in the operations of microfinance practitioners.

Microfinance Poverty Assessment Tool

Abstract: Currently, no rigorous tool exists to measure the poverty level of microfinance institution (MFI) clients. In order to gain more transparency on the depth of poverty outreach, CGAP collaborated with the International Food Policy Research Institute (IFPRI) to design and test a simple, low-cost operational tool to measure the poverty level of MFI clients relative to nonclients. This tool is a companion piece to the CGAP Appraisal Format; donors should not use the poverty assessment tool without also conducting a larger institutional appraisal. The concept of poverty is complex and strongly influenced by local cultural and socioeconomic conditions. The poverty assessment approach presented in this manual supports a flexible definition of poverty that can be adapted to fit local perceptions and conditions of poverty. The tool is intended neither as a means to target new clients nor to assess the impact of microfinance services on the lives of existing clients. It may provide a useful means to verify-both for the donor and the MFI-the extent to which an existing strategy results in poor clients joining the MFI. The tool assesses the poverty levels of MFI clients compared to nonclients within the operational area of an MFI. Using available data or expert opinion, the tool also relates local poverty levels to poverty measured at larger regional and national levels.

A Cost-Effectiveness Analysis of the Grameen Bank of Bangladesh

Abstract: Reports of the success of the Grameen Bank of Bangladesh have led to rapid growth in funding for microfinance. But has the Grameen Bank been cost-effective? This article compares output with subsidy for the bank in a present-value framework. For the timeframe 1983-97, subsidy per person-year of membership in Grameen was about $20, and subsidy per dollar-year borrowed was about $0.22. Although the article does not measure consumer surplus for Grameen users, the evidence in the literature suggests that surplus probably exceeds subsidy. The Grameen Bank - if not necessarily other microlenders - was probably a worthwhile social investment.

Banking on Social Change: Grameen Bank Lending to Women

Abstract: The Grameen Bank in Bangladesh has become an international model for “microcredit” as a poverty alleviation strategy. The purpose of this paper is twofold: to evaluate the Grameen Bank as a strategy for empowering and improving the socioeconomic status of women in Bangladesh, and to identify lessons from the Grameen Bank experience that can inform development policy more generally. Arguments for and against Grameen Bank are evaluated in the light of evidence from studies of the Bank and knowledge of women and development. The conclusions that are drawn from this evaluation are that Grameen Bank is not a panacea for poverty alleviation and improving women's lives, that it has increased the income of borrowers, has led to improvements in specific aspects of their lives, and that it has potential if used in conjunction with other progressive social and economic policies to contribute to long-term, sustainable, progressive social change.

Microfinance institutions and public policy

Abstract: Many governments and nongovernmental organizations have adopted policies to promote the growth of microfinance institutions (MFIs). The appropriate level and form of support for MFIs are discussed in this paper on the basis of a review of key MFI characteristics. Governments are also responsible for the regulation of MFIs; here, some principles concerning the extent and coverage of MFI regulation and supervision are developed.

History matters in microfinance

Abstract: Microfinance is not a recent development, and neither is the development of regulation and supervision of microfinance institutions (MFIs). Every now developed country has its own history of microfinance. It is important to recognize this because it presents a view different from that of many in the microfinance community who associate microfinance with credit NGOs and believe that microfinance was invented in Bangladesh some 20-odd years ago. Attributing the origin of microfinance to recent initiatives misses not only the historical depth and scale of microfinance, but also centuries of experience, which means: learning from trial and error, failure and success. The beginnings in Europe were all informal and small-scale, including informal savings clubs, among them the box clubs in England during the 18th century.

The Money Exchange Dealers of Kabul: A Study of the Hawala System in Afghanistan

Abstract: Money convenient, and inexpensive means of transferring funds into Afghanistan and among its provinces. They offer a diverse range of financial and non-financial business services at the local, regional, and international level. More recently, they have been instrumental in providing financial services for the delivery of emergency relief and humanitarian and developmental aid into Afghanistan for the majority of international and domestic NGOs, donor organizations, and development aid agencies. This study was undertaken to: (1) determine the current practice of hawala in Afghanistan; (2) verify the assertions regarding the convenience, speed, and cost-effectiveness of hawala transactions in comparison with formal financial institutions such as the central bank and the remaining state banks; (3) evaluate the use of money exchange dealers to remit development funds to regions that are not served by formal financial institutions; (4) identify the operational characteristics that make the hawala system vulnerable to financial abuse; and (5) consider the appropriate regulatory and supervisory options for informal funds transfer systems in Afghanistan.

