September 4, 2008, Evelyn Stark

Randomized Control Trials (RCT) have recently been touted by some in the microfinance industry as the best (or only) way to truly measure impact of microfinance. Considering the dearth of any other “proof” that microfinance helps poor people fight poverty, it’s clear why randomized control trials hold so much appeal: It’s scientific, uses a counterfactual/control group (which some of our prior studies didn’t do at all) and has the attraction of a definitive answer. It doesn’t hurt that the economists running these trials often manage to come up with some pretty interesting and fun studies, to wit: Dean Karlan, Jonathon Zinman and Xavier Gine's recent paper - “Put your money where your butt is: a commitment savings account for smoking cessation” .

But, our question is: are we looking to RCTs to do too much? And, by leaning towards over-reliance on RCT, are we forgetting about the need to use the right tools for the right issues? Are we in danger of throwing away “OK” monitoring, evaluation and impact methods and tools instead of improving them to be more useful and accurate?

The 12th Economist article entitled “Control Freaks” was clearly skeptical about randomized controls and led me to very unscientifically survey some colleagues, and Google. I found the following issues elicited the most concern with randomized control trials (note -there were no randomistas amongst respondents – they may have answers for each point!):

• Difficulty in setting up a randomized trial (client selection, staffing, follow-up);
• Expense - cited as equal to the cost of the microfinance intervention being tested
• Ethical challenge - the control group is “excluded” from service for the period of the test
• Time – results are measured over a relatively long periods (at least 1 year) and therefore the inability to make changes to the product/service in that time
• Relative merit (time, cost & results) to good market research and product piloting seemed unclear, or negative
• Limited by the specificity of the research question; unable to probe nuance and context or make results replicable across programs in different contexts

It seems that the last three points in particular make a strong case against putting all of our efforts into RCT in today’s dynamic, competitive microfinance environment. As A. Bradford Hill “one of this century’s foremost biostatisticians” said (in 1965): “All scientific work is liable to be upset or modified by advancing knowledge”[1]. 

As our industry innovates and expands, can MFIs afford to lose a competitive edge while narrow questions are tested; And, as an industry, can we afford to forego the rigorous, impact analysis that RCT provides?

[1]Quoted from: “Preventing HIV Transmission: the role of sterile needles and bleach”

Not For Profit = No Profits?

August 27, 2008, Christoph Kneiding

Profit margins of MFIs that function as non-profit organizations have exceeded those of for-profit MFIs in 2005 and 2006 (see Figure). This seems to be counter-intuitive as one generally thinks of for-profits as more prone to maximize their profitability than their non-profit counterparts. Of course, we have to remind ourselves that non-profit is a legal form, and not a mission statement. There are two important factors that can help to explain the phenomenon we observe.

First, for-profits face higher costs than non-profits, for various reasons. Funds come increasingly from commercial lenders who want a higher return on their invested capital than is the case for donors. MBB data shows that in 2006, more than 90 percent of the average for-profit MFI portfolio (versus 57 percent for non-profits) was commercially funded, which incurs a higher financial cost. For-profits (which are generally incorporated as banks) also face higher regulatory costs, as financial supervisory bodies pose extensive requirements with regard to reporting and internal processes of these institutions. Lastly, for-profits do not enjoy tax-exemption of their profits, as is the case for non-profits. After-tax margins of for-profit MFIs are therefore even lower as the figures shown in the graph are calculated on a pre-tax basis.

But that’s just part of the story. For-profit MFIs tend to operate in more mature markets, which are characterized by higher levels of competition. In general, this leads to a drop in interest rates, which puts downward pressure on profit margins. Bolivia is a very good example for this phenomenon: from the early nineties until now, interest rates have dropped from 60 to 17 percent, mainly driven by the arrival of new players in the Bolivian market. It is reasonable to assume that profit-driven MFIs will continue to focus on more developed markets, where they increasingly will encounter competing institutions. Further pressure on profit margins can be expected.

Rhetorical Question: Is all this rhetoric good for Microfinance?

August 20, 2008, Evelyn Stark

(Why can't we all just get along)
We're in the middle of campaign season here in America and we're being bombarded with headlines about how this candidate is unqualified, and how that candidate is out of touch with the "common man". It's such a distraction that even the politically aware start to tune it out.

