Showing papers on "Microfinance published in 2009"

Performance and governance in microfinance institutions

Abstract: Accepted version of article published in the journal: Journal of Banking & Finance Published version available on Science Direct: http://dx.doi.org/10.1016/j.jbankfin.2008.11.009

The Impact of Microcredit on the Poor in Bangladesh: Revisiting the Evidence

Abstract: The most-noted studies on the impact of microcredit on households are based on a survey fielded in Bangladesh in the 1990s. Contradictions among them have produced lasting controversy and confusion. Pitt and Khandker (PK, 1998) apply a quasi-experimental design to 1991–92 data; they conclude that microcredit raises household consumption, especially when lent to women. Khandker (2005) applies panel methods using a 1999 resurvey; he concurs and extrapolates to conclude that microcredit helps the extremely poor even more than the moderately poor. But using simpler estimators than PK, Morduch (1999) finds no impact on the level of consumption in the 1991–92 data, even as he questions PK’s identifying assumptions. He does find evidence that microcredit reduces consumption volatility. Partly because of the sophistication of PK’s Maximum Likelihood estimator, the conflicting results were never directly confronted and reconciled. We end the impasse. A replication exercise shows that all these studies’ evidence for impact is weak. As for PK’s headline results, we obtain opposite signs. But we do not conclude that lending to women does harm. Rather, all three studies appear to fail in expunging endogeneity. We conclude that for non-experimental methods to retain a place in the program evaluator’s portfolio, the quality of the claimed natural experiments must be high and demonstrated.

Does microfinance empower women? Evidence from self‐help groups in India

Abstract: Microfinance programs like the Self Help Bank Linkage Program in India have been increasingly promoted for their positive economic impact and the belief that they empower women. However, only a few ...

Does Regulatory Supervision Curtail Microfinance Profitability and Outreach

Abstract: Regulation allows microfinance institutions to evolve more fully into banks, particularly for institutions aiming to take deposits. But there are potential trade-offs. Complying with regulation and supervision can be costly. The authors examine the implications for the institutions' profitability and their outreach to small-scale borrowers and women. The tests draw on a new database that combines high-quality financial data on 245 of the world's largest microfinance institutions with newly-constructed data on their prudential supervision. Ordinary least squares regressions show that supervision is negatively associated with profitability. Controlling for the non-random assignment of supervision via treatment effects and instrumental variables regressions, the analysis finds that supervision is associated with substantially larger average loan sizes and less lending to women than in ordinary least squares regressions, although it is not significantly associated with profitability. The pattern is consistent with the notion that profit-oriented microfinance institutions absorb the cost of supervision by curtailing outreach to market segments that tend to be more costly per dollar lent. By contrast, microfinance institutions that rely on non-commercial sources of funding (for example, donations), and thus are less profit-oriented, do not adjust loan sizes or lend less to women when supervised, but their profitability is significantly reduced.

Expanding microenterprise credit access: Using randomized supply decisions to estimate the impacts in Manila

Abstract: Microcredit seeks to promote business growth and improve well-being by expanding access to credit We use a field experiment and follow-up survey to measure impacts of a credit expansion for microentrepreneurs in Manila The effects are diffuse, heterogeneous, and surprising Although there is some evidence that profits increase, the mechanism seems to be that businesses shrink by shedding unproductive workers Overall, borrowing households substitute away from labor (in both family and outside businesses), and into education We also find substitution away from formal insurance, along with increases in access to informal risk-sharing mechanisms Our treatment effects are stronger for groups that are not typically targeted by microlenders: male and higher-income entrepreneurs In all, our results suggest that microcredit works broadly through risk management and investment at the household level, rather than directly through the targeted businesses

From Credit to Collective Action: The Role of Microfinance in Promoting Women's Social Capital and Normative Influence

Abstract: Can economic ties positively influence social relations and actions? If so, how does this influence operate? Microfinance programs, which provide credit through a group-based lending strategy, provide the ideal setting for exploring these questions. This article examines whether structuring socially isolated women into peer-groups for an explicitly economic purpose, such as access to credit, has any effect on the women s collective social behavior. Based on interviews with 400 women from 59 microfinance groups in West Bengal, India, I find that one third of these groups undertook various collective actions. Improvements in women s social capital and normative influence fostered this capacity for collective action. Several factors contributed to these transformations, including economic ties among members, the structure of the group network, and women's participation in group meetings. Based on these findings, I argue that microfinance groups have the potential to promote women s social capital and normative influence, thereby facilitating women s collective empowerment. I conclude by discussing the need for refining our understanding of social capital and social ties that promote normative influence.