A Cost‐Effectiveness Analysis of the Grameen Bank of Bangladesh

Abstract: Reports of the success of the Grameen Bank of Bangladesh have led to rapid growth in funding for microfinance. But has the Grameen Bank been cost-effective? This article compares output with subsidy for the bank in a present-value framework. For the timeframe 1983–97, subsidy per person-year of membership in Grameen was about $20, and subsidy per dollar-year borrowed was about $0.22. Although the article does not measure consumer surplus for Grameen users, the evidence in the literature suggests that surplus probably exceeds subsidy. The Grameen Bank — if not necessarily other microlenders — was probably a worthwhile social investment.

Money Talks: Conversations with Poor Households in Bangladesh about Managing Money

Abstract: This paper describes the money management behavior of 42 low-income Bangladeshi households, half of them rural and half living in urban slums. They were found to be active managers of their financial resources. Thirty-three varieties of financial instrument were found to be in use by the sample households during the research year. As well as using a wide variety of instruments, most households engaged in multiple uses of the instruments: on average each household initiated a new money management arrangement every two weeks. The sums of money involved are large, both absolutely and relative to incomes. The average "€œturnover"€ (the total transaction flows of money through financial instruments) per household was $839' in the year"€”a sum equal to about three-fifths of their annual income. The total value of the microfinance market for poor people in Bangladesh probably exceeds $10 billion. Households appear to be using financial instruments of all kinds to build lump sums of money for immediate expenditure rather than to build up long-term, large financial assets or to hold high-value, long-term debt. These sums were overwhelmingly formed in the informal sector. The role of the MFIs is thus somewhat contradictory. Their outreach into these households is excellent but their share of the total money management activities is small. The apper concludes that both MFIs and poor households would benefit if MFIs acheived a better understanding of current and potential demand for financial services by the poor and tailored prodcuts and delivery systems accordingly.

Microfinance Poverty Assessment Tool

Abstract: Currently, no rigorous tool exists to measure the poverty level of microfinance institution (MFI) clients In order to gain more transparency on the depth of poverty outreach, CGAP collaborated with the International Food Policy Research Institute (IFPRI) to design and test a simple, low-cost operational tool to measure the poverty level of MFI clients relative to nonclients This tool is a companion piece to the CGAP Appraisal Format; donors should not use the poverty assessment tool without also conducting a larger institutional appraisal The concept of poverty is complex and strongly influenced by local cultural and socioeconomic conditions The poverty assessment approach presented in this manual supports a flexible definition of poverty that can be adapted to fit local perceptions and conditions of poverty The tool is intended neither as a means to target new clients nor to assess the impact of microfinance services on the lives of existing clients It may provide a useful means to verify-both for the donor and the MFI-the extent to which an existing strategy results in poor clients joining the MFI The tool assesses the poverty levels of MFI clients compared to nonclients within the operational area of an MFI Using available data or expert opinion, the tool also relates local poverty levels to poverty measured at larger regional and national levels

Microfinance and social capital: does social capital help create good practice?

Abstract: The role of organising and disseminating knowledge as a global public good has become a major preoccupation of international development organisations. One area in which they are particularly active is support for microfinance programmes in developing countries. More recently, the microfinance 'best practices' deposited in, and disseminated by, these international organisations have been associated with social capital. This paper examines the ways in which the notion of social capital is employed to explain the success of microfinance programmes. It argues that various types of social interactions that are generated around successful microfinance operations are randomly called 'social capital'. This means that the presence of social capital does not tell us much about what sort of microfinance programmes, in terms of design and implementation, should be regarded as good practice.

Microcredit: The Rhetoric of Empowerment, the Reality of "Development as Usual"

Abstract: This essay provides a critical analysis of some of the ideological assumptions underlying microcredit and considers the implications it has on the lives of women it is supposed to empower. Such an analysis explores the disjuncture between rhetoric and reality as it reveals the ideological commitments reinforced by neoliberal notions of development. The data presented come from a variety of sources: a critical analysis of some of the current writing on microcredit; interviews conducted between 1998-1999 with development workers who have been engaged in microcredit programs in developing countries; and fieldwork I conducted at the Microcredit Summit in New York City in 1998. (excerpt)

A Review of Commitment Savings Products in Development Countries

Abstract: Many financial institutions in developing countries offer savings products. Yet, little has been done to assess systematically and quantitatively the relative merits of different product designs. This paper first examines different designs that provide incentives to clients to commit to save. Mechanisms are divided into deposit-side mechanisms that help clients make regular deposits, and withdrawal-side mechanisms that help clients restrict the use of their funds except for well-planned uses or emergencies. Then, using results from a short web-based survey of microfinance instititutions, we describe different commitment savings products in use around the world. * We thank Vo Van Cuong and Xianbin Yao and others at the Asian Development Bank for useful comments and support, and we thank the Asian Development Bank for funding under RSC-C20817-PHI. All views and errors are ours. ** Corresponding author: Dean S. Karlan, 337 Wallace Hall; Princeton University, Princeton, NJ 08550; dkarlan@princeton.edu

