The Impact of Business Training and Capital for High Potential Entrepreneurs in Colombia

Small and medium enterprises (SMEs) are thought to be important drivers of growth in developing economies, but entrepreneurs in these countries face many barriers, including poor access to training, finance, and business networks. In Colombia, Fundación Bavaria’s “Destapa Futuro” (Open the Future) program identifies promising enterprises and provides them with a suite of financial, technical, business, and training resources. Researchers found that the trainings did not affect key business outcomes, such as sales and profits, but helped entrepreneurs to expand their business networks. 
For additional information on current SME Initiative projects, click here.
Policy Issue:
Small and medium enterprises (SMEs) are thought to be important sources of innovation and employment in developing countries, due to their flexibility in responding to new market opportunities and their potential for growth. However, entrepreneurs face a number of barriers to expanding their businesses and employing more workers, including constrained access to credit, lack of management skills, and unfavorable government regulation. Business training, capital, and mentorship are possible tools that could help SMEs overcome these barriers, but existing evaluations of business training programs and capital injections for entrepreneurs have found mixed results. Additional research is needed to understand how training programs should be designed and delivered in order to best help entrepreneurs develop their operations and foster economic growth.
Context of Evaluation:
Fundación Bavaria, a foundation started by one of the largest beverage companies in Colombia, works to foster entrepreneurship in Colombia through an intensive, year-long program called “Destapa Futuro” (Open the Future). The program uses a competitive process to identify entrepreneurs with promising business plans or small start-ups and provides them with business training, capital, technical advice, and the opportunity to network with investors. Since 2005, Bavaria has spent close to $10 million on the program, trained thousands of entrepreneurs, and financially assisted more than 200 businesses. 
Destapa Futuro targets relatively experienced and educated entrepreneurs. The average participant was 36 years old, had 16 years of education, and had four years of experience as an entrepreneur. Seventy-three percent were male. During the fifth round of Destapa Futuro in 2010-2011, these participants received business training from two organizations that support entrepreneurs, the Centro de Formación Empresarial (CFE) and Endeavor Colombia. 
Description of Intervention:
Researchers evaluated Destapa Futuro’s impact on business outcomes, the difference between the two organization’s different training strategies, and the relative impact of receiving prizes in cash or in kind. In order to participate in the program, entrepreneurs completed an online application, which included questions on business characteristics, leadership potential, experience in business administration, and potential social impact. From the database of 8400 applications 475 candidates, half of them with business plans and the other half with existing start-ups, were selected and ranked. 
This pool of 475 entrepreneurs was divided into three groups:
  • The top 25 entrepreneurs all received the Endeavor training. Because their participation in the training program was not randomly assigned, they were not part of the study sample.
  • The following 100 entrepreneurs were randomly assigned to receive training from either Endeavor or CFE.
  • The remaining 350 entrepreneurs were randomly assigned to either the CFE training group or the comparison group, which did not receive any training.
Both the Endeavor and CFE trainings included modules on financial management, marketing and business plan development. Endeavor offered an in-person training, delivered in two two-day sessions. All classes had a maximum of 20 entrepreneurs per trainer. In addition to lectures, each entrepreneur participated in several one-on-one discussions with program coordinators, trainers and mentors. CFE used a combination of online learning and in-person classes.  In the online component, which consisted of four modules over one month, participants were assigned to groups of 18-21 students. They completed online modules with homework assignments, participated in online forums, and collaborated via email and phone. The entrepreneurs who completed homework and participated in forums were eligible for the in-classroom training, which consisted of four days of classes with the same tutor assigned during the online training. 
After the CFE and Endeavor trainings were completed, the 100 entrepreneurs with the best business plans and course performance were selected to receive an additional coaching session in preparation for the business plan presentation that would determine the prize winners. The coaching session provided contestants with feedback on content and style of their presentations. After the presentations, the best 60 entrepreneurs were awarded a prize to fund their business.
In order to test how having the flexibility to choose how to spend the prize money affected business outcomes, half of the winners were randomly assigned to receive cash, and the other half received an in-kind prize. Cash prizes ranged from about 5,600 USD to 56,000 USD (10-100 million COP). Fundacion Bavaria determined the nature of the in-kind prizes based on the entrepreneur’s requests and available resources, and they included business equipment, marketing and advertising materials and other business investments.  Forty winners were also randomly selected to receive mentorships with Bavaria executives, who listened to business plan presentations, gave advice, and suggested potential contacts.
Results and Policy Lessons:
Impact on business outcomes: Entrepreneurs who participated in the CFE training did not have higher sales, costs, profits or number of employees than the entrepreneurs who did not receive any training.  Entrepreneurs in the CFE training were just as likely to start a company as entrepreneurs who did not receive training. Similarly, entrepreneurs who participated in the Endeavor training did not have significantly different business outcomes compared to those who participated in the CFE training.
One of the goals of the Destapa Futuro program was to help entrepreneurs expand their business networks by meeting fellow entrepreneurs, trainers and mentors. Entrepreneurs in the CFE training who did not have existing start-ups were more likely to secure a contact with a partner, ally or investor than entrepreneurs who did not participate in the training. The Endeavor training was more beneficial for network expansion for entrepreneurs with existing start-ups, while the CFE training was more beneficial for entrepreneurs with business plans only.
In-kind versus cash prizes: Compared to recipients of cash, winners of in-kind prizes did not have significantly different sales, profits or costs. The type of prize also did not influence investment choices of entrepreneurs, with the majority investing their winnings into machinery and equipment. Since the type of prize did not affect outcomes of entrepreneurs, and it was logistically easier and faster to disburse cash prizes, in this context cash may be a preferred option.
In the sixth round of Destapa Futuro, Bavaria Foundation modified the program to be more financially sustainable while providing more personalized support to entrepreneurs.

Impact of Rural Microcredit in Morocco

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. With more than 200 million borrowers,1 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.

Context of the Evaluation: 

In the past, most microfinance services in Morocco have been concentrated in the urban and peri-urban areas, while people in rural areas used various forms of informal credit. The level of access to formal credit from a bank or financial institution is very low in these locations: the initial surveys of this project showed that only 6 percent of those in comparison villages borrowed from formal credit sources.

Between 2006 and 2007, Al Amana opened around 60 new branches in sparsely populated rural areas. The main product Al Amana offers in rural areas is a group-liability loan, and, since March 2008, individual loans for housing and non-agriculture businesses were also introduced in these areas. Groups were formed by three to four members who agreed to mutually guarantee the reimbursement of their loans, with amounts ranging from MAD 1,000 (Moroccan dirhams) to MAD 15,000 (US$124 to US$1,855) per group member. Individual loans were also offered, usually for clients that could provide some collateral.

Details of the Intervention: 

Within the catchment areas of new MFI branches opened in areas that had previously no access to microcredit, 81 pairs of matched villages were selected. Within each pair, one village was randomly selected to receive microcredit services just after the branch opening, while the other received service two years later.

The baseline survey was grouped in four waves to follow Al Amana’s timeline of branch openings between 2006 and 2007. Data on socio-economic characteristics, households’ production, members’ outside work, consumption, credit, and women’s role in the household were collected among a sample of households. An endline survey was administered two years after Al Amana intervention started in each wave.

By the time of the endline survey, 17 percent of surveyed households living in treatment villages had taken a loan from Al Amana. Over three-fourths of those who had taken loans from Al Amana received group-liability loans, and borrowers were predominantly men. Households in areas where credit was offered had borrowed an average total of 10,571 MAD (US$1,310).

Results and Policy Lessons: 

Al Amana program increased access to credit significantly: households were 8 percentage points more likely to have a loan of some kind in treatment villages relative to comparison villages, where around one-quarter of households had loans. The main effect of improved access to credit was to expand the scale of existing self-employment activities of households, including both keeping livestock and agricultural activities.

Among livestock-rearing households, there was an increase in the stock of animals held. Across all households, microcredit offers generally increased sales, household consumption, and profits. However, effects on profits were mixed across business types. While more profitable businesses in microcredit villages increased their profits, profits fell for businesses in microcredit villages that already made relatively small profits. While overall self-employment income increased in villages offered microcredit, this increase was accompanied by a decline in income from day labor and salaried positions. This labor tradeoff resulted in no overall change in income levels between treatment and comparison villages.

[1] CGAP. “Financial Inclusion” Accessed: 2015. 01.20

Borrower Responses to Fingerprinting for Loan Enforcement in Malawi

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.

Policy Issue:                                                                                                                      
Identity theft is a common crime the world over. In developing countries, the damage caused by identity theft and identity fraud goes far beyond the individual victim, however, and ultimately creates a direct impediment to progress, particularly in credit markets. Biometric technology can help to reduce these problems. A biometric is a measurement of physical or behavioral characteristics used to verify or analyze identity. Common biometrics include a person’s fingerprints, face, iris, or retina patterns; speech; or handwritten signature. These are effective personal identifiers because they are unique and intrinsic to each person, so, unlike conventional identification methods (such as passport numbers or government‐issued identification cards), they cannot be forgotten, lost, or stolen.
Biometric technology can improve access to credit and insurance markets, especially in countries that do not have a unique identification system to prevent identity fraud—the use of someone else’s identity or a fictitious one to gain access to services otherwise unavailable. In the case of credit, biometric technology can make the idea of future credit denial more than an empty threat by making it easier for financial institutions to withhold new loans from past defaulters and reward responsible past borrowers with increased credit.
Context of the Evaluation:
With 80% of its population residing in rural areas, Malawi’s economy is focused on agriculture.1 In these rural areas where there is limited access to credit, farmers, often have difficultly investing in agricultural inputs such as fertilizer that can dramatically increase harvest size.  
To fill this gap in demand for credit, Malawi Rural Finance Corporation (MRFC), a government-owned microfinance institution, provides a loan product designed for farmers purchasing “starter kits” from Cheetah Paprika Limited (CP). CP is a privately owned agri‐business company that offers extension services and a package of seeds, pesticides, and fungicides at subsidized rates in exchange for farmers’ commitment to sell the paprika crop to CP at harvest time. The MRFC loans, roughly 17,000 Malawi Kwacha (approximately US$120), come in the form of vouchers, allowing borrowers to collect inputs from pre-approved suppliers who directly bill MRFC. Expected yield for farmers using two bags of fertilizer, the maximum quantity covered by the loan, on one acre of land is between 400‐600kg, compared to 200kg with no inputs.
Details of Intervention:
Smallholder farmers organized in groups of 15‐20 members applied for agricultural input loans to grow paprika and were randomly allocated to either a treatment or comparison group. The study sample covered four districts of the country and consisted of 249 clubs with approximately 3,500 farmers. In keeping with standard MRFC practices, farmers were expected to raise a 15% deposit, and were charged interest of 33% per year (or 30% for repeat borrowers).
After the baseline survey was administered to individual farmers gathering information about demographics, income, assets, risk preferences, and borrowing activities, a training session was held for all clubs on the importance of credit history in ensuring future access to credit. Then, in treatment clubs only, fingerprints were collected as part of the loan application and an explanation was given that this would be used to determine their identity on any future loan applications. Farmers in treatment clubs were given a demonstration of how a computer could identify an individual with a fingerprint scan. In the absence of fingerprinting, identification of farmers relied on the personal knowledge of loan officers.
MRFC loan officers, informed of which groups were fingerprinted, proceeded with normal loan application screening and approval. An endline survey was administered after the harvested crops were sold to CP.
Within the subgroup of farmers who had the highest default risk, based on risk taking and default behavior, fingerprinting led to increases in repayment rates of about 40 percent. In contrast, fingerprinting had no impact on repayment for farmers with low default risk.  Fingerprinted borrowers requested smaller loans amounts and devoted more land and inputs to paprika, thus diverting fewer resources to other crops compared to their non‐fingerprinted counterparts.
A rough cost‐benefit analysis of the pilot experiment suggests that the benefits from improved repayment greatly outweigh the costs of biometric equipment and fingerprint collection, which accounts for basic training and the time for credit officers to collect biometric data. The benefit‐cost ratio is 2.27.
This study suggests, therefore, that lending institutions may reap benefits by using biometric technology to identify borrowers and enforce loan repayment.
1 CIA World Factbook, "Malawi." Available from


The Impact of Microcredit in the Philippines

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

Policy Issue: 

Microcredit, or the practice of providing very small loans to the poor, often with group liability, is an increasingly common tool intended to fight poverty and promote economic growth. But microlending has expanded and evolved into what might be called its “second generation,” often looking more like traditional retail or small business lending where for-profit lenders extend individual liability credit in increasingly urban and competitive settings. The motivation for the continued expansion of microcredit is the presumption that expanding credit access is an efficient way to fight poverty and promote growth. Yet, despite optimistic claims about the effects of microcredit on borrowers and their businesses, there is relatively little empirical evidence on its impact.

Context of the Evaluation: 

First Macro Bank (FMB) is a for-profit lender that operates in the outskirts of Manila. A second generation lender, like many other Filipino microlenders, FMB offers small, short-term, uncollateralized credit with fixed repayment schedules to microentrepreneurs. Interest rates at this bank are high by developed country standards: several up-front fees combined with a monthly interest rate of 2.5 percent produce an effective annual interest rate greater than 60 percent.

The borrowers sampled in this study are representative of most mircrolending clients; they lack the credit history or collateral which are needed to borrow from formal financial institutions like commercial banks. Most clients are female (85 percent), and average household size (5.1 individuals), household income (nearly 25,000 Filipino pesos per month), and levels of educational attainment (44 percent finished high school and 45 percent had postsecondary or college education) were in line with averages for the area. The most common business owned by these clients is a sari-sari store, or small grocery/convenience store (49 percent own one). Other popular occupations among clients are in the service sector, such as hair dressing, barbering, tailoring, and tire repair.


Details of the Intervention: 

The researchers, with FMB, used credit-scoring software to identify marginally creditworthy applicants based on business capacity, personal financial resources, outside financial resources, personal and business stability, and demographic characteristics. Those with scores falling in the middle comprised the sample for this study, totaling 1,601 applicants, most of whom were first time borrowers. They were randomly placed in two groups: 1,272 accepted applicants served as the treatment and 329 rejected applicants served as the comparison. These rejected applicants could still pursue loans from other lenders, but it is unlikely they obtained one due to their marginal creditworthiness. 

Approved applicants then received loans of about 5,000 to 25,000 pesos, a substantial amount relative to the borrowers’ incomes—for example, the median loan size (10,000 pesos, or USD $220) was 37 percent of the median borrower’s net monthly income. Loan maturity was 13 weeks, with weekly repayments, and with a monthly interest rate of 2.5 percent. Several upfront fees combine with the interest rate to produce an annual percentage rate of over 60 percent.

Data was collected on business condition, household resources, demographics, assets, household member occupation, consumption, well-being, and political and community participation one to two years after the application process was completed.


Results and Policy Lessons: 

Impact on Borrowing: Being randomly assigned to receive a loan did increase overall borrowing: the probability of having a loan out in the month prior to the survey increased by 9.4 percentage points in the treatment group relative to comparison. 