Social efficiency in microfinance institutions

Abstract: Microfinance institutions (MFIs) are a special case in the financial world. They have a double financial and social role and need to be efficient at both. In this paper, we try to measure t...

The new moneylenders : are the poor being exploited by high microcredit interest rates?

Abstract: Over the past two decades, institutions that make micro loans to low-income borrowers in developing and transition economies have focused increasingly on making their lending operations financially sustainable by charging interest rates that are high enough to cover all their costs. They argue that doing so will best ensure the permanence and expansion of the services they provide. Sustainable (i.e., profitable) microfinance providers can continue to serve their clients without needing ongoing infusions of subsidies, and can fund exponential growth of services for new clients by tapping commercial sources, including deposits from the public. This paper asks whether micro credit rates are abusively high. Obviously there can be no one-size fits- all answer to this question, not only because there are huge variations in the interest rates and related circumstances of individual Micro-finance institutions (MFIs) around the world, but also because there is no agreed standard for what is abusive. There is an intense dispute about how high interest rates and profits would have to be to qualify as excessive, and indeed about whether terms like this have any useful meaning, at least in the arena of for-profit microfinance.

Assessing the incremental effects of combining economic and health interventions: the IMAGE study in South Africa

Abstract: OBJECTIVE: To explore whether adding a gender and HIV training programme to microfinance initiatives can lead to health and social benefits beyond those achieved by microfinance alone. METHODS: Cross-sectional data were derived from three randomly selected matched clusters in rural South Africa: (i) four villages with 2-year exposure to the Intervention with Microfinance for AIDS and Gender Equity (IMAGE), a combined microfinance-health training intervention; (ii) four villages with 2-year exposure to microfinance services alone; and (iii) four control villages not targeted by any intervention. Adjusted risk ratios (aRRs) employing village-level summaries compared associations between groups in relation to indicators of economic well-being, empowerment, intimate partner violence (IPV) and HIV risk behaviour. The magnitude and consistency of aRRs allowed for an estimate of incremental effects. FINDINGS: A total of 1409 participants were enrolled, all female, with a median age of 45. After 2 years, both the microfinance-only group and the IMAGE group showed economic improvements relative to the control group. However, only the IMAGE group demonstrated consistent associations across all domains with regard to women's empowerment, intimate partner violence and HIV risk behaviour. CONCLUSION: The addition of a training component to group-based microfinance programmes may be critical for achieving broader health benefits. Donor agencies should encourage intersectoral partnerships that can foster synergy and broaden the health and social effects of economic interventions such as microfinance.

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.

Efficiency of Microfinance Institutions: A Data Envelopment Analysis

Abstract: This study examines the cost efficiency of 39 microfinance institutions across Africa, Asia and the Latin America using non-parametric data envelopment analysis. Our findings show non-governmental microfinance institutions particularly; under production approach, are the most efficient and this result is consistent with their fulfillment of dual objectives: alleviating poverty and simultaneously achieving financial sustainability. However, bank-microfinance institutions also outperform in the measure of efficiency under intermediation approach. This result reflects that banks are the financial intermediaries and have access to local capital market. It may be possible that bank-microfinance institutions may outperform the non-governmental microfinance institutions in the long run.

