News & CommentaryArchive
Oct 21, 2010
Microfinance Impact and Innovation: Microfinance Impacts
We are blogging from the Microfinance Impact and Innovation Conference in New York City, an event co-hosted by Innovations for Poverty Action, the Financial Access Initiative, Moody’s, Deutsche Bank and CGAP. Given the semi-live nature of these blog posts, please forgive any typos, or unintentional errors or omissions.
In the second session of the morning, Dean Karlan from IPA and Yale, and Abhijit Banerjee and Esther Duflo from JPAL presented findings from the latest round of microfinance impact studies. We wrote here and here about the study presented by Banerjee, as well as the first impact study Karlan conducted in the Philippines with First Macro Bank. Today’s presentations offered new evidence from a follow-on studies in the Philippines, and new research out of Morocco.
First, Dean Karlan’s presentation from the Philippines: Karlan began with a high level overview of why impact studies are important, what they tell us and why researchers randomize, along with a summary of the two types of randomization used in impact studies to date. (For an overview on why randomized trials are important and useful, click on that first “here” in the previous paragraph.) He then followed with a presentation of findings from the two impact studies he has conducted in the Philippines, the first with First Macro Bank, the second which he is conducting with First Macro Bank and First Valley Bank specifically to identify what micro-credit recipients do with their funds.
First, a word on methodology: Karlan’s study subjects were chosen using a credit scoring methodology. Namely, the researchers expanded the bank’s normal pool of accepted clients to include a group that were “marginal,” i.e. they fell slightly below the bank’s standard threshold for credit worthiness. Half of the group that fell into this band were then offered credit.
The findings from the follow-on study with First Macro Bank and First Valley Bank showed that clients used the funds for all kinds of purposes – even though they were expressly given funding for entrepreneurial purposes. Around 46 percent of clients used new debt to pay down old debt, and 28 percent used funds for a single large household purchase. In all, 39 percent of the money goes unaccounted for, 15 percent is used to pay down other loans, 9 percent goes into the household and 37 percent is invested in the business. Curiously, Karlan’s study got at these results by asking clients the same questions in a number of different ways. Not surprisingly, when the banks ask clients why they want the funds only 2 percent of clients admit potential uses other than the business, even after the funds are given. Only when an independent surveyor asks indirectly do any relevant percentage of people admit to non-entrepreneurial uses for credit.
Esther Duflo presented the second set of new data of the morning, “fresh from the oven” in her words. Duflo’s study with the microfinance institution Al Amana took place in rural Morocco in areas previously unserved by formal financial institutions. In all, around 5000 households were captured in the study of the impact of a group liability microcredit product.
Since the people in the study would not have been exposed to formal financial services, the target method was expressly designed to offer services to a higher proportion of people who, based on assessments of baseline data, would be more likely to take-up loans. Despite these efforts and the heavy marketing of the bank, only 16 percent of those who were offered loans took them (interestingly, as with the Karlan data, a lot of the study participants lie in follow-on interviews about having taken a loan – why would they do that?)
So what was the impact on those credit recipients?
The study found no impact on household consumption.
The study found no improvements in welfare.
The study found no effect on the likelihood that a recipient would start a new business.
The study did not show an increased ability to deal with shocks.
The study did find for people who already had a business, however, that loan recipients were more likely to stop engaging in wage work and invest more in their businesses. Livestock owners were more likely to buy more livestock and of a different variety than they had previously owned (so cow farmers diversified with sheep, and vice-versa, creating a de factor savings). And agricultural business sales increased, they took on more employees and those employee wages went up. Non-agricultural businesses did not show the same positive effects and income, on average, did not increase, partly because increases in the household business were offset by the “substitution” effect of decreased wage work.
For Duflo, the findings confirmed for her a sense that micro-credit “is not like textbooks. It is an opportunity as opposed to an input, and as an opportunity it is embraced in different ways by different people.“
From my side, I wonder what we should think about the “substitution” effect away from wage work in favor of self-employment. What kind of work were those recipients doing that they gave up for their own agricultural production? Is this consolidation a good thing, or a sign that they are taking on increased risk?
Full disclosure: Innovations for Poverty Action is a client of Sona Partners, the sponsor of Philanthropy Action.