Distant voices: the views of the field workers of NGOs in Bangladesh on microcredit

Abstract: Recently, microcredit has become a fashionable cure-all for most non-governmental organizations (NGOs) in Bangladesh. The provision of services to the poor is by definition always difficult, and even NGOs have problems. NGOs in Bangladesh define the poor in different ways when creating their target groups. The policies of nearly all NGOs in Bangladesh are formulated by their senior managers, and field workers are rarely consulted. This paper will explore the opinions on microcredit of selected field workers of four types of NGOs in Bangladesh – on how the problem of microcredit might be solved. Problems of microcredit programmes, they say, include non-accessibility to the poorest, low return, misuse and overemphasis on repayment. Field workers discuss what level of importance should be given to microcredit as against services like education, health or awareness creation. Most conclude that NGOs are overemphasizing microcredit, which leaves little time and few resources for other problems of the poor, so bringing the whole ‘development’ effort of the NGOs into question. Most field workers think that many microenterprises are not sustainable and that in many cases clients will remain dependent on the NGOs for credit.

Micro-finance and poverty reduction in Asia: what is the evidence?

Abstract: Despite the extensive spread of micro finance, studies on the actual impact of MFIs are often more ambivalent about its impact than is the aid community. Much has been written on the range of institutional arrangements pursued in different organizations and countries and in turn a vast number studies have attempted to assess the outreach and poverty impact of such schemes. However, amongst the academic development community there is a recognition that perhaps we know much less about the impact of these programs than might be expected given the enthusiasm for these activities in donor and policy-making circles. In recognition of this uncertainty this paper aims to bring together some of the recent evidence that has been accumulating on the impact of microfinance activities on poverty reduction. In particular we ask what is the evidence on three specific issues: (1) the extent to which microfinance initiatives have made a lasting difference in pulling households out of poverty on a permanent basis; (2) the extent to which microfinance programs reach only the better-off amongst the poor, leaving the ‘core poor’ unaffected; and (3) how far micro finance is a cost-effective means of transferring income to the poor. The evidence surveyed here suggests that the conclusion from the early literature, that whilst micro finance clearly may have had positive impacts on poverty it is unlikely to be a simple panacea for reaching the core poor, remains valid. Reaching the core poor is difficult and some of the reasons that made them difficult to reach with conventional financial instruments mean that they may also be high risk and therefore unattractive microfinance clients. Hence there is a need to continually improve design and outreach and to see MFIs as part of the package for targeting the poor, rather than the whole solution.

Microfinance : evolution, achievements and challenges

Abstract: Preface vii Introduction 1 Malcolm Harper 1. Financial innovations for microenterprises - linking formal and informal financial institutions Hans Dieter Seibel and Uben Parhusip 2. Savings mobilization and microenterprise programmes Maria Otero 3. Raising the curtain on the 'microfinancial services era' Stuart Rutherford 4. Towards a more market-oriented approach to credit and savings for the poor Henry R. Jackelen and Elisabeth Rhyne 5. Microinsurance - the risks, perils and opportunities Warren Brown 6. Regulating microfinance - the options Robert Peck Christen and Richard Rosenberg 7. Commercial banks and women microentrepreneurs in Latin America Gloria Almeyda Stemper 8. Credit for the rural poor - the case of BRAC in Bangladesh A. M. R. Chowdhury, M. Mahmood and F. H. Abed 9. The effects of liberalization on access to bank credit in Kenya Peninah W. Kariuki 10. 'Are you poor enough?' - client selection by microfinance institutions Graham A. N. Wright and Aleke Dondo 11. The holy grail of microfinance: 'helping the poor' and 'sustainable' Christopher Dunford 12. Is microdebt good for poor people? A note on the dark side of microfinance David Hulme 13. The managed ASCA model - innovation in Kenya's microfinance industry Susan Johnson, Nthenya Mule, Robert Hickson and Wambui Mwangi 14. Empowered to default? Evidence from BRAC's micro-credit programmes Shahin Yaqub

Do Peer Group Members Outperform Individual Borrowers? A Test of Peer Group Lending Using Canadian Micro-Credit Data

Abstract: Microfinance institutions now serve over 10 million poor households in the developing and developed world, and much of their success has been attributed to their innovative use of peer group lending. There is very little empirical evidence, however, to suggest that group lending schemes offer a superior institutional design over lending programs that serve individual borrowers.