Impact on Business Outcomes: Accepted applicants used credit to shrink their businesses. Treated clients who owned businesses operated 0.1 fewer businesses and employed 0.27 fewer paid employees. One explanation could be that these smaller businesses cost less and are thus more profitable. Perhaps clients would more readily invest in and grow their businesses if loan proceeds are tied to detailed business planning or closer monitoring by the lender. 

Impact on Risk Management: Evidence suggests that increased access to formal credit complements, rather than crowds-out local and family risk-sharing mechanisms. Treated clients substituted away from formal insurance into informal risk sharing mechanisms: there was a 7.9 percentage point reduction in holding various types of formal insurance, including life, home, fire, property, and car insurance, and treated clients reported increased access to informal sources of credit in an emergency, such as family and friends. In all, these results suggest that microcredit improves the ability of households to manage risk by giving them additional options: using credit instead of insurance or savings, and strengthening family and community risk-sharing. 

Determinants of Microcredit Delinquency in the Philippines

Intuition suggests that certain personality types are predisposed to loan default. Accurately identifying these personality types could have profound implications for consumer banking policy, and also important lessons for our understanding of why credit markets may fail. In partnership with the Rural Bank of Mabitac in the Philippines, researchers implemented two experiments and a survey to predict if prospective clients with various personality traits would pay back their loans. The study found that both individuals with higher moral costs and individuals who were the least naïve displayed lower default rates than other groups. The study also found that that survey-based social capital measures are not predictive of loan default for these individual loans, contrary to the results from a prior study with group loans. More general personality index measures were not good predictors of default, either.

Policy Issue:

In microfinance, lending institutions have come to rely on the knowledge of the group to identify and screen out less trustworthy borrowers.  With more traditional, individual-liability lending programs, institutions rely on credit investigation and the subjective intuition of credit officers to screen clients. While intuition may tell us that certain personality types are predisposed to loan default, there is little evidence to indicate which personality types, if any, are predisposed to not pay back loans. Accurately identifying personality characteristics that make a person more likely to default could have profound implications for consumer banking policy, and also important lessons for our understanding of why credit markets may fail.

Context of the Evaluation:

The Rural Bank of Mabitac, the partner in this study, aims to provide sustainable financial assistance to microentrepreneurs in the areas of Laguna and Quezon in the Philippines. The bank, which has over 4,000 microfinance clients, has a very high default rate of 71 percent (default defined as not completing full payment on or before the maturity date of loan).  This study took place from 2005 to 2006 in various locations across the island of Luzon in the Philippines.

Participants in the study were mostly female clients of a the bank. The vast majority were entrepreneurs, and the most common form of business was corner stores. Most of the participants had secondary or post-secondary education and were relatively wealthy by national standards.

Details of the Intervention:

To find out if people with certain personality traits are more likely to default on their loans, researchers collected information about clients’ personalities, then tracked their repayment behavior over a one-year period.  

The Rural Bank of Mabitac provided researchers with the financial transaction data through one year for all of the subjects involved in the study. Bank staff conducted two experiments and a survey immediately after clients received approval for a new individual loan.

The first experiment was designed to identify subjects with high moral standards. Bank staff interviewed clients and in exchange for a small cash reward. However, when the survey was completed, clients received slightly more than they were owed, leading them to believe the bank made an error. Researchers recorded whether the client returned the excess amount of money while still in the bank, left and then came back to return it, or kept it.

The second experiment was designed to identify subjects who were not able to complete a future task and those who were naïve about the likelihood that they would complete the task. Bank staff administered a short survey to clients to measure their planning capability. Staff asked some clients to either complete the survey on the spot or text back the responses by a pre-specified date in order to receive monetary compensation. Others were told they would receive monetary compensation if they texted the answers back on a pre-specified date.

Researchers then administered a survey with the social capital questions from the General Social Survey (GSS) on trust, fairness and helpfulness. Finally, they examined the relationship between personality index measures and behavior in financial settings using the Big Five personality index model, which identifies five personality characteristics: openness, conscientiousness, extraversion, agreeableness, and emotional stability.

Results and Policy Lessons:

From the first experiment, researchers found that those with “high moral standards” –who voluntarily returned to the bank to return the excess money—were 15 percent less likely to default within the first year of the loan, and if they did default, they defaulted on a smaller amount. 

In the second experiment, clients who chose to text-back were not more likely to actually text-back relative to those not given the choice, which suggested the presence of subjects with naïvely optimistic beliefs. Rationally aware subjects—those who did not choose the text-back option—were less likely to default relative to the other groups.

Researchers did not find evidence that survey-based personality index measures were good predictors of loan default. This could be either because default was driven circumstances out of the clients’ controls, and therefore not correlated with personality, or because the index used in this study did not successfully identify the clients’ personality traits.

From a policy perspective, these experiments suggest that financial institutions could benefit from further exploration of surveys and experiments to provide information on clients’ financial behavior, particularly given the growth of cell phone ownership and the introduction of mobile banking.

Read about a related project in Peru

The Psychology of Debt: An Experiment in the Philippines


Policy Issue:

In many developing countries it is commome for street vendors or small-scale entrepreneurs to borrow small amounts of money for their working capital at very high interest rates. Over time, these interest rate payments can amount to a burdensome proportion of a vendor's take-home profit. If vendors saved small amounts of money over time, they may be able to build up a buffer of savings large enough to stop the practice of borrowing money from informal lenders. It is unclear, though, whether vendors may persist in borrowing due to lack of information about the benefits of saving, and whether a financial literacy program would benefit these small-scale entrepreneurs.

Context of the Evaluation:

In urban markets in the Philippines, like the large covered market in Cayagan do Oro, street vendors are prevalent and often borrow from informal moneylenders at high rates of interest. Vendors in this study all ran their own businesses, had a history of indebtedness at interest rates of at least 5% per month over the previous 5 years, and had an outstanding debt of less than 5,000 pesos (US$100). Vendors were included in the study only if they met these conditions and operated a business in or near the public market in Cagayan de Oro.  Vendors most often used their loans to expand or maintain their current businesses.

Description of Intervention:

Researchers tested two interventions to help break the cycle of debt. After an initial baseline survey to gather information on history of debt, household consumption and financial literacy, 250 vendors were randomly assigned to one of four groups. They either (1) had their outstanding debt paid off, (2) were given financial literacy training, (3) received both, or (4) received nothing (comparison).

For the debt payoff intervention, researchers gave respondents money equal to their previously reported debt and had them payoff their outstanding balances (an average of about $47). For the financial literacy intervention, researchers developed a script modeled after Freedom from Hunger’s financial literacy module. Partner staff conducted a single financial literacy session with respondents in small groups of about 16 people that focused on the benefits of savings, the long-term costs of repeated borrowing from moneylenders, the value of planning in advance and saving for large expenses, and the advantages of borrowing from formal lenders (like microfinance institutions or banks) at lower interest rates.

A set of follow-up surveys were administered after 1 month, 2 months and 3 months and an endline survey was administered between 19 and 21 months after the baseline survey.  The baseline survey was administered in early July 2007 and the endline survey was administered between February and April 2009.

Results and Policy Lessons:

Results forthcoming. A follow-up study is being conducted to replicate the results, expand the sample, and assess the impact of adding a savings component to the debt forgiveness intervention. This component consists of offering a savings account with no starting fees and initial deposits subsidized by IPA.

See here for a similar study in Chennai, India.


Psychological Responses to Microfinance Loan Recovery Strategies in Peru

Microfinance clients are usually too poor to offer any property as collateral, so micro-lenders use alternative methods to encourage repayment. The most common methods are: (1) threatening to not offer loans in the future to clients who default and (2) using peer pressure mechanisms to ensure that borrowers repay. 

We have partnered with PRISMA to identify ways to implement these methods more effectively. PRISMA has recently deployed a new strategy in its individual loan program for loan recovery that involves sending written notifications to defaulters. This strategy makes use of both the promise that good payers can receive additional loans from PRISMA in the future and the pressure that loan recipients face from their loan guarantors.

Details of the Intervention:

In the study, clients are randomly assigned to two groups. Two thirds of the clients receive written notifications if they fall in default (treatment group), while the rest of the clients do not receive any additional written notifications (control group). Within the treatment group, clients receive letters with either "gain" or "loss" frames, telling the client either that rectifying his credit standing will allow him access to credit in the future or telling him that his continued default will keep him from accessing loans in the future and threatening legal action. Additionally, in some cases both the sponsor and the client receive a letter, while in other cases only the client does.


The study followed PRISMA´s loan clients from March 2006 to January 2008. We found that letters significantly reduce default rates and are most effective when messages with a loss frame are sent to both clients and their guarantors.

Testing for Peer Screening and Enforcement in Microlending: Evidence from South Africa

The microcredit model, in which individuals are liable to a group, has been tremendously successful in extending credit to the extreme poor. Yet individuals may also be able to select creditworthy peers and hold them accountable to repay their loans. In South Africa, researchers evaluated whether people have enough information to identify reliable borrowers among their peers and if they can help enforce loan repayment. They found that when given incentives, peers were not effective at screening for creditworthiness, but they were effective at enforcing peer repayment and reducing default.

Policy Issue:

Without collateral or credit history, it can be difficult for the poor to gain access to credit through traditional channels, because lenders often impose restrictions on borrowing when they have limited information about a person’s ability to repay a loan. One way that lenders try to reduce the risk of lending to the poor is by using peer intermediation to help identify reliable borrowers and enforce loan repayment. Group lending, where the possibility of future loans for a group of borrowers is contingent on everyone in the group repaying, is one example of this. However, little is known about the channels by which peer networks influence repayment behavior. For example, in group lending models it is not always clear whether peers pressure other members into repaying, or whether they screen out unreliable individuals beforehand to ensure that potential group members are reliable. Peer intermediation may also be effective under individual liability programs, where banks hold individuals rather than groups accountable for repayment. More empirical research is needed to determine whether and how peer mechanisms can help lenders extend credit to the poor.

Context of the Evaluation:

Opportunity Finance South Africa, a for-profit micro-lending institution, is among the largest microfinance institutions operating in South Africa with over 3,000 active borrowers. They offer small, high-interest loans with a fixed monthly repayment amount to poor borrowers in Kwazulu Natal province, where nearly 50 percent of people live in poverty and over 30 percent are unemployed. During the time of the study, average loan size was around US$400, and having a documented, steady job was a necessary condition for receiving a loan.

Details of the Intervention:

Researchers partnered with Opportunity Finance South Africa to test its Refer-A-Friend program, which offered existing clients the opportunity to receive a bonus for referring a friend who met particular criteria. In order to test whether people have information about the reliability of their peers and can enforce loan repayment, referrers were randomly divided into two groups, each of which received a different set of incentives.

1.     Screening Incentive Group: Referrers in the first group received a bonus if the person they referred was approved for a loan.  As a result, they had an incentive to screen for candidates who were likely to get approved for a loan based on observable characteristics.

2.     Screening and Enforcement Incentive Group:Referrers in the second group received a bonus if the person they referred was approved and subsequently repaid the loan on time. They had an incentive to both screen for creditworthiness and encourage repayment.

The 4,408 existing clients who were given the opportunity to make a referral ended up referring a total of 430 people, of whom 245 were ultimately approved for a loan. Existing clients could earn US$12 for referring someone who was subsequently approved for a loan and/or repaid a loan, while those referred earned US$5 upon approval. 

Once the referrals were approved, researchers introduced a second stage of randomization, which changed the initial set of incentives that referrers faced. Half of the referrers in Group 1 were offered an additional bonus of US$12 if the person they referred repaid the loan, thus introducing an enforcement incentive with the potential to double their total bonus. Incentives remained unchanged for the other half of Group 1. Among referrers who were originally in Group 2, half received a bonus as soon as their referee’s loan was approved, thus removing the original enforcement incentive. Incentives remained unchanged for the other half of people in Group 2.

Researchers measured screening and enforcement effects by comparing repayment performance and default rates of loans referred by people facing different incentive structures.

Results and Policy Lessons:

Researchers found that referred clients were 32 percentage points more likely to be approved for a loan than drop-in clients, from a base of 23 percent. However, incentives for peer screening did not significantly improve repayment rates, suggesting that, relative to lenders, peers did not necessarily have better information about the creditworthiness of people in their network.   

Incentives for peer enforcement, on the other hand, did have a significant impact on various measures of repayment performance. The enforcement effect, generated by the incentives that referrers faced after loan approval, significantly improved referees’ loan performance by reducing late repayment, increasing the likelihood that the loan was repaid in full at maturity, lowering the proportion of the principal still owed at maturity, and reducing the number of loans that lenders deemed unrecoverable. On the whole, the enforcement effect reduced default rates by between 9 and 19 percentage points. This suggests that peers can be extremely effective in enforcing repayment, and even small incentives create social pressure that can lead to large reductions in default.  

This study shows how referral programs offer one way of identifying and isolating the often unobservable effects of peer selection and peer enforcement. Results suggest that peer enforcement can have large effects on individuals’ repayment behavior, while peer selection may only be partly effective at generating information that banks can use to make lending decisions. The research methods employed can serve as guidance for lenders, demonstrating how to build into operations low-cost testing to learn more about using peers to bring in new clients, and reduce risk.

Related paper citation:

Bryan, Gharad, Dean Karlan, and Jonathan Zinman.  “Referrals: Peer Screening and Enforcement in a Consumer Credit Field Experiment.” American Economic Journal: Microeconomics, forthcoming (June 2014). 

Small Consumer Loans for the Working Poor in South Africa

Expanding access to business credit is a goal shared by microfinance practitioners, policymakers, and donors alike. However, there is less of a consensus when it comes to expanding access to consumer credit. Even as microfinance institutions increasingly move beyond entrepreneurial credit and offer consumer loans, practitioners and policymakers continue to voice their concern for “unproductive” lending. This study seeks to address these concerns by examining the impact of a consumer credit supply expansion.

We found significant and positive effects on job retention, income, the quality and quantity of food consumption, control over household decision-making, and mental outlook for these borrowers. We only find negative effects on other aspects of mental health, principally stress.

Policy Issue: 

An important means of exiting poverty is access to productive resources, yet many poor people lack the capital necessary to invest in higher education, smooth consumption, or start a business. Expanding access to credit is a common means to enable participation in the economy, and there is a common assumption that expanding access to productive credit makes entrepreneurs and small business owners better off. There is less consensus however, on whether expanding access to credit to support consumption helps borrowers, particularly when loans are being extended at high interest rates to higher-risk customers. 


Context of the Evaluation: 

Poverty in South Africa is widespread; approximately 57 percent of individuals were living below the poverty line in 2001.  Numerous impoverished areas could potentially benefit from increased access to credit to help smooth household consumption. However, the poor typically lack the credit rating and/or collateral needed to borrow from traditional institutions such as commercial banks.  Moneylenders dominate the informal lending market and typically charge 30-100 percent interest per month.

The cooperating Lender has operated for over 20 years as one of the largest, most profitable microlenders in South Africa. It offers small loans at high interest over short periods of time, frequently to the working poor who have no collateral and must make payments on a fixed schedule. 