So, what does this have to do with microfinance? Recently I've been reading articles with headlines like: "Did Yunus Deserve the Nobel Peace Prize: Microfinance or Macrofarce?" as well as dueling articles and Op-Eds in the Economist and the Wall Street Journal that make it seem like microfinance only exists at rhetoric's polar opposites. All good. Or all bad.

At what point will it be all right to admit - to proclaim - that microfinance has a place in the toolkit of anti-poverty and pro-growth development? And, that it may not be the right tool in all circumstances; it may be a great driver and leader in some instances, and it may be useless or even negative in others? Is all of this name-calling helping us move forward as a field, or is it a distraction? Are there really so many competing (even nefarious?) interests at play? Are people trying to simply profit off the poor? Are poor-to-middling NGOs really trying to capture subsidies just to keep their headquarters staff employed?

Or, are we all imperfect, but striving towards the same goals? And, if so, can we agree that we need solid, profitable (you can call it sustainable) financial services firms (of many types) with strong financial and social interests and incentives in serving poor, underserved people? And, then can we agree to divide up our expertise to make that happen and move forward?

There are a lot of poor and very poor people who couldn't care less about the rhetoric, but who might find access to good financial services really useful.

Reaching the last mile in Vietnam?

August 4, 2008, Klaus Prochaska

Seventy to 80 percent of the poor in Vietnam have some kind of access to microfinance services, largely through the government-owned Vietnam Bank for Social Policies (VBSP). On a recent trip to Vietnam I had the chance to see up close how the VBSP reaches some 5 million customers with subsidized credit.

We accompanied VBSP loan officers on their trip to a remote settlement in the province of Hoa Binh, located in the mountainous areas northwest of Hanoi. Once a month, they drive to the most remote of a national total of 8,700 transaction points, and convert local authority offices into temporary "bank branches" to disburse loans and collect repayments.

During the seemingly endless trip on longwinded narrow roads it quickly became clear why no other provider of financial services had set up shop. The main square was inhabited by water buffaloes and the area was out of reach of any phone connection. The older women among the clients who slowly started to trickle in had blackened teeth - a byproduct of chewing betel nuts that has become a sign of beauty.

VBSP counts on the help of the Women’s Union, a sociopolitical “mass” organization which, according to our driver, comprises about 60 percent of all women in the country. For a fee, they undertake 6 out of the 10 steps that comprise the whole loan cycle. They advertise, organize eligible customers in groups, distribute and fill out loan applications, and also collect repayments. Actually disbursing the loans through the Women’s Union was discontinued years ago after some incidents of corruption.

Enlisting the cooperation of local authorities and sociopolitical organizations allows for reduced transaction costs. But not enough to run the subsidized loan program sustainably, which is widely criticized for its distorting effect on the market.

VBSP shared their plans of raising interest rates, which currently range from zero to 50 percent of market rate. They also intend to develop a mobile phone banking product to further decrease their cost of operations. Maybe VBSP could play a useful experimentation role with m-banking in Vietnam? The example of Caixa Economica’s use of correspondents in Brazil has shown that public agencies can take the lead in trying out new delivery methods. 

Are "upmarket" MFIs really more sustainable?

July 16, 2008, Christoph Kneiding

Can microfinance institutions reach poor people and cover their costs at the same time? In the graph below, we plotted Operational Self-Sufficiency (a common measure of the extent to which MFIs cover their costs) for three types of institutions: providers of “small”, “medium”, and “large” loans (as measured by the average loan balance in percent of GDP per capita). What difference do we see? Not much, in fact. The average operational self-sufficiency for the “up-market” MFIs is slightly higher, but in general the three curves are quite similar. This observation doesn’t change if we break down average loan balances into more subgroups.

In his blog post of June 20, Rich Rosenberg showed that loan size is one factor – but not necessarily the only one – that drives MFIs’ interest rates. Smaller loans tend to carry higher interest rates, probably because the effort involved in extending a $100 loan is practically the same as for a $1,000 loan. Putting all these observations together, it seems that MFIs offering smaller loans offset higher operational costs by a combination of charging higher interest rates to their clients and securing concessional sources of funding. But they do not, on average, need to cover more of their costs through recurring injections in the form of grants or equity funding than the average MFI in the MIX.