Microfinance India: State of the Sector Report 2009

Abstract: Foreword Vipin Sharma Preface Overview: Despair to Hope Self-Help Group Bank Linkage Programme: Early Signs of a New Thrust Micro-Finance Institutions: Slow Recovery from a Disaster Andhra Pradesh: Dream Turns Nightmare Investment Climate: Fairweather Partners Social Performance Management: Beyond Responsible Finance and Customer Protection Policy Environment and the Regulation: Hard Times Ahead National Rural Livelihoods Mission: Will It Go beyond Finance? Financial Inclusion: March of the Banks Global Trends in Micro-Finance Future: Beginning Again? Appendix Bibliography

Impact of Microfinance on Rural Households in the Philippines

Abstract: This paper reports on the impact evaluation study of the Rural Microenterprise Finance Project (RMFP) in the Philippines. RMFP aimed to support efforts of the Government of the Philippines to strengthen rural financial institutions by assisting organizations that employed the Grameen Bank Approach (GBA) in providing credit to the poor. The project was implemented by the Peoples Credit and Finance Corporation (PCFC) and funded by the Asian Development Bank. The evaluation uses a quasi-experimental design with incoming clients of randomly selected participating microfinance institutions as the comparison group. An important innovation in the study is the inclusion of the appropriate number of former clients among the treatment group. Qualified non-participating households provide the control for area effects. The impact estimation uses the difference-in-difference estimation technique which effectively controls for the known sources of biases namely : nonrandom program participation (sample selection), non-random program placement, and non-random drop-out. The survey enumerated some 2,200 households divided evenly between treatment and comparison areas. It covered 116 villages spread throughout the three groups of islands (Luzon, Visayas, and Mindanao) and 38 microfinance institutions consisting of three types - banks, cooperatives, and non-government organizations. The survey results show the program appears to be hitting only a limited number of the intended target as majority of the existing clients and the incoming clients are found to be not poor according to official definition. The estimation results show a mildly significant positive impact on per capita income, per capita total expenditure and per capita food expenditure of loan availability. This impact, however, was found to be regressive negative on poorer households and positive only for households in the richest quartile. The program has enabled participants to reduce dependence on presumably higher-priced non-program loans as well as increased the proportion of those having savings. It has also made program clients busier with larger number of enterprises engaged in and more workers employed in these enterprises. No significant impact, however, was found on assets and human capital investments. The foregoing results led the authors to recommend that for microfinance programs to be effective as a poverty-alleviation tool there is a need to review and constantly monitor the effectiveness of the targeting procedures. In addition, it was pointed out that there maybe a need to assist the poor in selecting appropriate projects that not only ensure loan repayment but also generate ample profit as well.

The Microfinance Illusion

Abstract: In both developing and transition economies, microfinance has increasingly been positioned as one of the most important poverty reduction and local economic and social development policies. Its appeal is based on the widespread assumption that simply ‘reaching the poor’ with microcredit will automatically establish a sustainable economic and social development trajectory animated by the poor themselves. We reject this view. We argue that while the microfinance model may well generate some positive short run outcomes for a lucky few of the ‘entrepreneurial poor’, the longer run aggregate development outcome very much remains moot. Microfinance may ultimately constitute a new and very powerful institutional barrier to sustainable local economic and social development, and thus also to sustainable poverty reduction. We suggest that the current drive to establish the central role of microfinance in development policy cannot be divorced from its supreme serviceability to the neoliberal/globalisation agenda.

Financial Sector Development, Economic Growth, and Poverty Reduction: A Literature Review

Abstract: This paper reviews the theoretical and empirical literature on the role of financial sector development, with a view to deepening understanding of the rationale of development assistance to the financial sector of developing countries. The review leads to the following broad conclusions: (i) there are convincing arguments that financial sector development plays a vital role in facilitating economic growth and poverty reduction, and these arguments are supported by overwhelming empirical evidence from both cross-country and country-specific studies; (ii) there are however disagreements over how financial sector development should be sequenced in developing countries, particularly the relative importance of domestic banks and capital markets and, in developing the banking sector, the relative importance of large and small banks; (iii) while broadening the access to finance by microenterprises, small and medium-sized enterprises (SMEs), and vulnerable groups is recognized as critically important for poverty reduction, it is also widely believed that microfinance and SME credit programs need to be well designed and targeted to be effective. In particular, these programs need to be accompanied by other support services such as provision of training and capacity building, assistance in accessing markets and technologies, and addressing other market failures; and (iv) financial sector development and innovation will bring risks, and it is therefore essential to maintain sound macroeconomic management, put in place effective regulatory and supervisory mechanisms, and carry out structural reforms in developing the financial sector. The paper argues that these conclusions provide a strong justification for development assistance to target financial sector development as a priority area, and that, like any public sector intervention, such assistance should be designed to address market and nonmarket failures. The paper also highlights several areas where more research is urgently needed, in particular, how to sequence financial sector development, how to balance the need for financial innovation and that for economic and financial stability, and how to make microfinance and SME credit programs work better to reduce poverty.