Details of the Intervention: 

This evaluation examined the direct impact of small consumer loans on profitability, credit access, investment, and measures of well-being such as household consumption and physical and mental health. The sample consisted of 787 rejected loan applicants deemed potentially creditworthy by the Lender. Applicants were eligible if they had been rejected under the Lender’s normal underwriting criteria but not found to be egregiously uncreditworthy by a loan officer. The motivation for increasing credit supply for a pool of marginal applicants is twofold. First, it focuses on those who stand to benefit most from expanding access to credit, namely the unbanked poor. Second, it provides the Lender with information about the expected profitability of changing its selection process to examine marginally creditworthy individuals more closely.

A random portion of the eligible applicants were then assigned a “second look” by lender staff who were encouraged but not required to approve a randomly selected portion of these applicants for loans. Ultimately branches made loans available to 53 percent of the previously rejected applicants who had been randomly assigned to be re-examined. Accepted applicants were offered an interest rate, loan size, and maturity per the Lender’s standard underwriting criteria. Nearly all received the standard contract for first-time borrowers: a 4-month maturity at 200 percent APR.

Applicants in the treatment and comparison groups were surveyed six to twelve months after applying for a loan to examine behavior and outcomes that might be affected by access to credit, including mental health outcomes. 


Results and Policy Lessons: 

Impact for Borrowers: Expanding access to credit is found to significantly increase certain elements of well-being of borrowers. Economic self-sufficiency (employment and income) was higher for treated applicants than for those in the comparison group 6 to 12 months after treatment. Twenty-six percent of treated households report that the quality of food consumed by the household improved over the last 12 months. A subjective measure of “control and outlook”— comprised of factors such as intra-household bargaining power, community status, and overall optimism— is also higher for treated applicants. 

Long-Term Impact on Creditworthiness: Over a 13 to 27 month horizon, study results indicate a positive impact from having a credit score: having an ordinal score due to their credit history increased the probability of future loan approval in the sample by 19 percent, though there was no impact on the score itself. 

Impact on Mental Health: Receiving greater access to credit had mixed effects on the mental health of study participants, and results indicated that the mental health impacts of taking up a small individual loan may differ by gender. While the program had no significant effects on the mental health of women, men experienced increased symptoms of perceived stress and decreased symptoms of depression. The fact that even “good” major life events, such as starting a new job, can be stressful at times may explain why men in the treatment group experienced increases in perceived stress as they took up the loans and engaged in new economic activities. The positive impacts that increased credit access had on other areas of life (described above) may explain why symptoms of depression were reduced among men despite the increase in perceived stress.  

Profitability: Offering loans to marginal applicants, formerly rejected by the Lender’s usual screening process, is also found to be profitable for the Lender, although it is still substantially less profitable than offering loans to more creditworthy applicants. 

1 Southern African Regional Poverty Network (SARPN), “Fact Sheet: Poverty in South Africa,”


Selected Media Coverage:
Microlending: It's No Cure-All - Bloomberg Businessweek

Interest Rate Sensitivity Among Village Banking Clients in Mexico

See the full results in an executive summary here and the full paper here (PDFs).
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 more than 150 million borrowers, microcredit has undoubtedly been successful in bringing formal financial services to the poor. This practice has sparked a debate surrounding the question of “fair interest rates,” particularly given the extreme poverty of many microfinance clients. The arguments in defense of higher rates range from the belief that they are necessary in order to cover the high costs of lending, to access is more important than price and as more institutions enter the market, rates will drop. But these arguments remain untested, and the question of a “fair rate” remains unanswered.  The debate has intensified as investors look to the potential profitability of microfinance.  In 2007, Compartamos Banco, the largest microfinance institution in Latin America, held a successful IPO.  While the bank’s leadership defended the decision as a way to raise capital and provide credit to even more clients and investors including non-profit Acción International reaped the benefits, critics accused the bank of profiting at the expense of the poor.   

Context of the Evaluation: 

In 1990, Compartamos Banco began offering credit to women in Southern Mexico in an effort to promote economic development through spurring the growth of micro-businesses. Today, the organization has branches in every state in the Mexican Republic, and has over a million borrowers.  The bank requires all borrowers to have an existing business or plans to start one with the loan proceeds.  There are many microfinance providers in Mexico, and Compartamos loans are neither the cheapest nor most expensive.  

This study was undertaken in Compartamos branches throughout the country, representing a diverse population living in urban, periurban, and rural locations. The target population, comprised mostly of small-scale merchants who sell handicrafts or food products, also includes owners of more established businesses such as hair salons or restaurants, and people involved in agricultural activities. 

Details of the Intervention: 

Researchers sought to observe Compartamos borrowers’ reactions to varying interest rates, in order to determine the impact of loan cost on take-up and borrower behavior.  The study focused on the bank’s most popular product, a group liability loan offered exclusively to woman called Crédito Mujer. In order to borrow, clients must be women, 18 years of age or older and either currently be engaged in an income generating activity or plan to start one once given the loan.  

As part of the implementation of a new pricing model, Compartamos lowered the interest rates on the Crédito Mujer product for almost all clients.  At treatment branches, they lowered the rates further.  Under normal operations, each branch offers three rates – bronze, silver, or gold – which are assigned to borrowing groups based on the Compartamos pricing model.  Compartamos lowered the interest rates offered at treatment branches so that borrowers at those branches received a flat monthly rate that was .5% less than the same borrowers would have received at comparison branches  For example, a "bronze" borrowing group at a treatment branch received a rate that was .5% less than a "bronze" borrowing group at a comparison branch. 

Results and Policy Lessons: 

The results show that branches offering the lower interest rate scenario had more clients, more new clients and larger loan portfolios. The change in cost of borrowing, however, did not attract a different borrower profile.  The new borrowers at treatment branches were not poorer or less educated than existing clients.  The effect of lower interest rates on the financial sustainability of an MFI is also a crucial question.  Attracting more clients may at first glance appear a wholly positive outcome, but its effect on profitability is not obvious.  While adding several group members to an existing borrowing group increases income without increasing costs (because the same loan officer can service these loans in the same meeting), adding new groups may require hiring more personnel or even opening an expansion branch office.  Still, though these new clients resulted in higher costs in some cases, the overall effect on net profits was positive.

These findings suggest that MFIs that choose to lower rates can both attract and retain more clients, who in turn borrow greater amounts. This has implications for MFIs that are looking to improve their outreach, and can result in more people gaining access to credit and making use of it. And, achieving these goals can also be profitable, in contrast to the arguments put forth by some defenders of high interest rates. 


Interest Rates and Consumer Credit in South Africa

How sensitive are borrowers to higher interest rates? We worked with a South African lender to randomize both the interest rate offered to clients by a direct mail solicitation, and the maturity of an example loan shown on the offer letter.

Policy Issue:

In 2001, more than one billion people were living in extreme poverty, subsisting on less than $1 a day.1 Microcredit can help to alleviate poverty by expanding access to credit, providing the capital necessary to invest in higher education, smooth consumption or start a business. But providing small loans to risky clients in poor settings often yields small profits for lenders, and many microfinance institutions (MFIs) rely on subsidies to stay afloat. Policymakers often call on MFIs to increase interest rates in order to increase profits and eliminate their reliance on subsidies. This strategy makes sense if the poor are not sensitive to higher interest rates; microlenders could increase profitability and achieve sustainability without reducing the poor’s access to credit. Yet existing research offers little evidence on interest rate sensitivities in target markets, and little guidance on how MFIs can derive optimal rates.

Context of the Evaluation: 

Cash loan borrowers are prevalent in South Africa. Estimates of the proportion of working-age population currently borrowing in the cash loan market range from below 5% to around 10% and the borrowed funds account for about 11% of aggregate annual income. The for-profit South African lender who collaborated for this study is one bank who provides cash loans in this high-risk consumer loan market. Clients typically use loans for a range of consumption smoothing and investment purposes, including food, clothing, transport, education, housing, and paying off other debt. Cash loan sizes tend to be small relative to the fixed costs of underwriting and monitoring them, but substantial relative to a typical borrower’s income. For example, the lender’s median loan size of approximately US$150 is 32% of its median borrower’s gross monthly income. This lender typically offers “medium-maturity,” 4-month loans, with a 7.75 to 11.75% interest rate per month. Repeat borrowers have default rates of about 15%, and first-time borrowers default twice as often.

Details of the Intervention:

Researchers test the assumption that borrowers are not sensitive to higher interest rates by working with this South African lender to randomize both the interest rate offered to past clients on a direct mail solicitation, and the maturity of an example loan shown on the offer letter.

First the lender randomized the interest rate offered in “pre-qualified,” limited-time offers that were mailed to approximately 58,000 former clients with good repayment histories. Most of the offers were at relatively low rates. Clients eligible for maturities longer than four months also received a randomized example of either a four-, six- or twelve-month loan. Clients who wished to borrow at the offer rate then went to a branch to apply, through the standard bank procedure.

These clients were from 86 predominantly urban branches and had borrowed from the lender within the past 24 months. They were in good standing, and did not currently have a loan from the lender as of thirty days prior to the mailer. Each mailer contained a deadline, ranging from two to six weeks, by which the client had to respond in order to be eligible for the offer rate. At that time, loan applications were taken and assessed as per the lender’s standard underwriting, and 3,887 individuals were approved for a loan.

Results and Policy Lessons:

Price Elasticities: Results reveal demand curves with respect to price that were gently downward sloping throughout a wide range of rates below the lender’s standard ones. But demand sensitivity roses sharply at prices above the Lender’s standard rates. A price decrease from the maximum 11.75% to the minimum 3.25% rate only increased take-up by 2.6 percentage points. However, high rates reduced the number of applicants significantly; clients randomly assigned a higher-than-standard offer were 36% less likely to apply than their lower-rate counterparts. Higher rates also reduced repayment. Thus, an interest rate increase would be unprofitable for this lender. It would produce both a reduction in demand and increased default rates, which would not be compensated by the increase in interest revenue from higher rates.

Maturity Elasticities: The example maturity date on the loan letter powerfully predicted the actual maturity date chosen by the borrower. For each additional month of maturity suggested, the actual maturity date chosen was pushed out by 0.11 months. Researchers also found that each month of additional time to maturity increased loan demand by 15.7%. Most notably, the maturity effect was large relative to price sensitivity. Loan size did not respond to price in the maturity-suggestion sample, but was very responsive to loan maturity. On average, a one month maturity increase had approximately the same effect as a 436 basis point interest rate decrease.

Taken together, this evidence suggests a practical implication that some MFIs should consider using varied maturity dates rather than price to balance profitability and targeting goals.

1United Nation Secretary General Millennium Project, “Fast Facts – The Faces of Poverty,” (Accessed September 18, 2009)

Marketing Effects in a Consumer Credit Market in South Africa

The study investigates whether borrowers' choices can be manipulated by frames, cues, and other features that change the presentation of the choice, but not its actual content or inherent value.  IPA partnered with a consumer lender in South Africa to identify which psychological features of a mass-mailing advertising campaign are the most effective. Showing a photo of an attractive woman increased demand for the loan by the same amount as a 25% reduction in the monthly interest rate.

Policy Issue: 

Firms in all industries together spend billions of dollars each year advertising consumer products to influence demand, and microfinance institutions are no exception. Economic theories emphasize the informational content of advertising, but advertisers also spend resources trying to persuade consumers with “creative” content and design elements that are not purely informational. Advertising decisions are not inconsequential: decisions about whether to take up loans or savings accounts may be a crucial component of the success of interventions aimed at increasing access to financial services. Although laboratory studies in marketing have shown that “creative” content may affect demand, academic researchers have rarely used field experiments to study advertising content effects. Thus, although attempts to persuade consumers with non-informative advertising are common, little is known about how and how much such advertising influences consumer choice in natural settings like South Africa.   

Context of the Evaluation: 

Credit Indemnity, the cooperating consumer lender in this study, has operated for over 20 years as one of the largest, most profitable lenders in South Africa. The lender offers small, high-interest, short-term, uncollateralized credit with fixed monthly repayment schedules to the working poor, who generally lack the credit history or collateral wealth needed to borrow from traditional institutional sources such as commercial banks. The available data suggest that borrowers use their loans for a variety of consumption and investment uses, including food, clothing, transportation, education, housing, and paying off other debt.

Details of the Intervention: 

Working closely with a highly profitable consumer lender in South Africa, researchers sought to determine the effects of advertising content, price, and offer deadlines on loan take up. The lender sent direct mail solicitations to 53,194 predominantly urban former clients offering them a new loan at randomly assigned interest rates ranging from 3.25 percent per month to 11.75 percent per month. These mailers varied in a number of ways. First, there were eight variations in advertising content– (1) a person’s photograph on the letter, (2) a suggestion of how to use the loan, (3) a table featuring either a small or large number of example loans, (4) information about interest rate and payments, (5) a comparison to competitors’ rates, (6) mention of a promotional raffle, (7) a reference to the “special” or “low” rate, and (8) a mention of the lender offering services in the local language. Additional randomization included the time before the offer’s deadline, which varied from two to six weeks.

About 8.5 percent of clients who received the mailing applied for a loan, of which approximately 4,000 were approved according to the bank’s established criteria. Because the content of the mailer was recorded in their client profile, researchers could determine what kind of advertising scheme was associated with higher demand for loan products.

Results and Policy Lessons: 

Impact of Advertising Content on Demand: All eight advertising randomizations had significant effects on loan take up, but not on loan amount or default rates. Advertising content effects were large relative to price effects. Showing one loan option instead of four increased demand by the same amount as a 25 percent reduction in the monthly interest rate. Showing a female photo or not suggesting a particular use for the loan also had a similar effect.  These results suggest that seemingly non-informative advertising may play a large role in real consumer decisions.

Impact of Advertising Channels: Clients demonstrated the strongest responses to the non-price components of loan offers.  They preferred to be presented with fewer example loans, an attractive photo, and to not be told on what they should consider spending their loan. The success of these features suggests that advertising content is more effective when it aims to trigger an intuitive, or quick, effortless response, rather than a deliberative, or conscious, reasoned response.  

Impact of Deadlines: In contrast with the view that shorter deadlines help overcome limited attention or procrastination, there was little evidence that shorter deadlines increased demand. In fact, demand increased dramatically as deadlines randomly increased from two to six weeks. Even in a competitive market setting with high rates and experienced customers, subtle psychological features appear to be powerful drivers of behavior. 