Where does this leave us in the old outreach-sustainability discussion? 10 years ago, fronts were hardened between a “poverty camp”, advocating that microfinance should first and foremost reach the very poor, and a “sustainability camp”, whose proponents argued that MFIs should target financial sustainability, starting with covering all their operating costs. People in the poverty camp feared that pursuit of financial objectives would impede MFIs’ ability to serve poorer clients. The graph above suggest a more optimistic conclusion: sustainability seems to be decoupled from outreach, and most poverty-focused MFIs seem to be able to factor their operational costs into their loan prices.

Girls, cows and the way the world should be

July 10, 2008, Evelyn Stark and Jamie M. Zimmerman, New America Foundation

Just released last week and swiftly making its way through the fast lanes of the internet, Nike Foundation's new video for its GirlEffect campaign is stunning and provocative. It resonates with the socially-minded, big hearted idealist in all of us. The video explains how global poverty eradication will come from empowering a girl through micro-credit: the loan enables her to purchase a productive, money making asset (a cow), which quickly snowballs into further financial and social opportunities, more assets, greater social, economic and political empowerment, and into economic development of entire nations and opportunities for all women around the world. You get the picture (but if not – you can watch it here: www.girleffect.org).

At the heart of this new campaign - started by the Nike and NoVo Foundations, with the support of the UN Foundation, Population Council, ICRW, Center for Global Development and Plan International - lies a core and founding ethos in the microfinance movement: empowerment through small loans to women. The powerful message and imagery in this video will likely resonate loudly and emotionally with a large, global audience. But it’s also a bit too simplistic in its portrayal of human, social and economic development.

Microcredit may be a catalyst for empowerment, but it will not solve disenfranchisement of girls and women without other mechanisms also working in their favor. These girls need legal empowerment and effective institutions to guarantee such rights. They need access to effective social services such as education and health to fully develop their human capital. They need institutions and systems (at the local and national level) that encourage their empowerment and advancement.

Of course we want and need to support girls to stand up for their rights to be cowherds, MPs, bankers, petty traders or even advertising executives! How we get there from the finance side might just be a microloan for a cow… or, maybe a savings club operating in a safe environment, with a trained mentor such as Population Council and K-Rep found in Kenya; or, a maybe it’s a Child Savings Account that matures just in time for secondary school that's needed (see: Xac Bank, Hatton Bank and an experiment in Uganda); or a free goat that might lead to college in the US as it did for Beatrice Birra.

The reality is that the presence of a cow, food cart or other productive asset a microloan can facilitate will not automatically improve a girl's life. Between the microloan to a girl and a world free of poverty, there is a chasm filled with other problems that need to be solved.

The video will be an effective starting point to raise awareness of the potential power of microfinance. But it’s also a challenge: what can we do to make it a reality?

Foodflation

July 8, 2008, Elizabeth Littlefield

When a family already spends 80% of their income on food and the prices double - what do they do? The food crisis affects poor people most acutely. Foods that are mainly consumed by the poor have seen some of the largest price rises; sorghum rose 95% in 2007-8. Some of the causes of the food crisis - food shortages, un-manageable price increases for poor and very poor households, and export controls - demand rapid action. Others - such as increased bio-fuel production, low agriculture productivity in Africa, and weak market infrastructures - will require longer term solutions.                                                    

Feeding people in crisis is obviously the most urgent issue. For very good reasons, donors and governments are coming under pressure to disburse large sums quickly. Since MFIs have a branch network and many clients, it’s often tempting to think that we can use them to distribute emergency assistance. In past crises, when MFIs and loan officers do the distribution directly, this has proven to be very damaging to MFIs’ commercial principles, and their ability to survive to provide services in the long run. But it’s hard to even talk about preserving commercial principles when people are going hungry. So, what should we do?

A better approach in previous crises, although not without risks, has been for microfinance institutions to partner with relief organizations to distribute food or other forms of relief, with clearly delineated roles (like relief staff wearing clearly different T shirts from loan officers or visiting at different times).

