Published on February 5, 2008
Microfinance: Transactions at the bottom of the pyramid Jonathan MorduchNew York UniversityOctober 26, 2004World Bank: Microfinance: Transactions at the bottom of the pyramid Jonathan MorduchNew York UniversityOctober 26, 2004World Bank What we don’t know well (but should): What we don’t know well (but should) Microfinance impacts on poverty, economy, etc. Sensitivity of demand to interest rates Can poorer pay more than richer? Declining marginal returns vs. low skill/access/scale? Returns to capital of different segments Who exactly is served by which microfinance institutions? Tradeoff of outreach and sustainability Questions today: Questions today What happens on the ground? What are the market segments? How is finance used? Dimensions of access? The microfinance landscapeMicrocredit Summit data: The microfinance landscapeMicrocredit Summit data But it is a limited view of access: But it is a limited view of access Also: Credit unions Commercial and government banks Informal finance No map from access to capability Rural India (AP & UP): Formal credit outstanding by source: Rural India (AP & UP): Formal credit outstanding by source Bank Accounts? : Bank Accounts? India (UP and AP-rural) 48 % Brazil (11 urban areas) 43 Colombia (Bogotá city) 41 Mexico (México city) 25 Incl. compulsory savings (AFORES) 48 Source: Anjali Kumar et al “Access to Financial Services - What Do we Know Across Countries? Preliminary Comparisons”. Presentation at World Bank Finance Forum 2004 USA (households) 87 Slide 8: Demand for formal credit Source: Anjali Kumar et al “Access to Financial Services - What Do we Know Across Countries? Preliminary Comparisons”. Presentation at World Bank Finance Forum 2004 Rural India: Source of last non-formal loan, by % of households: Rural India: Source of last non-formal loan, by % of households Source: Basu et al, Scaling up, 2004. (Shamika Ravi: In Kerala, coops substitute for friends and relatives.) India: Uses of last informal loan, by % of households: India: Uses of last informal loan, by % of households Source: Basu et al, Scaling up, 2004. Indonesia: Reported primary uses for savings: Indonesia: Reported primary uses for savings Business Uses 16% Working capital 13 Buy building, equipment, vehicle 3 Non-business consumption 35% School fees 14 Medical expenses 3 Household consumption 13 Wedding/funeral/religious holiday/etc. 5 Finance and assets 6% Purchase land, housing 6 Pay loan 0 Other use or not applicable 39% Source: 2000 Survey of 201 Bank Rakyat Indonesia clients. Unweighted. Lessons from Financial Diaries: Lessons from Financial Diaries Financial diaries in S. Asia Poor, very poor and near-poor households were surveyed in detail about finances over a year. Very small samples (30-40 households, in some cases more). But rich data. India example In India, households enter a fresh financial arrangement – with a moneylender, money guard, savings club, or formal provider, among others – on average every two weeks. Main findings: 1) Respondents patch a wide array of informal services and devices together with semi-formal and formal services. 2) Those services are used intensively. Bangladesh diaries: Bangladesh diaries Bangladesh example: On average the Bangladeshi households push or pull through financial services and devices each year a sum of money ($839) =2/3 of their annual cash income. In Bangladesh, a sample of just 42 households were found to have used, between them, • 33 types of service or device during the year • No household used less than 4 • 1/3 of them used more than 10. Sum: Household financial management: Sum: Household financial management Active cash flow management Turning small flows into large lumps Smoothing income and consumption Household is the economic unit Active portfolio management Managing assets, jobs, income streams Managing multiple lenders Microfinance is just one component Microfinance loans make up 10-15% of total capital of the households surveyed (USAID AIMS project). “Access” has a quality dimension: “Access” has a quality dimension Financial access is not a yes/no question. Not just: do some people have access and others don’t? The real issue: Do households have access to a reliable, reasonable-quality set of tools and mechanisms? Financial ideals for improving portfolio management: Reliability Convenience Continuity Flexible range of services Financial ideals for improving portfolio management Reliable services: Rule-bound services in which transactions are made on the promised date in the promised sum at the promised cost. Not the same as regulated financial services. In Bangladesh NGOs are more reliable lenders than formal banks. Reliable services India: actual loan costs > nominal rates: Source: Priya Basu / World Bank-NCAER Rural Finance Access Survey (2003) Median interest rate per year Weeks until loan approval India: actual loan costs > nominal rates Bribes? Convenient services: The opportunity to make all kinds of transactions (loans and repayments, deposits and withdrawals) frequently, close to the home or business quickly, privately and unobtrusively. Convenient services Bank branches per person: Bank branches per person Continuous: Services that cater to continuing and long term needs, such as a sequence of loans, or storing lifetime savings. India’s Integrated Rural Development Programme failed its intended users by lacking this: one study showed that only 11% of all IRDP borrowers borrowed more than once. Continuous Flexible services: Allow poor people: to make pay-ins (savings deposits and loan repayments) in any sum at any time, and to take out sums (loans and savings withdrawals) in a wide range of values, quickly and conveniently. Flexible services Flexible services (more): Services that are not flexible in this way fail to serve the poor well because they fail to match their fragile and unpredictable cash-flows and spending needs. Flexible services (more) Supply side: market segments?: Supply side: market segments? Pensions Insurance Marguerite Robinson: Microfinance Revolution. World Bank 2001. < 75 cents/day? Destitute? Finance? Indonesia: direct “professional” assessment of credit-worthiness: Indonesia: direct “professional” assessment of credit-worthiness Enumerators were asked at the very end of the survey: “Given the salary and pension income as well as the profit-loss calculation and balance sheet above, would this household be feasible to be granted a loan if needed?” [with detailed follow-up questions] Would the enumerator make a loan to this household?: Would the enumerator make a loan to this household? Saving and Borrowing in Indonesia, 2002: Saving and Borrowing in Indonesia, 2002 10 120 237 470 1146 40 Probability of being judged feasible to borrow 1 .8 .6 .4 .2 0 Probability of borrowing Probability of saving Poverty line Per capita income (1000 Rp) Concluding thoughts: Concluding thoughts Quality matters: “current access to a bank” does not mean “satisfactory access to banking”. Frontiers have not been reached: deeper outreach is possible, perhaps on a commercial basis Need mechanisms tailored to cash flows, that fit into household portfolios Household surveys are needed to learn more. Experiments can help in assigning causality. Gains to both large, representative surveys and smaller, richer studies.