Selected Media Coverage:

Examining the Effects of Crop Price Insurance for Farmers in Ghana

Policy Issue:
Many small-scale farmers in the developing world face significant income uncertainty, and rural farmers who live from harvest to harvest don’t have much room for error. Variables beyond the farmers’ control, such as fluctuating crop prices, can make a significant difference in how much a family earns for the year.  Farmers may be unwilling to take on additional risks by borrowing and making long-term investments due this uncertainty. This reluctance is thought to contribute to the decision of many farmers not to invest in technologies such as hybrid seeds, fertilizer, or irrigation that could potentially improve crop yields. Many lenders are also extremely wary of extending credit to farmers, fearful that they will inherit the risks inherent to farming. Crop price insurance could help solve this problem, reducing the risk to farmers and providing them with encouragement to make investments in their farms. Lenders, too, may feel more confident in lending to farmers with greater income certainty, facilitating even more capital investments.
Context of the Evaluation:
In Ghana, 50 percent of the rural population lives in poverty. In the Eastern Region where Mumuadu Rural Bank (MRB) operates, an estimated 70 percent of households make a living in the agricultural sector, but agricultural loans make up only 2 percent of the bank’s loan portfolio. Focus groups with maize and eggplant farmers in the area revealed that farmers were hesitant to borrow for fear that fluctuations in crop prices could force them to default. Rainfall fluctuations, typically an important source of risk for farmers, are not a great concern in this part of Ghana. The prices offered for traded crops, however, do fluctuate greatly. Information gathered in baseline surveys suggested that there was a potential but untapped market for crop price insurance: farmers in the area served by MRB expressed that they would be willing to pay to guarantee a certain minimum crop price. Despite this encouraging baseline finding, banks and insurance providers face the challenge that insurance is not a commonly understood concept among farmers in the region.
Details of Intervention:
Researchers developed an agricultural loan product in coordination with MRB that had an insurance component that partially indemnified farmers against low crop prices. Specifically, if crop prices at harvest dropped below a set price floor (the 10th percentile of historical prices for eggplant and the 7th percentile for historical maize prices), the bank would forgive 50 percent of the loan and interest payments. Borrowers were not required to pay any premium for the insurance product. The goal of incorporating insurance into the loan product was to reduce farmers’ risk in borrowing to invest in agriculture inputs. The intervention targeted maize and eggplant farmers in particular because the crops are both commonly grown in the region and subject to volatile (but historically well documented) prices.
Standard Mumuadu procedure is to invite farmers to meet in a group with Mumuadu employees to discuss the bank’s financial services, and to encourage farmers to come to a branch to apply for a loan. The average loan size is approximately US$159, which represents a significant change in cash flow for the borrower. For this project, Mumuadu employees approached community leaders to obtain a list of all maize and eggplant farmers in the village. The same community leaders then invited farmers to attend one of the bank’s information sessions. Farmers on the list were randomly assigned to one of four groups, each of which received a variation on the Mumuadu marketing pitch. The four groups were:
  1. Farmers who were offered the standard Mumuadu loan product;
  2. Farmers who were offered the Mumuadu loan product with complimentary crop price insurance;
  3. Farmers who received financial literacy training, before being offered the standard Mumuadu loan product;
  4. Farmers who received financial literacy training, before being offered the Mumuadu loan product with complimentary crop price insurance.
Prior to the marketing of the loans, Mumuadu employees conducted a survey of the farmers, gathering information relating to their credit history, risk perception, financial management skills, and cognitive ability. An analysis of baseline data, bank administrative data, and a followup survey that focused on farmer investment decisions allowed researchers to draw conclusions on the effect of crop price insurance on borrower behavior and agricultural investment in Ghana.
Take up of loans among farmers was quite high, with 86 percent of farmers in the comparison groups choosing to borrow and 92 percent of farmers in the treatment groups taking out a loan.  This high take up across both treatment and control groups made an analysis of the features that predicted take up difficult.  In fact, the researchers found no systematic difference across the treatment and control groups when considering which features predicted borrowing. Overall, those who borrowed tended to be older, with higher scores on tests of cognitive ability.  They were also more likely to have a record of previous borrowing.  
Apart from predictors of borrowing, researchers were interested in whether crop price insurance changed farmers’ investment behavior. There is evidence that it did, but not overwhelmingly. The small sample and high take up across both groups may have played a role in this outcome. Farmers offered the insurance spent 17.9 percentage points more on agricultural chemicals (mostly fertilizer) than those who had not been offered the product. There was also a trend towards growing more eggplants and less maize among these farmers. Farmers offered the insurance were also between 15 and 25 percent more likely to bring their produce to markets rather than sell to brokers who come to pick up the crop. Anecdotally, it is believed that the so-called “farmgate” sellers offer guaranteed purchase contracts, but at lower prices locked in before harvest. Selling in the market, on the other hand, is a potentially more profitable but riskier option.  
There are a number of potential reasons why the researchers did not find large effects of the crop price insurance product on either or take up or investment, and further research in necessary to determine their roles. It is uncertain, for example, whether farmers truly understood the benefits of the insurance. Farmers may also have been reluctant to make long term investments changes before an insurance product demonstrates an established presence in the area. Alternatively, crop price uncertainty may not be as important of an indicator of investment decisions as previously thought. Further research, with a larger sample size, is needed to better understand the roles of risk, financial literacy, and product design in determining microinsurance impact.

Trust and Microfinance in Poor Communities in Peru

We evaluate a novel microfinance model in which new customers need to gain sponsorship by an existing customer. We investigate how relationships between individuals and social networks impact repayment behaviour. This individual lending program screens clients and enforces good practices much in the same way as more traditional group lending does, but allows microcredit to be extended to those who might not qualify or be interested in a group liability loan.

See here for a similar study in the Philippines.

Policy Issue: 

Microfinance has generated worldwide enthusiasm as a potential catalyst for economic development and poverty reduction. The success of microcredit in providing access to capital without increasing default rates, despite a lack of physical collateral, was originally attributed to the group liability model, in which groups of people are jointly responsible for one another’s loans. However, as the microfinance industry grows and becomes more competitive, institutions must strive to develop new financing methodologies that keep institutional costs low while also extending access to credit. A major problem in microfinance is reaching borrowers who don’t qualify for or are not interested in communal, group liability, banks. Thus, different microfinance structures are needed that reach the poor with individual loans, while still harnessing some of the screening and enforcement benefits of group lending.

Context of the Evaluation: 

Since returning to democratic leadership in 1980, Peru has struggled to regain economic stability and growth. Currently, 44% of its 29 million people live in poverty.1 This plight has driven many rural residents to the outskirts of Lima in search of work, where they make their homes in self-built shantytowns that surround the city’s center. These shantytowns now contain a large proportion of Lima's inhabitants, and their residents have limited access to formal financial services such as savings accounts or loans. This study is located in fairly diverse shanty communities in Ancash, just north of Lima. The economy of these communities is primarily based on mining of gold, copper and zinc and fishing.

Details of the Intervention: 

In collaboration with PRISMA, a Peruvian NGO offering credit through village banks, researchers designed and implemented a new loan product and administered surveys to 9,000 shantytown households. This program sought to use social connections to screen for responsible clients, outside of the traditional group lending model, by requiring new clients to match up with sponsors who were already bank clients in order to obtain a loan.

Existing communal bank members acted as a pool of potential sponsors who can cosign small, individual loans for residents of the community who are not already bank members. The sponsor was responsible for repaying a loan if the client defaulted, and thus they were incentivized to cosign with more responsible individuals whom they could easily monitor. Each adult household member in the village received a card, which outlined the rules of the program and included a list of all sponsors in the community as well as a map of the community showing sponsor location. Both spouses of a sponsoring household and a borrowing household had to act as co-signers.

The two pilot shantytown communities consisted of 282 households with 26 sponsors, and 371 households with 25 sponsors, respectively. Social network surveys conducted in the communities before the implementation of the loan program allowed researchers to map the relationships between clients and sponsors. Researchers measured the strength of connections between individuals by time spent together per week, and whether individuals were considered trustworthy. Interest rates were randomly assigned between 3% and 5% a month across all client-sponsor pairs, in order determine whether the interest rate or the social distance from one’s sponsor had a greater impact on the likelihood of default.

Results and Policy Lessons: 

Reporting early results from the two pilot communities, researchers found that close social relationships and geographic closeness between sponsor and client effectively improves trust between agents, reducing the likelihood of default and the risk of cosigning such a loan. Estimates of the relative effectiveness of interest rates and social connections at reducing defaults suggest that lending with a close neighbor reduces the likelihood of default by the same amount as a 3-4 point decrease in the interest rate.

These findings underscore the prediction on which the program was founded, namely that borrowers with close social relationships to their sponsors allow the bank to be more certain that this new client will repay their loan. Increased information from close social relationships ensures the sponsor, and thus the lender, knows what risk each client represents, and can act to minimize that risk. This individual program therefore effectively screens clients and enforces good practices much in the same way group lending does, and allows microcredit to be extended to those who might not qualify or be interested in a group liability loan.

1 CIA World Factbook, “Peru,”

Peeling Back the Layers of Group Liability in Bolivia

Policy Issue:
Since its inception in the 1970s, the group liability model has been hailed as the innovation that made lending to the poor possible.  Under the group liability model, borrowers take out loans with groups of other borrowers and all group members are  jointly liable for loans extended to others within the same group.  Many microfinance institutions continue to work under this model, yet some practitioners and scholars have begun to question the assumption that the benefits of group liability outweigh the costs. Many contend that group liability not only fails to increase repayment rates but that the policy also locks out those who could potentially benefit from credit access but are unwilling to take responsibility for other people’s loans. It is still unknown whether group liability or self-selection produce better outcomes for microfinance clients and lenders.
Despite abundant natural resources, Bolivia remains one of the poorest countries in South America. El Alto, a fast growing suburb of La Paz located in the highlands above the capital, is known for its politically active inhabitants whose protests over the use of natural resources have led to clashes with authorities. Cochabamba, on the other hand, is well known for its agriculture production of grains, coffee, cacao, and coca leaf. Pro Mujer, a prominent microfinance lender in Bolivia, provides loans to female clients in these areas. A majority of these clients engage in commercial activity, very often in local markets or selling goods produced in home-based businesses. Pro Mujer calls their borrowing groups “Communal Associations”, and a typical group has between 18 and 25 members.
Description of Intervention:
Researchers randomly selected 300 of the sample 400 Communal Associations to test the impacts of various forms of group liability. In these 300 groups, the Communal Associations were divided into sub-groups called “solidarity groups”.  Each solidarity group included 5-7 individual borrowers.  Rather than being responsible for the repayment of all loans in the Association, borrowers in the treatment Associations were only liable for the loans of the members within their solidarity group, effectively reducing the number of loans for which each woman was liable. 
Additionally, treatment groups were randomly allocated to be formed in different ways. In the first sub-treatment group, researchers shifted liability from the Association level to the solidarity group level without changing the self-selected composition of the solidarity groups. In the second sub-treatment, the solidarity groups were rearranged to be composed of borrowers with similarly-sized loans. In the final sub-treatment group, solidarity groups were rearranged and members were assigned to solidarity groups at random.
Researchers collected data on institutional outcomes important to Pro Mujer, such as repayment rate, loan size, dropout rate, and new member acquisition rate. In addition to analyzing the impact of group liability on borrowers’ behavior, researchers also collected data on how credit officers used their time in order to determine if the new policy had an effect on the efficiency of bank operations.  Loan officers are required to spend much of their time traveling to Communal Association repayment meetings.  If changes to the liability structure improve overall repayment, loan officers may be able to lead meetings and oversee repayment in a more efficient manner, allowing them to take on more borrowing groups.  On the other hand, if the new liability structure worsens repayment, loan officers may end up spending more of their time enforcing repayment, and have less time for other required activities. 
Results and Policy Lessons:
Due to low compliance, data analysis has been delayed.

Evaluating Village Savings and Loan Associations in Ghana

What type of people participate in Village Savings & Loan Programs (VSLAs)? What impact do these programs have on households and communities?

Policy Issue:

Although during the last decades microfinance institutions have provided millions of people access to financial services, provision of access in rural areas remains a major challenge. It is costly for microfinance organizations to reach the rural poor, and as a consequence the great majority of them lack any access to formal financial services.  Traditional community methods of saving, such as the rotating savings and credit associations called ROSCAs, can provide an opportunity to save, but they do not allow savers to earn interest on their deposits as a formal account would.  In addition, ROSCAs do not provide a means for borrowing at will because though each member makes a regular deposit to the common fund, only one lottery-selected member is able to keep the proceeds from each meeting.

Village Savings and Loan Associations (VSLAs) attempt to overcome the difficulties of offering credit to the rural poor by building on a ROSCA model to create groups of people who can pool their savings in order to have a source of lending funds.  Members make savings contributions to the pool, and can also borrow from it.  As a self-sustainable and self-replicating mechanism, VSLAs have the potential to bring access to more remote areas, but the impact of these groups on access to credit, savings and assets, income, food security, consumption education, and empowerment is not yet known. Moreover, it is not known whether VSLAs will be dominated by wealthier community members, simply shifting the ways in which people borrow rather than providing financial access to new populations.

Context of the Evaluation:

The Northern region of Ghana is one of the least developed parts of the country.   The majority of its residents make their living in agriculture.  Services including mail delivery, telephone, and medical clinics are very limited in this sparsely populated part of Ghana.

Description of Intervention:

In Ghana, researchers are working to measure the dynamics of self-selection with VSLAs.  This study is conducted with 180 communities selected by our partner, CARE, after being identified as villages in which VSLA programs could be initiated.  Ninety villages were randomly selected to receive the VSLA intervention, and the remaining 90 villages are used for comparison.  For those villages randomly assigned to receive the intervention, a CARE representative will enter the village to meet with residents and begin to form VSLAs there.  Interested participants form groups of 15 to 30 community members, pooling their capital to create a fund from which members can borrow.  Members pay back loans with interest, and savings also earn interest, with the rates determined by the group at its founding.  The CARE representatives initiate the formation of new VSLAs, but the eventual goal of the intervention is to provide the community with the capacity to make these groups self-sustaining by providing training on initiation and administration of new VSLAs.

Three years after full implementation, a follow up survey will allow researchers to understand who chooses to participate in VSLAs in Ghana, as well as how their lives may be affected as a result.  

Results and Policy Lessons:

Results Forthcoming.

We are also working with CARE to evaluate their VSLA programs in Malawi and Uganda.

Group versus Individual Liability for Microfinance Borrowers in the Philippines

Microcredit has become a popular anti-poverty policy in the last decades. Now with more than 150 million borrowers, microcredit has undoubtedly increased access to formal financial services for the poor.

Policy Issue:

Microcredit has become a popular anti-poverty policy in the last decades. Now with more than 150 million borrowers, microcredit has undoubtedly increased access to formal financial services for the poor. An extensive debate exists about the advantages and disadvantages of group liability, where a group of individuals are all responsible for each others’ loans if one member defaults, versus individual liability, where only the borrower is at risk if they default. Group liability may improve repayment rates but it also raises the possibility that bad clients will take advantage of good clients in their liability group.

While individual liability lending may address some of these issues, it also has potential drawbacks in the form of less intensive screening of members, and higher default rates due to the lack of member responsibility to cover group members’ loans. Additionally, credit officers may spend more time in securing payment or using a more intensive and time-consuming credit investigation and background checks.  