When clients are severely affected and loan repayments can’t be met, some MFIs have rescheduled loans, provided emergency loans that help pay the original one, or temporarily reduced or suspended payments. Some MFIs have also relaxed compulsory savings requirements until the situation abates, though this has had mixed long term effects. And ironically savings can be the most important thing for poor families in crisis.

What role should microfinance and MFIs play in the food crisis? I’d like to hear your views on where microfinance can help meet urgent needs while preserving long term viability.

Why do microcredit interest rates vary so dramatically around the world?

June 20, 2008, Richard Rosenberg

The global average is about 35 percent, but the average in Mexico is above 60 percent and in Sri Lanka is below 20 percent. Small loan sizes are the most commonly cited reason why microcredit rates are higher than normal bank rates: microcredit is a “high-touch” business, and MFIs have to process thousands of tiny transactions. But here’s a graph of MFIs in 33 countries, showing pretty clearly that loan size by itself doesn’t explain the differences between their average interest rates. 

We see several other dynamics at work:

• Operating costs can be pushed up by factors other than loan size, such as geographic dispersion of rural borrowers, or an unusually expensive labor market, both of which affect costs in Mexico. Age of the MFI is another factor. Surprisingly, scale doesn’t seem to make much difference: statistical analysis by the MIX shows that economies of scale tend to level off after the MFI gets its first 2,000 or so clients. 

• Political pressure can make a difference. Some countries impose a legal cap on interest rates to keep them “affordable,” even though this may restrict the availability of microloans. In other countries (like Ethiopia), the government provides a lot of microfinance at very low rates, and MFIs feel political pressure to do the same. 

• Management objectives differ. In countries like Bangladesh, managers felt that high interest rates were inconsistent with their social mission, and consequently set rates at levels that would produce very little profit, at least in the early years. In Latin America, many MFIs thought that attracting commercial capital was the best way to expand their social outreach, and wanted higher profits to attract such capital. We are now seeing players in microfinance—only a few so far—whose objective is profit, pure and simple: of course, such investors want interest income to be as high as possible.

• Competition gives borrowers choices, which puts downward pressure on interest rates, forcing MFIs to become less profitable and/or more efficient. This is clearly happening in some places—e.g., Bolivia, where interest rates have dropped from 60 percent in the early 1990s to about 17 percent now. But competition doesn’t produce this result everywhere: rates have not dropped very much in Bangladesh.

What do you think? Are there other explanations for interest rate differences that we’ve overlooked? 

Welcome to CGAP's microfinance blog

May 29, 2008, Elizabeth Littlefield

We’re launching this blog as a way for CGAP’s microfinance specialists to talk about research they are working on and to share interesting observations about issues around access to finance that they come across from their study, mission and advisory work. We hope that you’ll enjoy the opportunity to engage in the conversation, and share your own observations by providing your comments and responses to relevant posts.
 
Microfinance is facing a moment of reckoning. Last month, CGAP, along with Deutsche Bank and the Boulder Institute, gathered leaders from across the industry, and all ends of the spectrum from commercial to non-commercial approaches, to discuss some core questions facing microfinance. How can the industry navigate the choppy waters of commercial credit, while maintaining its social and development objectives? What should be the future direction of the industry? A push on growing numbers, or a focus on using subsidies to reach those at the bottom – and are these forces at odds?
 
Out of that meeting came the Pocantico Declaration, a statement of intent by the leaders that the microfinance community needs to come together to agree principles for operating in this new environment, where microfinance is enjoying a much higher profile and a flood of funding.
 
I firmly believe that we need to establish a code of ethics to help us navigate between commercialization and our social mission. To do so, we should neither abandon the years of progress that have been made in professionalizing this industry, nor should we abandon our principles in treating poor clients fairly and with respect. For me, the key is to recognize that microfinance is a service industry. We must improve our service, offering a broader range of products for the poor clients we serve.
 
Commercial pressures may be painful. But they are rigorous on governance, management, cost control, transparency – all areas where the microfinance industry has made considerable progress in recent years, and where we must not slip back. Ultimately we hope that competition will propel institutions to reach exponentially more clients who need access to these services.
 
Without firm commercial foundations, it is questionable whether microfinance will become the profitable business that it needs to be in order to survive and help more poor people. And without clear values and an ethic first and foremost to serve the poor, it certainly won’t survive in a form that any of us will recognize as microfinance.