Microfinance and Climate Change Adaptation

Abstract: In 2006, the Nobel Peace Prize was awarded to Mohammed Yunus and the Grameen Bank for their roles in developing microfinance as an ‘ever more important instrument in the fight against poverty’ (Norwegian Nobel Committee 2006). The following year, the award was given to Al Gore and the Intergovernmental Panel on Climate Change (IPCC), for their roles in educating the world about the unprecedented global challenge of climate change. In making these unusual and even controversial awards, the Nobel Committee recognised the remarkable fact that, in the space of just three decades, microfinance and climate change science have generated broad social movements grounded in the belief that these processes have the capacity to radically transform life around the world.

Does microfinance reduce rural poverty? Evidence based on household panel data from northern Ethiopia

Abstract: This paper evaluates the long-term impact of microfinance credit from the intensity of participation in borrowing. We use a four-round panel data set on 351 farm households that had access to microfinance in northern Ethiopia. Over the years 1997-2006, with three-year intervals, households are observed on key poverty indicators: improvements in annual consumption and housing improvements. The relatively long duration in the panel enables to measure household poverty changes between consecutive periods and see the long-run effects of exposure to microfinance from the intensity of participation borrowing. The fixed-effects model is innovatively modeled to account for potential selection biases due to both time-invariant and time-varying unobserved individual household heterogeneities. Results show that microfinance borrowing indeed causally increased consumption and housing improvements. A more flexible specification that allows for the number of times the household has been in borrowing also shows that repeated borrowing is effectively increasing consumption: the longer the borrowing relationship the larger the effect partly due to lasting credit effects. Impact estimates that do not account for such dynamic effects may therefore undermine the effect of MFI borrowing.

Measuring results of microfinance institutions : minimum indicators that donors and investors should track - a technical guide

Abstract: Funding agencies' microfinance interventions produce better results when design, reporting, and monitoring focus explicitly on key measures of performance that are measured and reported regularly The more transparent the results, the more likely funders are to learn from successes and failures, and to take corrective actions when needed Unfortunately, many projects that support retail microfinance providers fail to include such measurement This is especially true of programs that channel support indirectly (through networks or wholesale 'apex' facilities, for example) and credit components of non-financial programs (such as revolving funds lodged in social projects) This technical guide is written for funding agency staff who design or monitor projects that finance microfinance institutions (MFIs) or community-managed loan funds (CMLFs) This guide offers basic tools to measure performance in a few critical areas: 1) breadth of outreach, how many clients are being served? 2) Depth of outreach, how poor are the clients? 3) Loan repayment (portfolio quality), how well is the lender collecting its loans? 4) Financial sustainability (profitability), is the MFI profitable enough to maintain and expand its services without continued injections of subsidies? 5) Efficiency, how well does the MFI control its operating costs? This list has been kept short, and the treatment of indicators as basic as possible, to make this guide useful for non-specialists

Can Microfinance Reduce Portfolio Volatility

Abstract: Microfinance is arguably one of the most effective techniques for poverty alleviation in developing countries. Although traditionally supported by nongovernmental organizations and socially oriented investors, microfinance institutions (MFIs) have increasingly demonstrated their value on a stand‐alone basis, typically exhibiting low default rates combined with attractive returns and growth, encouraging greater commercial involvement. This study addresses a related issue—whether microfinance shows low correlation with international and domestic market performance measures. If so, it could form the empirical basis for MFI access to capital markets and performance‐driven investors in their search for efficient portfolios. Our empirical tests do not show any exposure of microfinance institutions to global capital markets, but significant exposure regarding domestic GDP, suggesting that microfinance investments may have useful portfolio diversification value for international investors, not for domest...