In the Philippines 25% of the population live below the national poverty line[1], and many depend on small and individual enterprise for their livelihood. The islands of Leyte, Cebu, and Bohol, where this study takes place, host a wide range of economic activities, including farming, fishing, manufacturing, and commerce. As is true in much of the Philippines, most of this area has been heavily penetrated by microfinance institutions. Rural banks, cooperatives, and NGOs offer both individual- and group-liability microcredit loans and competition is strong. Most of the lending centers involved in this study are located in small towns or rural villages, though some are located in mid-sized cities. The majority of the members of the Green Bank of Caraga, the sample of this study, are microentrepreneurs engaged in small-scale sales or activities such as tailoring, food processing, and small-scale farming. The average loan size for this sample is US$116), not an insignificant amount when compared against the Philippines GDP per capita of $3,300.[2]

Description of Intervention:

Researchers examined two trials conducted by the Green Bank of Caraga to evaluate the effects of group liability relative to individual liability on monitoring and enforcing loans.

In the first trial, a randomly selected half of the bank’s 169 existing group-lending centers on the island of Leyte were converted to the individual liability model, phased in over time.Researchers could then isolate the impact of group liability on behavior through peer pressure by comparing the repayment behavior of existing clients in group-liability centers and converted individual liability centers. Centers were then assigned to comparison, individual liability or staggered individual liability (the first loan for each member is covered by group liability, but subsequent loans have individual liability). Critical to the design is the fact that individual-liability centers were converted from existing centers, and not newly created. By comparing the repayment behavior of existing clients in group-liability centers and converted centers, researchers were able to isolate the impact of group liability on employing peer pressure to mitigate moral hazard. 

In the second trial, the sample consisted of 124 randomized communities in areas where the bank was not yet operating. Once feasible villages were identified, an independent survey team conducted a business census, a household roster, and a social network survey. Each of these villages was randomly assigned into one of three treatment groups before the bank established lending centers: liability program, individual-liability program, and group-liability program converted to individual-liability after the first cycle.


After three years, researchers found that individual liability compared to group liability leads to no change in repayment rates (clients in individual liability centers were no more likely to default than their peers in group liability centers) in the short as well as the long term. The removal of joint liability resulted in larger lending groups, hence further outreach and use of credit but the average loan size was smaller, leading to no change in overall group profitability. Loan sizes in converted groups were lower because members were more likely to withdraw savings, lowering their capacity to borrow. Under individual liability, members were also less likely to be forced out of their center, because they could only be removed by credit officers—not peers. Thus, individual liability made existing centers 13.7 percentage points less likely to be dissolved.

Bank officers in new areas were lesswilling to open groups despite the fact that there had been no increase in defaults. This constrained the growth of the lending program.

[1] United Nations Human Development Report, “Human Development Indices,” (accessed August 25, 2009).

[2] As of 2008. CIA World Fact Book, “The Philippines,” , (accessed Nov, 20, 2009).


Business Education for Microcredit Clients in Peru

Policy Issue:

Microfinance has generated worldwide enthusiasm as a potential answer to economic development and poverty reduction. But high default risk and unproductive use of loaned funds plagues many programs. A significant debate exists within the microfinance community as to whether lenders should focus solely on the lending business, or whether they should take advantage of the frequent meetings to integrate various types of training and improve microfinance outcomes. Integrating trainings on health or good business practices with group meetings poses a unique opportunity to deliver these services at minimal cost, but requires clients to spend more time at regular meetings, potentially leading to a higher dropout rate.

Context of the Evaluation: 

Of Peru’s 29 million people, almost half live in poverty,1 and microfinance institutions (MFIs) hope to improve the socio-economic situation of this population through the promotion of village banking. FINCA Peru, a small, non-profit, but financially sustainable MFI that has been operating in Peru since 1993 creates village banks for poor, female microentrepreneurs, giving them access to formal financial services. Their clients are relatively young, have little formal education and often have families to support. All clients have microenterprises, which may include selling food or handicrafts, or small scale agriculture. FINCA clients each hold, on average, $233 in savings and their average loan is US$203, with a recovery rate of 99%.

Details of the Intervention:

Researchers worked with FINCA in Ica and Ayacucho, Peru to measure the marginal impact of adding business training to a group lending program. FINCA sponsored 273 village banks with a total of 6,429 clients, most of whom were women. These banks were divided into treatment groups and comparison groups, with 104 mandatorily participating, 34 voluntarily participating, and 101 as the comparison.

Individuals who held accounts at treatment banks received 22 entrepreneurship training sessions and materials during their normal weekly or monthly banking meeting. Training materials were developed through a collaborative effort between FINCA, Atinchik and Freedom from Hunger and had been used in past projects. Sessions included exercises and discussion with the clients, and a lecture which aimed to improve basic business practices such as how to treat clients, how to use profits, where to sell, and the use of special discounts and credit sales. For example, in one lesson the trainers had each microentrepreneur write out a budget for their enterprise. Comparison groups remained as they were before, meeting with the same frequency to make loan and savings payments. Data was collected on dropout rates, repayment rates, loan size, savings, business size and income to asses the impact of the training.

Results and Policy Lessons:

Impact on Business Practices: There was weak evidence that the training may have helped clients identify strategies to increase sales and reduce downward fluctuations: for clients in the treatment group, sales in the month prior to the follow up surveys were 15 percent higher than in the comparison group, and returns were an average 26 percent higher in "bad months" when they would have expected downward fluctuations in their sales. Clients who received business training were significantly more likely to keep records of their account withdrawals, and had better knowledge about business and how to use profits for business growth and innovation. Interestingly, there were actually larger effects for those individuals that expressed less interest in training at the outset of the program. This result implies that demand-driven market solutions may not be as simple as charging for the cost of the services. It is possible that after a free trial, clients with low prior demand would subsequently appreciate its value and demand the service.

Impact on Business Outcomes: This study found little or no evidence of changes in key business outcomes such as business revenue, profits or employment.. For example, the business training had no effect on the number of workers employed at family businesses, did not change the profit margin of the most common products sold at retail businesses, did not increase the number of sales locations, and did not induce entrepreneurs to start new businesses. 

Impact on Institutional Outcomes: Business trainings had effects on some institutional outcomes such as client retention, but not on others such as loan size or accumulated savings. Perfect repayment among treatment groups was three percentage points higher than among comparison groups. Treatment group clients were four percentage points less likely to drop out of the program (either permanently or temporarily) than were comparison group clients, although the proportion of client dropout still remained high in the treatment group, where 59 percent of clients left their banks at some point during the intervention, compared to 63 percent in the comparison group. The training is costly to run, as it requires labor costs for the organization to train their staff and acquire materials. This constituted a 10 percent increase in FINCA’s costs. However, the improved client retention rate generated significantly more increased net revenue than the marginal cost of providing the training, and so all in all providing business trainings was still a profitable undertaking for FINCA.

1 CIA World Factbook, “Peru,”

Selected Media Coverage:

Evaluating the Saving for Change Program in Mali

While informal savings groups are common around the developing world, their formats can limit flexibility in responding to members’ needs, particularly when it comes to loans or coping with unexpected expenses. In Mali, Oxfam’s Saving for Change (SfC) program allows groups of women to form a savings group together. Members can also apply for loans from the group, to be paid back with interest. When the group ends, the pool of funds with the loan interest is redistributed to the members. In 200 villages in the Segou region where SfC was implemented, women were 5 percent more likely to be part of a savings group, and savings were 31 percent higher than in the 300 comparison villages without the program. Households in those villages experienced better food security, and had more livestock, but there were no significant differences observed in a number of other economic and social well-being outcomes.
Policy Issue:
Community-based methods of saving, such as Revolving Savings and Credit Associations (ROSCAs), can offer informal savings and credit options where access to formal financial services is limited. Under this system, a group of individuals meet regularly to contribute to a fund that is then given as a lump sum to a different member at each meeting. However, ROSCAs can be an inflexible means of borrowing since the pool of funds is fixed and is given to only one member at a time, often by lottery. As such, members cannot necessarily rely on ROSCA payouts to cover unexpected expenses, such as those due to illness or natural disasters. One way to overcome these challenges may be to encourage savings and credit groups to adopt flexible rules that cater better to the needs of their members. Additional research is needed to understand how to better organize ROSCAs and whether they enable participants, especially the poorest, to save and borrow more.
Context of the Evaluation:
The Saving for Change (SfC) program began in Mali in 2005 to assist women in organizing themselves into simple savings and credit groups. The program is meant to address the needs of those who are not reached by formal financial service providers or traditional ROSCAs. As part of the program, about twenty women voluntarily form a group that elects officers, establishes rules, and meets weekly to collect savings from each member. At meetings, each woman deposits a previously determined amount into a communal pool, which grows in aggregate size each time the group meets. When a member needs a loan, she asks the group for the desired amount; the group then collectively discusses whether, how, and to whom to disperse the funds. Loans must be repaid with interest, at a rate set by the members, and the interest collected is also added to the communal pool of funds. Saving for Change introduced a novel oral accounting system which helps the women manage each woman’s debts and savings totals.
At a predetermined date, the group divides the entire pool among members in proportion to their savings contributions. The timing can coincide with times of high expenditure, such as festivals or the planting season. The interest from the loans generally gives each member a return on her savings of approximately 30 percent, annually. The group can then start a new cycle and establish new rules.  Groups sometimes opt to increase their weekly contributions, accept new members, or select new leaders.
Unlike formal lenders, SfC group members lend their own money, so collateral is not required. The fact that all money originates from the women themselves, as opposed to outside loans or savings-matching programs, also increases the incentives to manage this money well. In addition, the program is designed to be self-replicating through “replicating agents” in each village.Once the first group is established in an area, members themselves become trainers and set up new groups in their village and the surrounding area.  
Prior to the study, approximately 22 percent of women in the sample area were members of ROSCAs and over 40 percent of households had experienced a large, unexpected fluctuation in income or expenditure during the last 12 months.
Details of the Intervention:
In order to test the impact of the SfC program as well as different strategies for encouraging replication, researchers randomly selected 500 villages in the Segou region of Mali  to participate in the study. These villages were randomly divided into two treatment groups of about 100 villages each, and one comparison group with nearly 300 villages. The first treatment group received the SfC program with a structured, three-day training for replicators who received a handbook on how to start and manage savings groups. The second treatment group received the SfC program with an informal, organic training program in which trainers answered questions but did not provide any formal instruction to replicators. The comparison group did not receive the SfC program.
Results and Policy Lessons:
Adoption of SfC: Nearly 30 percent of women in treatment villages joined a savings group as part of the SfC program. Those women who chose to participate in the SfC program were, on average, older, more socially connected, and wealthier than non-members. Take-up was higher in villages that received the structured training program than in those that received the informal training.
Savings and Loans: Women in treatment villages were 5 percentage points more likely to be part of a savings group, and average savings in treatment villages increased by US$3.65 or 31 percent relative to the comparison villages. The SfC program also significantly increased women’s access to credit. Women in the treatment villages were 3 percentage points more likely to have received a loan in the past 12 months, and this loan was more likely to have come from a savings group rather than from family and friends.
Resilience to income shocks: Households in the villages receiving SfC were 10 percent less likely to be chronically food insecure than those in control villages. In addition livestock holdings increased, and households in treatment villages owned on average US$120 more in livestock than those in comparison villages, a 13 percent increase. In Mali, owning livestock is a preferred way to store wealth and mitigate against risks such as drought or illness.
Structured vs. Organic Replication: Villages that received structured replication training rather than informal training had higher participation rates in SfC. In addition, households in those villages were less likely to report not having enough food to eat and more likely to report owning assets such as livestock. Even though the structured training program was slightly more expensive to implement, it delivered greater benefits to villages assigned to that version of the SfC treatment.
Researchers did not find any significant effects of the program on health outcomes, school enrollment, investment in small businesses or agriculture, or women’s empowerment. 

Impact of Rural Credit in Peru

Few studies have rigorously quantified the impacts of microcredit loans or determined the sensitivity of borrowers to interest rate pricing. In cooperation with the Peruvian microfinance institution ARARIWA, IPA is investigating the impact of microloans on the whole as well as determining the demand curve for microcredit.

For the study, areas in Cuzco are divided into one of three groups: a control group with no access to credit during the 24 months of the study, a treatment group that will receive credit offers at a lower interest rate, and treatment group that will receive credit offers at a higher interest rate. Data is being collected to analyze the take-up of microcredit loans, changes in socioeconomic levels, and borrower sensitivity of interest rates.

Dean Karlan

Innovative Finance for Technology Adoption in Western Kenya

Adoption of agricultural technologies like fertilizer and improved seeds is low in African countries compared to other developing countries and evidence suggests that using these technologies can dramatically increase farm productivity and income. In an ongoing study, researchers are collaborating with One Acre Fund to examine the effect of credit and savings on the adoption of fertilizer and hybrid seeds, farm productivity, and farmer livelihoods.

Policy Issue:

Adoption of modern agricultural technologies—inorganic fertilizer and hybrid seeds in particular—can lead to large increases in productivity and profitability for many African smallholder farmers. Yet actual adoption rates for these technologies are low: fertilizer use in Sub-Saharan African countries is about twelve times lower than other developing countries and adoption of modern crop varieties is about five times lower than in Asian countries. One potential explanation is that low adoption is linked to poor access to credit or savings, meaning that farmers often have difficulty finding enough cash when it comes time to make these purchases. Improved access to credit, in the form of upfront fertilizer and seed loans which are paid back over time, could spur adoption. Yet credit is relatively expensive and inflexible compared to savings. Savings products could help farmers accumulate cash to make fertilizer or seed purchases, but it may be difficult for farmers to save due to competing uses for their money and demands from family or friends. While credit and savings may potentially benefit farmers, there is little evidence about the relative effectiveness of either tool for increasing use of agricultural technologies.

Context of the Evaluation:

About 79 percent of Kenya’s population lives in rural areas and relies on agriculture for most of its income. Smallholder subsistence agriculture produces about 75 percent of total agricultural output and the primary crop is maize. For many farming households, home maize storage is the primary source of savings and is typically much larger than other formal sources (e.g. bank accounts) or informal sources (e.g. community savings groups). Yet many households suffer from substantial post-harvest losses in maize stores, due to insects or rotting. Farmers also appear to use storage inefficiently: they sell their maize at low post-harvest prices and often buy it back later in the season at prices that are four to five times as high. As a result, farmers may lack the cash needed to purchase fertilizer or seed during planting season. Yet for farmers who need cash, access to credit remains low: according to a 2009 national survey, 60.4 percent of adult Kenyans reported no access to credit or loans, and less than 10% of farmers in the study region in Western Kenya report having access to formal credit. Based in Kenya, One Acre Fund (OAF) works with over 130,000 farm households in Kenya, Rwanda, and Burundi, focusing mainly on seed and fertilizer loan and delivery. When expanding into new areas, OAF holds initial community interest meetings and then organizes groups of farmers who all receive the same program or service.

