Can fingerprinting borrowers improve repayment rates? For micro-lending to be viable microfinance institutions need to ensure that their clients repay their loans. We worked with the Malawi Rural Finance Corporation (MRFC) to create a more reliable system for identifying and tracking, by fingerprinting borrowers. Fingerprinting improved repayment rates, especially for those borrowers predicted to have the worst repayment rates. Fingerprinted borrowers are as much as 40% more likely to fully repay their loan than non fingerprinted borrowers. Borrowers who were fingerprinted also took out smaller loans, perhaps to be sure of their ability to repay. Even with conservative estimates of the benefit of increased repayment and the cost of outsourced fingerprint matching, the results suggest an attractive cost-benefit ratio.
Can financial incentives work to help people quit smoking? The CARES (Committed Action to Reduce and End Smoking) Program, creates a commitment contract that provides financial incentives for smokers who wish to quit smoking. Smokers offered the product were more likely to be smoke-free 6 and 12 months afterwards!
Microfinance institutions have increased access to financial services over the last few decades, but provision in rural areas remains a major challenge. Traditional community methods of saving, such as ROSCAs can provide an opportunity to save, but do not allow savers to earn interest on their deposits as a formal account would, or provide a means for borrowing. Savings Groups attempt to address these shortcomings by forming groups of people who can pool their savings in order to have a source of lending funds.
This project is one of the few to rigorously evaluate the impact of a microcredit program. It takes advantage of the expansion of Al Amana, Morocco's largest microfinance institution, into rural areas of Morocco where access to formal credit is very low. 50% of households sampled in initial surveys indicated that they were in need of credit in the previous year, but never actually requested it.
Policy Issue:
Microcredit is the most visible innovation in anti-poverty policy in the last half-century, and in three decades it has grown dramatically. Now with almost 130 million borrowers, microcredit has undoubtedly been successful in bringing formal financial services to the poor. Many believe it has done much more, and that by putting money into the hands of poor families (and often women) it has the potential to increase investments in health and education and empower women. Skeptics, however, see microcredit organizations as extremely similar to the old fashioned money-lenders, making their profits based on the inability of the poor to resist the temptation of a new loan. They point to the large number of very small businesses created, with few maturing into larger businesses, and worry that they compete against each other. Until recently there has been very little rigorous evidence to help arbitrate between these very different viewpoints.
Few studies have rigorously quantified the impact of microcredit loans. IPA has partnered with Compartamos Banco to evaluate the social and economic impact of their principal village banking loan product. The study will measure outcomes at both the individual and community level, and will estimate the impact on microenterprise growth, beneficiary income, credit and savings behavior, as well as health and other factors.
This is one of a handful of new studies which provide a rigorous estimate of the impact of microfinance. Accepted applicants used credit to change the structures of their business investments, resulting in smaller, lower-cost, more profitable businesses. So while business investments did not actually increase, profitability did increase because the capital allowed businesses to be reorganized. This happened most often by shedding unproductive employees.
The results also highlight the importance of replicating tests and program evaluations across different settings. We are working towards that goal, and are currently implementing microfinance impact studies in Morocco, as well as continuing studies in the Philippines. See here for other studies on varying interest rates in Mexico, Peru and South Africa.
While savings research shows the promise of access to savings for specific demographics, i.e. entrepreneurs & members of ROSCAS, as well as through commitment devices, there is little evidence on impact of a simple savings account on the general population.
Policy Question:
The potential benefits of a formal savings account are manifold and include improved ability to cope with shocks, asset accumulation and space to plan for the future. There has been promising though limited evidence to date on the potential of access to savings accounts for the poor. Additionally, such studies have thus far focused on specific subsets of the population such as entrepreneurs or, for commitment savings studies, existing clients of a bank or microfinance institution. The current literature lacks studies that consider how generally poor households behavior changes when offered access to financial markets through a savings account.
In 2009 well over a million Filipino citizens worked overseas, collectively sending home billions of US dollars in remittances. The majority of overseas workers come from urban areas. This project explores some of the barriers to migration for rural inhabitants, such as lack of information, credit constraints, and the complex Philippines passport process.
Agriculture is a way of life for most people in Mali. The vast majority of cultivated land is used by small farmers for subsistence agriculture. Previous research has shown that returns to agricultural investment are high, but in practice many farmers do not take on profitable investments.
In addition to the lack of banking infrastructure, many other constraints limit the availability and effectiveness of savings services for the poor. There has been very little research to map the demand for services so that products can be designed with clients’ needs and cash-flow in mind. These constraints in the supply and demand for savings service point to the need for specialized market research and product development efforts. Efforts to unveil the actual needs and perceptions of low-income clients to better devise products and incentives for them may result in more rigorous savings behavior.