Governance and Performance of Microfinance Institutions in Mediterranean Countries

Abstract: This paper examines empirically the relation between governance mechanisms and the performance of Euro‐Mediterranean microfinance institutions (MFIs) in terms of outreach and sustainability. Specifically, we found that performance‐based compensation of managers is not associated with better performance of MFIs. The results identify trade‐offs between MFIs outreach and sustainability depending on larger board size, and on higher proportion of unaffiliated directors. Moreover, the study shows that the more women there are on the board the better the performance, and reveals that external governance mechanisms help MFIs to achieve better financial performance. This study also allows us to distinguish other factors leading to better sustainability such as Regulation, and the use of individual lending methodology. However, the MFIs, active as NGOs, seem to be more consistent with their social mission than with their financial performance.

Banks and Microbanks

Abstract: Using two new datasets, the authors examine whether the presence of banks affects the profitability and outreach of microfinance institutions. They find evidence that competition matters. Greater bank penetration in the overall economy is associated with microbanks pushing toward poorer markets, as reflected in smaller average loans sizes and greater outreach to women. The evidence is particularly strong for microbanks relying on commercial funding and using traditional bilateral lending contracts (rather than the group lending methods favored by microfinance nongovernmental organizations). The analysis considers plausible alternative explanations for the correlations, including relationships that run through the nature of the regulatory environment and the structure of the banking environment; but it fails to find strong support for these alternative hypotheses.

Microfinance tradeoffs : regulation, competition, and financing

Abstract: This paper describes important trade-offs that microfinance practitioners, donors, and regulators navigate. Drawing evidence from large, global surveys of microfinance institutions, the authors find a basic tension between meeting social goals and maximizing financial performance. For example, non-profit microfinance institutions make far smaller loans on average and serve more women as a fraction of customers than do commercialized microfinance banks, but their costs per dollar lent are also much higher. Potential trade-offs therefore arise when selecting contracting mechanisms, level of commercialization, rigor of regulation, and the extent of competition. Meaningful interventions in microfinance will require making deliberate choices - and thus embracing and weighing tradeoffs carefully.

Should Access to Credit be a Right

Abstract: Discussion on financial ethics increasingly includes the problem of exclusion of the poorer segments of society from the financial system and access to credit. This paper explores the ethical dimensions surrounding the concept of a human right to credit. If access to credit is directly instrumental to economic development, poverty reduction and the improved welfare of all citizens, then one can proclaim, as Nobel Prize Laureate M. Yunus has done, that it is a moral necessity to establish credit as a right. Arguments both supporting and opposing the concept of a right to credit are presented. While there may be general agreement that access to financial services may provide a pathway out of poverty, granting a universal right could induce perverse effects such as overindebtedness. Bearing in mind the ultimate goal of proponents of this right as well as the potential harmful consequences, this paper offers a new perspective on the question of access to credit based on a goal-right system.

Financial Development and the Efficiency of Microfinance Institutions

Abstract: This paper investigates whether the country-level financial environment in which microfinance institutions (MFIs) have to work affects their operations. In particular, we argue that the efficiency of MFIs is determined by the extent to which financial markets of countries are developed. On the one hand, well-developed financial markets provide an environment in which MFIs are able to flourish and increase their efficiency. On the other hand, however, well-developed financial markets may also substitute for MFIs, which reduces demands for their services, thus potentially reducing their efficiency. Given the fact that the relationship may go both ways, we empirically investigate the direction of the relationship between measures of financial development and measures of MFI efficiency, using data for 435 MFIs over the period 1997-2007.

Microfinance as a Poverty Reduction Tool: A Critical Assessment

Abstract: This paper attempts to provide a critical appraisal of the debate on the effectiveness of microfinance as a universal poverty reduction tool. It argues that while microfinance has developed some innovative management and business strategies, its impact on poverty reduction remains in doubt. Microfinance, however, certainly plays an important role in providing safety-net and consumption smoothening. The borrowers of microfinance possibly also benefit from learning-by-doing and from self-esteem. However, for any significant dent on poverty, the focus of public policy should be on growth-oriented and equity-enhancing programs, such as broad-based productive employment creation.