Details of the Intervention:

In partnership with OAF, researchers are examining the effect of different credit and savings products on the adoption of fertilizer and hybrid seeds, farm productivity, and farmer spending on health, education, and food. In particular, they are currently evaluating whether well-timed access to credit allows farmers to make better use of storage and sell their output at higher prices, and they are studying how any additional profits are re-invested. Researchers first randomly divided 232 groups of farmers (5-7 per group) into one of the following groups: 

  1. Post-Harvest Loan: 77 groups (474 farmers) were randomly selected to be offered a loan directly following harvest in September or October. 
  2. Post-Harvest +3 Loan: 75 groups (480 farmers) were randomly selected to be offered a loan three months after Harvest in January. 
  3. Comparison Group: 80 groups (635 farmers) were offered no loan.

Stored maize served as loan collateral, and all farmers who received loans also received a laminated tag with OAF’s logo attached to farmers’ stored maize. Following random assignment of the loan treatments, a subset of individuals within each group was randomly selected to receive a simple cash lockbox to promote savings. Additionally, researchers randomly selected 159 farmers within the comparison group to receive laminated tags to test whether the tag alone allows farmers to credibly claim to friends and family that they cannot give away their stored maize. Stored maize is easily visible to family and visitors and local norms promote sharing of surplus maize, so the tag may allow farmers to justify not sharing.

Results and Policy Lessons:

Results forthcoming. 

Edward Miguel

Price Fluctuations and Supply Chain Credit to Cocoa Farmers in Sierra Leone

In perfectly competitive markets, higher valued agricultural products should translate into higher prices, putting more money in the pockets of farmers. However, changes in value tend to reach producers at a lower rate in developing economies, which may be a result of the nature of the relationships between farmers and traders in this context. In Sierra Leone, when researchers offered a bonus to traders that mimicked a market fluctuation, farmers were not offered higher prices, but traders increased the amount of credit they offered farmers by 50 percent, suggesting value is passed to farmers through a channel other than price.

Policy Issue:

Rural areas of developing economies often lack formal financial institutions. In their absence, agents in the rural agricultural sector have emerged as a substitute source of credit for farmers and households. It is common practice, for instance, for an agricultural buyer to provide credit to farmers before the harvest under the agreement that the farmer will sell all produce to that trader at a pre-determined price at the time of harvest. A long tradition in development economics has observed that relationships such as these lead to transactions that are interlinked: the price is determined jointly with the terms of the credit contract. Specifically, since the loan benefits the farmers by providing cash when they need it, the existence of a credit contract may lower the price farmers receive for their product.

This research explores how these interlinked transactions influence how market fluctuations “pass through” to the farmers. In a perfectly competitive market, a higher valued product should translate into higher prices, putting more money in the pockets of producers. However, changes in value tend to reach producers at a lower rate in developing economies, which may be a result of the nature of these interlinked relationships. This research examines if value is passed to producers through other less visible channels, in particular, through credit.

Context of the Evaluation:

Cocoa is Sierra Leone’s largest export crop by value, comprising 8.6 percent of exports in 2009.1 The cocoa trade within the country is highly fragmented across many traders with many links, similar to other agricultural markets in developing economies: farmers sell to traders, who sell to wholesalers in small towns, who in turn sell to exporters in larger towns, who in turn sell to buyers at the port. The provision of loans by traders to farmers is a defining characteristic of this industry. Traders offer farmers credit before and during the harvesting season, which typically lasts from the beginning of the rainy season in July until early January of the following year. Traders then allow farmers to repay the loan in cocoa by selling at a below market price for subsequent sales until the loan has been repaid.

Details of the Intervention:

To examine how value is passed to producers, researchers partnered with five privately owned wholesalers in Sierra Leone’s cocoa producing Eastern Province to conduct a randomized evaluation. These wholesalers, three in the town of Segbwema and one each in the towns Pendembu and Kailahun, collect cocoa in their warehouses and then sell it on to exporters in the provincial capital of Kenema. The sample included 80 traders, comprising almost the complete set of traders who do business regularly with these wholesalers.

Researchers grouped traders in pairs and then randomly allocated one trader to treatment in each of the pairs. The research team then paid the randomly selected traders in the treatment group a bonus of 150 Leones (US$0.04) for each pound of high quality cocoa they sold, the equivalent of 5.6 percent of the average wholesale price. The bonus was designed to mimic fluctuations in the market price received by traders. Several months later, they measured how this bonus had affected prices and credit delivered to farmers across the different villages in which the traders operated.

Results and Policy Lessons:

Using detailed data on the prices and credit supplied to farmers, researchers found that the bonus translated into a negligible price increase for farmers. However, it substantially increased credit provision. Farmers selling to traders that received the bonus were 11 percentage points more likely to receive credit from the traders than those selling to traders in the comparison group (23 percent vs. 12 percent). In addition, the price response was lower in markets where this credit response was higher, suggesting that these two response margins (price and credit) are substitute.

The evaluation confirms that market conditions faced by the intermediary substantially affect the supply of credit to farmers, and that market fluctuations do not necessarily “pass-through” to the farmer in the form of higher prices, but rather through a less obvious channel: the provision of credit. These results provide an explanation for why price changes reach farmers in developing economies at relatively low rates.

[1]United Nations Commodity Trade Statistics Database.

Lorenzo Casaburi

Finding Missing Markets: An Agricultural Brokerage Intervention in Kenya

Policy Issue: 

In much of the developing world, farmers grow crops only for local or personal consumption, despite export options which are thought to be much more profitable. There are several plausible reasons why farmers might choose to grow crops for local markets, forgoing the opportunity to make more money through export crops. There may be information gaps about profitability of export crops, lack of access to the capital needed to make the switch to export crops, inadequate infrastructure to bring crops to urban centers, concern over risky export markets, or misinterpretation by researchers as to the true profit opportunities. 

Context of the Evaluation: 

Kenya’s horticultural sector, which includes fruit and vegetable production, has received a great deal of attention over the past decade due to the rapid and sustained growth of its exports to Europe. Although Europe’s appetite for Kenyan agriculture exports has been great, small farmers have largely failed to cash in on this opportunity. Many farmers instead receive below-market prices for their crops by selling them at the local market or to intermediaries, who then resell the produce at regional market centers or to export firms. In the study sample, about half of the household income came from agriculture, and most owned the land they cultivated, which was usually about one acre. Farmers grew subsistence crops (beans, maize, potatoes, and kale) 50 percent of the time and cash crops (coffee, bananas, and tomatoes) 34 percent of the time. Only 12 percent of farmers grew any export crops.  

Details of the Intervention: 

In collaboration with DrumNet, a Kenyan NGO, researchers evaluated whether a package of services could help small farmers adopt, finance, and market export crops, and thus make more income. DrumNet tried to link smallholder farmers to commercial banks, retail farm suppliers, transportation services, and exporters. To be a member of DrumNet, a farmer had to be a member of a registered self-help group (SHG), express interest in growing export crops marketed by DrumNet (i.e. French beans, baby corn, or passion fruit), and have irrigated land. 

In 2003, researchers randomly divided the 36 active self-help groups (SHGs) in the Gichugu area into three equal groups: the first treatment group received all DrumNet services; the second treatment group received all DrumNet services except for credit; and the third served as the comparison.

All individuals in the two treatment groups received a four-week orientation course, which explained the financing and selling process, and good agricultural practices. In additional, all treatment individuals opened a personal savings account with a local commercial bank to accommodate possible future business transactions. Individuals in the credit treatment group also contributed the equivalent of a week’s labor wages to an insurance fund, which would serve as partial collateral for a line of credit. After being organized into groups of five, which were jointly liable for individual loans taken out, individuals in the credit treatment group received an in-kind loan from a local agriculture supply store.

At harvest time, for individuals in both treatment groups, DrumNet negotiated prices with an exporter and arranged a produce pickup. Once the produce was delivered to the exporter, the exporter payed DrumNet who, after deducting any loan repayments, credited the remainder to the individual savings accounts that each farmer opened when they registered. 

Results and Policy Lessons: 

Impact of the DrumNet Program: One year after the program began, treatment individuals were 19.2 percentage points more likely to be growing an export crop, but there were no significant gains in income for the full sample. However, among first-time growers of export-oriented crops, program participation led to a 31.9 percent increase in income.

Out of the twelve SHGs in each treatment group, ten decided to take advantage of DrumNet services when credit was offered, compared to only five of twelve when it was not, implying that farmers perceived credit as an important factor for cultivating export crops. However, access to credit had no effect on income gains compared to no-credit SHG groups. 

Long-term Consequences: Unfortunately, one year after the evaluation ended, the exporter refused to continue buying from the DrumNet farmers since none of the SHGs had obtained EU export certifications. This led to DrumNet’s collapse as farmers’ export crops were left to rot and loans went into default. Farmers returned to growing for local markets, underscoring the original concerns over export market risk. 


Agricultural Microfinance in Mali

Evidence suggests additional investments in agriculture could increase income for subsistence farmers, potentially improving the livelihoods of millions of people. In rural Mali, giving some farmers unrestricted cash grants led to significantly higher productivity and profits, suggesting farmers would invest more in their farms if they had more capital. Providing farmers with an innovative loan product also led to a significant increase in farm investments and expenditures, suggesting agricultural loans tailored to farmers’ seasonal cash flow may be an effective way to increase investments in agriculture. In addition, this research suggests farmers vary in the returns they are able to generate from inputs, and agricultural loans attract clients with a better-than-average ability to grow their farms.

Policy Issue:

Agricultural productivity in Africa is very low despite the existence of modern agricultural inputs such as improved seeds, fertilizers, and pesticides. As a much of the population works in agriculture, encouraging the adoption of these technologies could raise agricultural productivity and in turn reduce poverty and encourage economic growth. But why do farmers fail to invest in these potentially profitable inputs? One reason may be that they do not have enough cash on hand when they need to purchase inputs and they lack access to credit. Microcredit organizations have attempted to address this problem, but the typical microcredit loan contract—where clients must start repayment after a few weeks—is ill-suited for agriculture. Providing farmers with loans at the beginning of the planting season, to be repaid in a lump sum at the time of harvest, could facilitate investment in inputs and increased profitability. However, there is little evidence on this type of microcredit.

Context of the Evaluation:

In Mali, 80 percent of people work in agriculture, most of them in subsistence farming. The sector accounts for about 37 percent of Gross National Product.1 This study takes place in the region of Sikasso, within the areas of Bougouni and Yanfolila, in southern Mali. In these areas, farmers grow cash crops like cotton, maize, sorghum, millet, and groundnuts.

Soro Yiriwaso, is a microfinance institution in Mali whose mission is to increase economic opportunities for poor Malians, especially women, by offering financial services. Soro Yiriwaso offers a loan product called Prêt de Campagne, or “countryside loan,” to women who join local community associations. Unlike most microloan products, it is designed specifically for farmers. The loans are dispersed at the beginning of the agricultural cycle between May and July and clients must repay loans on one lump sum immediately after the harvest. Soro Yiriwaso issues the loan to groups of women organized into village associations. Each individual woman then establishes a contract with the association for her loan.

Details of the Intervention:

To evaluate the impact of the Prêt de Campagne loan product on agricultural productivity and farm profits, researchers partnered with Soro Yiriwaso to conduct a two-stage randomized evaluation in 198 villages in rural Mali.

In the first stage of the study, Soro Yiriwaso offered their standard agricultural loan in 88 randomly selected villages. In these villages, only women who joined a local community association were eligible to receive loans. In the remaining 110 villages, no loans were offered.

In a second stage of the study, researchers offered grants in the 88 loan villages to a random subset of the households who chose not to take out loans.  The grants were worth 40,000 FCFA (US$140)— about the size of the average loan provided by Soro Yiriwaso and equivalent to around 70 percent of what average households spent on agricultural inputs. In the 110 villages where no loans were offered, households were also randomly selected to receive the grants. Similar to the loans, these grants were issued directly to a female household member.

Over a two-year period, researchers measured changes in farmers’ cultivated area, input use, and production output. They also collected data on food and non-food expenses of the household as well as on financial activities (formal and informal loans and savings) and livestock holdings.

Results and Policy Lessons:

Take-up and Use of Loans: About 22 percent of the women chose to accept the loan in treatment villages, which is a take-up rate similar to other microcredit products. Households offered loans increased investments and expenditures on agricultural inputs. Households in villages which were offered loans spent on average US$10.35 more on fertilizer and US$5.08 more insecticides and herbicides than the households in villages that did not get loans. Offering loans led to an increase in the value of agricultural output by US$32, and an increase in the value of livestock by US$168. The loans did not have a significant effect on profits, consumption, whether the household has a small business, nor educational expenses.  The return to agricultural investment varied across farmers, with more productive farmers generating higher returns to agricultural inputs.

Grants: In villages where loans were not offered, providing grants to women in households led to an increase in agricultural investments and, ultimately, profits. Households randomly selected to receive grants cultivated 8 percent more land and invested 14 percent more on inputs than households that did not receive grants. Output and farm profits among women who received grants also increased 13 percent and 12 percent, respectively.  

Self-Selection: Productive farmers—households that invested more in agriculture, had above-average agricultural output and profits, or had more agricultural assets and livestock than average before the program—were more likely to borrow and demonstrated higher returns to investment. Moreover, in the villages where loans were offered, households who opted not to take out a loan and instead received a grant did not generate the same returns as those in no-loan villages who were offered grants. This suggests that households that applied for loans were those with the high returns to capital.

Retention and repayment: The repayment rate among women who elected to take out loans was perfect and 50 percent of clients chose to borrow money again, which is on par with typical client retention rates for sustainable, entrepreneurially focused microcredit operations.

Overall, this research suggests that agricultural lending tailored to the farmers’ seasonal cash flow may be an effective way to increase investments in agriculture and improve yields and profits. Furthermore, the evidence that productive farmers are more likely both to apply for agricultural loans and to generate higher returns on the agricultural investments they make has important implications for credit markets. In short, farmers vary in the returns they are able to generate from inputs, and agricultural loans attract clients with a better-than-average ability to grow their farms. 

Related Paper Citation:

Beaman, Lori, Dean Karlan, Bram Thuysbaert, and Christopher Udry. Self-Selection into Credit Markets: Evidence from Agriculture in Mali. No. w20387. National Bureau of Economic Research, 2014.

[1] International Fund for Agricultural Development (IFAD). “Mali Statistics.” Rural Poverty Portal. Accessed: 4 March 2015.

Fighting Procrastination among Loan Officers in Colombia

Microcredit banks may be able to operate more efficiently if their loan officers spread their workload evenly over time, resulting in a more stable cash flow for the bank—but loan officers, like many people, have a tendency to procrastinate. This evaluation in Colombia found that introduction of short term goals, positive reminders and incentives led to a significant change in the way loan officers allocated their time and improved performance. The effect of the small nudges only became significant, however, when branch managers were included in the intervention. 

Policy Issue:

It often hard for individuals to balance current needs against long-term goals, or to meet self-imposed deadlines without an external nudge in the right direction. Most scholarly research has focused on procrastination problems in the context of individual choices and decisions; in contrast, efficient mechanisms for fighting procrastination in firms and organizations have been little-studied. In the context of development, it is likely that microcredit banks could operate more efficiently if their loan officers spread their workload evenly over time, resulting in a more stable cash flow for the bank—but loan officers, like many people, have a tendency to procrastinate.


Bancamia, a for-profit microfinance bank in Colombia, specializes in access to finance for micro-enterprises, low- and middle-income segments, rural populations, and women. At the time of this intervention, Bancamia had close to US $160 million in outstanding loans to over 180,000 clients. Although the bank’s loan officers are paid on commission, they commonly postpone credit collection efforts and sourcing new clients until the last two weeks of each month, just before bonuses are calculated. As a result, they report exhaustion and high stress levels close to the monthly deadline. Loan officer procrastination also creates cash management problems for Bancamia, as there is a mismatch between the timing of credit repayment at the beginning of the month and credit disbursement at the end.

Description of Intervention:

Researchers partnered with Bancamia to introduce incentives for loan officers to shift their work earlier in the month under an initiative called the “Madrugador” (or “Early Riser”) program. Prior to the intervention, Bancamia’s payment structure for loan officers included a commission on new loans, with weekly targets. For every week that loan officers failed to meet their targets, they were punished with a 5 percent reduction in their potential commission. Despite this payment structure, which was already designed to spread the workload over time, loan officers were not able to keep self-imposed deadlines. As a result, most were in effect giving up part of their paycheck each month.

In contrast to the punishment-based incentive system, the intervention tested emphasized positive rewards and frequent goal reminders. Under the Madrugador program, small prizes like movie tickets or restaurant coupons were awarded weekly to loan officers who met quotas for new loans early in the month, and branch managers were asked to remind their employees about meeting weekly goals. Researchers also printed and distributed the “Madrugador Monthly Bulletin,” featuring the best performers in each participating branch and a reminder about the program’s grand prize, a free vacation for the top performer overall.

Half of Bancamia’s 61 branches were randomly selected to participate in the incentive program, while the other half served as a comparison group. After three months, the Madrugador program was expanded to include incentives for branch managers, including as well as loan officers, including small prizes if their branch met 50 percent of the set goals, grand prizes if their branch performed best overall, and acknowledgement in the monthly bulletin.


The introduction of short term goals, positive reminders and incentives led to a significant change in the way loan officers allocated their time and improved performance. The effect of these small nudges became significant, however, only when branch managers were included in the intervention. There was an average 18 percent increase in the sourcing of new loans in the first two weeks of each month and a 30 percent improvement in the achievement of target goals above the comparison group. Before the intervention, only about 15 percent of loans were disbursed during the first two weeks of the month, while one-third of loans were made during the very last week. After the Madrugador Program ended, however, loan officers began procrastinating again, and the improvement in workload distribution disappeared.   

During the intervention, loan officer compensation rose 25 percent (an increase of US$152-191, independent of program prizes) relative to the comparison group. This was not because loan officers made more loans total over the course of the month, but because the program helped them to spread their workload across the month to take advantage of the existing commission payment structure. Even though they knew they could make more money if they did not procrastinate, loan officers needed support from an organizational structure that provides short-term goals and reminders about when to exert effort in order to use their time optimally.

Bancamia’s loan officers in the treatment group also reported significantly higher job satisfaction and lower stress levels with the leveled-out workload. Because the project was highly popular with employees, Bancamia is restarting the Madrugador program on its own.

Antoinette Schoar

The Miracle of Microfinance? Evidence from a Randomized Evaluation

This study was the first rigorous randomized evaluation of the "traditional" microlending model. The findings from the study suggest that access to microcredit has important effects on household expenditure patterns and the creation and expansion of businesses, but no effect on health, education, women’s decision-making, or average monthly expenditure overall, at least in the short term. It is possible that impacts on education, health, or women’s empowerment would emerge after a longer time, when the investment impacts (may) have translated into higher total expenditure for more households. However, at least in the short-term, microcredit does not appear to be a recipe for changing education, health, or women’s decision-making. 

Policy Issue: 

Microcredit is one of the most visible innovations in anti-poverty policy in the last half-century, and in three decades it has grown dramatically. Now with more than 150 million borrowers, microcredit has undoubtedly been successful in bringing formal financial services to the poor. Many believe it has done much more and, 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.

Context of the Evaluation: 

Over one third of Hyderabad's population resides in slums and other poor settlements 1, where there is extremely low access to formal financial services. At the time of the baseline survey, there were almost no microfinance institutions (MFIs) lending in the sample area, yet 69% of the households had at least one outstanding loan. Loans were taken from moneylenders (49%), family members (13%), or friends and neighbors (28%). Commercial bank loans were very rare.

Launched in 1998, Spandana is one of the largest and fastest growing microfinance organizations in India, with 1.2 million active borrowers in 2008. Spandana offers traditional microfinance loans, in which self-formed groups of six to ten women are given loans. A “center” is comprised of 25-45 groups, and to join an individual must  (i) be female, (ii) aged 18 to 59, (iii) residing in the same area for at least one year, (iv) have valid identification and residential proof, and (v) at least 80% of women in a group must own their home.

Details of the Intervention:

This project investigates a randomized impact evaluation on the introduction of microcredit in a new market. Spandana selected 120 areas in Hyderabad as places in which they were interested in opening branches, based on those communities having no pre-existing microfinance presence, and having residents who were desirable potential borrowers. Sixteen communities were subsequently dropped from the sample because they were found to have large numbers of migrant workers, who are less desirable as loan candidates. Fifty-two areas were randomly selected for the opening of an MFI branch immediately, while another 52 served as the comparison communities.

Spandana introduced their financial products into the treatment villages at the beginning of the study in 2005. Data was collected on income, consumption, borrowing, and investment practices in a random sample of eligible households in both treatment and comparison areas. The typical loan was approximately Rs. 10,000 (US$250).

Results and Policy Lessons:

Loan Take-Up and Use: Twenty-seven percent of eligible households took up loans from Spandana or another MFI by the time of the endline survey. Spandana does not insist that loans be used for business purposes, however 30% of Spandana borrowers reported they used their loans for starting a new business, and 22% to buy stock for existing businesses. Additionally, 30% of loans were reportedly used to repay an existing loan, 15% to buy a durable good for household use, and 15% to smooth household consumption.

New Businesses and Business Profits: Seven percent of households in treatment areas reported operating a business which was opened in the past year, compared to 5.3% in comparison areas. Existing business owners did not see a change in profits with the new competition.

Expenditure: Expenditure patterns were very different for different groups. Those with an existing business bought more durable goods for their home and business (i.e. they invested). Those most likely to start a new business cut back sharply on temptation goods (tobacco, eating out, etc) and invested more. Those least likely to start a business consumed more non-durable goods. A switch from temptation goods to investment in the first two groups is encouraging and may lead to higher consumption in the future, though it is too early to tell. The increased consumption of the third group may come from paying off higher interest loans, which means that the households have more money to spend. But it could also mean that the households simply spent the loans on non-investment goods, and have fallen further into debt. Again, this short-term study cannot tell. 

Education, Health and Female Empowerment: No evidence was found to suggest that microcredit empowers women or improves health or educational outcomes. Women in treatment areas were no more likely to be make decisions about household spending, investment, savings, or education. Households in treatment areas spent no more on medical care and sanitation than do comparison households, and were no less likely to report a child being sick. Among households with school-aged children, households in treatment areas are also no more likely to have children in school- although school going rates were already high in the treatment and comparison groups.

1 Greater Hyderabad Municipal Corporation, “Chapter V: Basic Services to the Urban Poor,” Hyderabad - City Development Plan, (Accessed September 8, 2009)

Identifying Information Asymmetries in a Consumer Credit Market in South Africa

Policy Issue: 
Access to credit may enable the poor to start or expand a business, increase investments in health and education, and cope with risks, such as medical emergencies or droughts. However, in the presence of strong competing demands for limited resources, the poor may be more likely to default on a loan and as higher-risk borrowers, may find it difficult to obtain a loan, even when they are willing to pay high interest rates. This problem is often exacerbated by the presence of information asymmetries, or differences in information available to the lender and borrower. In credit markets, borrowers usually have better information than the lender. Borrowers have better information about themselves, the prospects of the investment activities for which the funds are borrowed, the risks associated, and their likelihood of default. If lenders do not have full, accurate information about a borrower, they may be more hesitant to offer credit, particularly to poor borrowers who have a higher initial risk of default.
There are two types of information asymmetries. The first, which is often called “hidden information,” supposes that only borrowers who know beforehand that they will not be able to repay the loan will accept the high interest rates that accompany high-risk loans. The second type, commonly referred to as “hidden action,” supposes that borrowers given high interest rates have greater incentives to default since it becomes more costly to repay the loan. If lenders know which of these effects is more responsible for loan defaults among high-risk borrowers, they may be better able to design policies that increase the likelihood of repayment, which would allow them to extend access to credit to those who are generally considered to be too high of a risk.
Context of the Evaluation: 
The partner lending institution was one of the largest and most profitable micro-lenders in South Africa, with a network of more than 100 branches across the country offering small, high-interest, short-term credit with fixed monthly repayment schedules to the working poor. The lender’s median loan size was R1000 (US$150), which was about one-third of the average monthly income of its borrowers. The partner typically offered four-month loans with an interest rate between 7.75 and 11.75 percent per month depending on observable risk, with 75 percent of clients in the high-risk (11.75 percent) category. Risk was determined through a combination of a centralized credit scoring system and loan officer discretion. Half of new loan applicants were denied for a variety of reasons including unconfirmed employment, suspicion of fraud, poor credit rating, and excessive debt burden. Of those who were approved, many did not repay their loans; about 30 percent of first-time borrowers and 15 percent of repeat borrowers defaulted.
Details of the Intervention: 
Researchers sought to determine the presence and relative importance of “hidden information” and “hidden action” effects to explain the high rate of default amongst high-risk borrowers in South Africa. In the summer of 2003, the partner lender mailed a brochure to 57,533 former clients with a good repayment history offering a randomly-assigned interest rate, which was conditional on their previous designation as low, medium, or high-risk borrowers—high-risk borrowers were offered high rates, low-risk borrowers low rates. In all, 5028 clients accepted the offer, of which 4348 were approved for a loan.
While meeting with loan officers to determine the conditions of their loan, 41 percent of borrowers were randomly selected to receive an offer for a new interest rate (the contract rate) that was lower than the original offer rate they received in the brochure.
After the loan contracts were finalized, a random 47 percent of the borrowers who had received the lower contract rate were informed that they would receive that same low rate on all future loans for the next year as long as they repaid the initial loan on time. The guaranteed future rate was designed to give borrowers a greater incentive to repay their initial loan.
By randomizing the interest rate along three dimensions—(i) the initial offer rate featured in the mailer, (ii) the contract rate that was revealed only after the borrower agreed to the initial offer rate, and (iii) the future rate that extended preferential pricing on future loans to borrowers who remained in good standing—the researchers essentially created five different groups whose repayment rates could be compared to determine whether hidden information or hidden action effects have a larger impact on loan repayment.
·         Group 1: High offer rate, high contract rate, no low future rate
·         Group 2: High offer rate, low contract rate, guaranteed low future rate
·         Group 3: High offer rate, low contract rate, no low future rate
·         Group 4: Low offer rate, low contract rate, guaranteed low future rate
·         Group 5: Low offer rate, low contract rate, no low future rate
Results and Policy Lessons: 
Hidden Information: To identify any hidden information effect, within the sample that received the low contract rate, the repayment behavior of clients who received a higher initial offer rate was compared to that of clients who received a low initial offer rate. The hidden information effect would occur if the higher initial offer rate attracted those with a (unobservable) lower probability of repaying the loan. However, the results indicate that the initial offer rate had no effect on the rate of default; those who received the high offer rate were no more likely to default than those who received the low offer rate, which suggests that borrowers did not accept the high interest rate because they knew they would not be able to repay.
Hidden Action: To detect any effect of hidden action, within the sample that accepted the high initial offer rate, researchers compared the repayment behavior of clients that were offered the high contract rate with that of clients that were offered the low contract rate. If clients that received the high contract rate were more likely to default because it was more costly to repay the loan that would indicate hidden action effects. Conversely, the results indicate that borrowers who were offered the higher contract rate were no more likely to default.
Comparing the repayment behavior of groups that received the same initial offer rate and contract rate, but different repayment incentives, can also identify hidden action effects. The results indicate that borrowers who were guaranteed a low future rate if they repaid their initial loan were 13 to 21 percent less likely to default on their loan than the average borrower, and the larger the discount on future loans, the less likely borrowers were to default. This suggests that high-risk borrowers may normally deem it too costly to repay their loans, even when given a lower interest rate, but they may be more motivated to repay when offered an additional incentive.
Related Papers Citations: 
Karlan, Dean, and Jonathan Zinman. 2009. “Observing Unobservables: Identifying Information Asymmetries with a Consumer Credit Field Experiment.” Econometrica 77 (6): 1993-2008.


Estimating the Impact on the Lender's Bottom Line and Borrowers' Household Welfare of Expanding the Supply of Consumer Credit to the Working Poor in South Africa

Policy Issue:

Microcredit is one of the most visible innovations in anti-poverty policy in the last half-century, and in the past three decades it has grown dramatically. While some microfinance institutions (MFIs) focus on maximizing profits, others carry a social mission and seek to maximize access to credit for the poor, subject to their available budget. Regardless, nearly all MFIs face tightening pressure from policymakers, donors, and investors to eliminate their reliance on donor or government subsidies. Economic modeling, policy, and practice suggest that loan pricing (selecting interest rates and repayment conditions) is critically related to reliance on these subsidies. Yet existing research offers little insight into interest rate sensitivities in MFI markets,and little methodological guidance on how to determine optimal interest rates.Instead MFIs and policymakers rely largely on intuition, and often presume that the poor are insensitive to interest rates.

Context of the Evaluation:

The cooperating Lender has operated for over 20 years as one of the largest, most profitable microlenders in South Africa. The Lender competes in a “cash loan” industry segment that offers small, high-interest, short-term, uncollateralized credit with fixed monthly repayment schedules to the working poor population. Cash loan sizes tend to be small relative to the fixed costs of underwriting and monitoring them, but substantial relative to a typical borrower’s income. For example, the Lender’s median loan size of 1000 Rand (US$150) was 32 percent of the median borrower’s gross monthly income. Cash lenders focusing on the highest-risk market segment typically offer one-month maturity loans at 30 percent interest per month. As a comparison, informal sector moneylenders charge 30-100 percent per month.

Description of Intervention:

Researchers are testing how the poor respond to changes in interest rates using data from a field experiment in South Africa. Researchers worked with the cooperating Lender  to randomize the interest rate offered in “pre-qualified,” limited-time loan offers that were mailed to over 50,000 former clients with good repayment histories. Most of the offers were at relatively low rates, and the offer rate randomization was stratified by the client’s pre-approved risk category. The standard interest rate schedule for four-month loans was: 7.75 percent per month for low-risk clients, 9.75 percent for medium-risk, and 11.75 percent for high-risk. At the Lender’s request, 96 percent of the offers were at lower-than-standard rates, with an average discount of 3.1 percentage points on the monthly rate. The final range of interest rates faced varied from 3.25 percent per month to 14.75 percent per month.

Loan price is not the only parameter that could affect demand. Liquidity constrained individuals may respond to loan maturity as well, since longer loan maturities reduce monthly payments and thereby increase the amount of cash available each month. To test this theory, a subset of clients eligible for maturities longer than four months also received a maturity suggestion as well. The suggestion took the form of non-binding “example” loan showing one of the Lender’s most common maturities (four, six, or twelve months), where the length of the maturitywas randomly assigned. Clients wishing to borrow at the offer rate then went to a branch to apply, as per the Lender’s standard operations.

Results and Policy Lessons:

Demand Response to Price: Among the sub-sample of clients that received interest rate offers below the standard rate for their risk category, a price decrease from the maximum to the minimum rate offered in this sample increased take-up by 2.6 percentage points, or 31 percent of the baseline take-up rate. High interest rates, on the other hand, depressed the levelof take-up: clients that received interest rate offers above the standard rate for their risk category were 3 percentage points (36 percent) less likely to apply. Higher rates also reduced repayment. Taken together, these results indicate that people’s demand for credit increases moderately when interest rates are lower than the market price, but drops off steeply when interest rates are above average.

Maturity Date: While the sub-sample for the maturity estimate is small, loan size is found to be far more responsive to changes in maturity date than to changes in the interest rate, which is consistent with the hypothesis that liquidity constraints affect loan size, since longer maturities reduce monthly payments and thereby improve cash flows. There is also some evidence that only relatively poor borrowers are sensitive to maturity, whereas for price sensitivity this does not appear to be the case.A practical implication is that some MFIs should consider using maturity rather than (or in addition to) price to balance profitability and targeting goals.

For this particular lender, the cost of reducing interest rates (lost gross interest revenue) slightly exceeded the benefits (increased gross revenue from marginal borrowing, increased net revenue from higher repayment rates). Thus this Lender, which had no social targeting objectives, had no incentive to cut rates. Policymakers keen on avoiding subsidies often prescribe that MFIs should raise rates. However, evidence from this study also shows that this would have been disastrous for the Lender, as increasing interest rates above standard reduced both loan take up and eventual repayment.


Access to Credit and the Scale-Up of Biometric Technology in Malawi

Introducing biometric identification substantially increased repayment rates amongst Malawian farmers with the highest risk of default. Researchers are now examining the large-scale impact of biometric technology on repayment and borrower behavior at microfinance institutions across the country.

Policy Issue:

Credit enables small-scale farmers and business owners in developing countries to finance crucial inputs such as fertilizer, improved seeds, and business assets. However, formal lenders may be discouraged from lending to the rural poor due to difficulties in ensuring repayment from borrowers who lack adequate collateral or verifiable credit histories. Obtaining reliable information on individuals’ credit history can be difficult in countries without unique identification systems, like social security numbers or government-issued photo identification. Borrowers can avoid sanction for past default by simply applying for new loans under different names or from different institutions. Biometric identification, such as fingerprints, can help lenders identify unique borrowers, verify credit histories, and enforce loan repayment, which in turn can make it cheaper for banks to extend credit to the poor.

A previous study among paprika farmers in Malawi showed that fingerprinting substantially increased loan repayment among the riskiest borrowers. Researchers are now scaling up the use of fingerprinting for loan enforcement and examining its effects on borrowing and lending across the country.

Context of the Evaluation:

Few rural Malawian households have access to loans for business and agricultural purposes: only 11.7 percent reported taking out a loan in the previous year, and among these loans only 40.3 percent were from formal lenders.1 According to the World Bank’s Doing Business Report, which ranks countries on the ease of owning and operating a local business, Malawi ranked 109 out of 129 countries in terms of the supply of private credit.

Researchers are partnering with the Malawi Microfinance Network, four microfinance institutions (MFIs), and two credit bureaus, Credit Data Malawi and CRB Africa, to expand the use of fingerprinting and introduce a fingerprint-based credit bureau that would enable information sharing across lenders.

Details of the Intervention:

Researchers will measure the large-scale impacts of fingerprinting on lending and borrowing across Malawi in partnership with four MFIs, covering over 50 percent of microfinance borrowers in 27 out of 28 districts.

Two hundred and thirty-six loan officers from the participating MFIs will be randomly assigned to a treatment or comparison group.  All borrowers managed by loan officers in the treatment group will be fingerprinted in the process of loan application.  Borrowers served by officers in the comparison group will not be fingerprinted. To capture the effects of fingerprinting at different stages in the loan cycle and agricultural season, loan officers in the treatment group will fingerprint their borrowers in phases. 

Researchers will evaluate the impact of fingerprinting on borrower and lender behavior and levels of agricultural output and business productivity among borrowers. In addition, researchers will evaluate any indirect effects on borrowers and lenders nearby the institutions that fingerprinted clients.

Results and Policy Lessons:

Project ongoing, results forthcoming.

Shopping for Financial Products in Peru

Financial products have the potential to help the poor, yet most financial institutions are driven by commercial goals, and their staff may not be incentivized to offer products most suitable to low-income clients. In this study in Peru, participants visited banks and pretended to be shopping for financial products in order to gather information on how bank staff treat different types of clients. Policymakers aim to use the information from this study to improve consumer protection policy and practices for financial products and services in Peru.

Policy Issue:

Financial institutions, driven by commercial interests, often offer expensive products to clients first, and staff are rarely incentivized to provide information about ways to avoid fees or access cheaper products. Meanwhile, many clients lack the necessary understanding of financial products to engage in sound financial decision-making; it requires a certain level of financial knowledge to avoid paying fees, or to ask if a cheaper product is available, even when it is not offered. Less informed customers may not be able to navigate this territory to find products that best suit their needs.

Indeed, research suggests that lack of transparency and low quality of information provided by financial institutions has negative consequences for low-income consumers. In a related study, for example, staff at financial institutions failed to voluntarily provide much information about avoidable fees, especially to people lacking financial knowledge, and clients were almost never offered the cheapest product.1

Many governments around the world have tried to address this problem by introducing legislation to improve customer protection policy and practices related to disclosure and transparency for financial products. This study aims to contribute evidence for such policymaking in Peru and beyond.

Context of the Evaluation:

The World Bank and Peru’s banking and insurance supervision agency, Superintendencia de Banca, Seguros, y AFP (SBS), are working to improve consumer protection policy and practices in the Peruvian market for financial products and services. This includes work to improve product disclosure and transparency for credit and savings products.  These institutions are therefore seeking high-quality data on existing practices, notably the quality and type of financial information and advice offered to low-income individuals by Peruvian financial institutions that provide savings, individual term credit products, and credit cards. 

Details of the intervention:

To evaluate whether financial institutions provide different treatment to clients based on their profile, and if so, what the differences in information are, researchers carried out an audit study of financial institutions in urban areas of the northern, southern and central regions of Peru, specifically in the cities of Lima, Puno, and Piura.

The study had two phases. First, low-income individuals carried out 529 visits to financial institutions, which included commercial banks, lending institutions and microfinance institutions, where they pretended to be shopping for different financial products. They either requested a savings account, a term credit product, or a credit card. Prior to conducting the shopping exercises, the participants received two days of training on how to act out their assigned consumer profile. They followed scripts that entailed using language and behaviors that signaled high or low levels of financial experience. 

After the exercises, the participants completed questionnaires on what information was presented and in which forms, as wells as on their personal impressions of the quality of information, advice and customer service provided by the institutions.

Mystery shoppers’ visits were intended to determine the types of information—verbal, physical and otherwise—institutions provide to low-income financial consumers. The participants act out the different consumer characteristics to enable researchers to examine any differences in how staff treat clients based on perceptions of the clients’ financial knowledge.

In the second stage, surveyors carried out interviews with 62 credit officers, at institutions where the exercises had been conducted, to obtain information on the staff members’ socio-demographic characteristics, perception of clients, financial knowledge, and salary and incentives structure.

Researchers will merge results from this study with findings from related studies in Mexico and Ghana.

Results and Policy Lessons:

Results forthcoming.

[1]Giné, Xavier, Cristina Martinez Cuellar, and Rafael Keenan Mazer. "Financial (dis-) information: evidence from an audit study in Mexico." World Bank Policy Research Working Paper 6902 (2014). Available at:


Examining Underinvestment in Agriculture: Returns to Capital and Insurance Among Farmers in Ghana

Risk, rather than a lack of capital, appears to drive underinvestment in agriculture in Northern Ghana - when farmers were provided with weather insurance they spent more on inputs such as chemicals, land preparation, and labor.

Policy Issues:

Underinvestment in agricultural inputs such as fertilizer, hybrid seeds, or labor is thought to drive low crop yields in Africa and other parts of the developing world. Several factors may help explain why farmers fail to invest in such potentially profitable inputs. It is possible that they are wary of the riskiness of adopting new agricultural methods or tools—if they invest and their crops still fail, they will have even less money than if they had not invested at all. Farmers may also lack the capital necessary to purchase these inputs, and be unable to obtain credit to finance investment in their farms. Because the returns to using new technologies can be so high, encouraging use among farmers has the potential to greatly improve their welfare, but financial institutions and policymakers need to first understand what factors are truly driving underinvestment in agriculture.


The climate of northern Ghana’s savannah region has a single short wet season, with high annual variation in rainfall. This kind of weather pattern creates great risk for farmers who depend on the weather for their livelihood, particularly when agriculture is primarily rain-fed, as it is in this area. There is strong evidence that shocks in the amount of rainfall translate directly into consumption fluctuations for farmers, and so investment in new agricultural technologies or methods has the potential to significantly affect welfare. Throughout Ghana, the average farmer uses only 7.4 kg of fertilizer per hectare, while in South Asia fertilizer use averages more than 100 kg per hectare. Initial surveys in northern Ghana revealed that the median farmer participating in this study did not use any chemical inputs on their crops, often citing lack of money or concerns regarding weather risk as key obstacles preventing investment.

Description of the Intervention:

In the first year of the study, researchers tested the relative importance of capital and risk in driving farmers’ investment behavior. From a total of 502 households, 117 were randomly selected to receive a cash grant to fund agricultural inputs; these farmers received GHC 60 (approximately US$45) per acre for up to 15 acres, delivered at a time of their choosing. Another 135 randomly selected households received a grant for an insurance scheme that paid roughly GHC 100 (US$75) per acre of maize if rainfall at a local weather station went above or below specified thresholds. Ninety-five households received both the cash grant and the insurance grant, while 155 households received no additional services and formed the comparison group.

In the second year, researchers tested different prices for rainfall insurance among the original sample households, plus households in an additional twelve communities. Households were visited up to four times by marketers: during the first visit they were informed about the product, during the second visit they were asked to sign the contract and pay premiums, during the third visit the marketer issued a policyholder certificate, and during a fourth visit an auditor verified their understanding of the product. The price that people were offered for insurance was randomly assigned at the community level: households in the original sample would be offered rainfall insurance at a cost of either 1 GHC or 4 GHC (approximately US$0.75 or US$3), while in the newly added communities, households would be offered insurance at either the market price of GHC 12-14, or the actuarially fair price of GHC 8-9.5.

In year three, the pricing experiment continued in collaboration with the Ghana Agricultural Insurance Programme (GAIP), to market their drought-indexed insurance. Because this product was more complex, scripts used at the four marketing visits were updated to make it more understandable. Pricing of the insurance was again randomized at the community level, with 23 communities receiving the market price, 23 communities receiving the actuarially fair price, and 26 communities receiving a subsidized price.


Importance of Capital vs. Risk: Results from the first year suggest that risk, rather than capital, was the major constraint on investment among farmers in this sample. Farmers who received the insurance grant increased their expenditure on farm chemicals, and also brought more acres of land under cultivation. If the primary constraint on investment was a lack of capital, then the insurance product, which offered no up-front payouts, would not have affected their ability to purchase materials. Many farmers appeared to recognize the value of the insurance product, with a significant proportion choosing to purchase insurance in years two and three. Take-up of the insurance product did not change when a token price of GHC 1 per acre was charged, and even at the actuarially fair price of almost GHC 10 per acre, 40-50 percent of farmers purchased insurance.

Impacts of Weather Insurance: Farmers with weather insurance invested more in agricultural inputs, particularly in chemicals, land preparation, and hired labor. Total cultivation expenditures were more than GHC 250 (US$188) higher for farmers with insurance, representing a 33 percent increase relative to the comparison group. These impacts were even larger among farmers who received both insurance and a capital grant. Despite the increases in production, it is not clear that investments were actually profitable for farmers: the additional expenditures may have increased by more than the value of the additional output, depending on how household labor is valued.

Trustworthiness of Insurance: Results suggest that how much farmers trust the insurance scheme has a large impact on their take-up and response to rainfall insurance. Take-up of insurance was considerably higher among farmers who also received a capital grant, but it was not higher among households who were wealthier. This suggests that farmers might not have been entirely confident that the promised insurance payouts would be made when trigger events occurred, and so they were more willing to take the risk of purchasing when they had been given extra cash. Similarly, individuals who were familiar with others who had received insurance payouts in previous years were significantly more likely to take-up insurance themselves.


Read about the new agricultural insurance product launch as a result of this study here, and about its' 2012 payout to farmers here.

Click here for a Q&A with researcher Chris Udry

The Impact of Food and Cash Loans on Smallholder Farmers in Zambia

Many farming households turn to off-farm work to make ends meet between harvests, reducing the amount of time they can invest in increasing their farms’ productivity. In ongoing work in Zambia, researchers are testing the relationship between scarcity, labor supply and agricultural productivity. Selected farmers receive access to either cash or food loans during they lean season that they are responsible for repaying at harvest. Researchers will track a variety of outcomes including yields, labor supply, food consumption and how impacts vary within the household and by loan type. In a pilot, already completed, food loans were shown to increase food consumption during the lean season, reduce the portion of households engaging in off-farm work, and increase wages. In the pilot, both take up and repayment rates were over 90 percent and results clearly established the relevance of hunger as a driver of labor supply decisions. 

Policy Issue:
Many farming households turn to casual day labor, typically on other better-off farms, to make ends meet between harvests, which often means that farmers do not have time to invest in  their own land. If farmers neglect on-farm activities that are important for production, such as weeding or application of fertilizer, then off-farm work can result in lower yields on farmers’ own fields. With a poor harvest, families are less able to set aside resources to last through the next season, increasing their reliance on off-farm work. Providing credit, either in the form of food or in cash, could allow farmers to spend more time on their farms. Farmers would not be forced to find off-farm income to feed their families between harvests, and would therefore be able to spend additional time applying fertilizer, weeding, or harvesting the crop, which would increase yields. In the long run, this gain in productivity might increase incomes by more than farmers could earn through casual labor. Although existing research looks at the impact of agricultural loans on crop productivity, this is one of the first studies to look at the impact of credit on how farmers allocate labor.
Context of the Evaluation:
Small-scale farming is the primary source of income in rural Zambia, and 72 percent of the work force is employed in agriculture. Most farmers are poor, and in Chipata District, where this evaluation takes place, the average income is less than US$500 per year for a household of six people. Sixty-three percent of households in rural Chipata are classified as “very poor” and almost all households lack electricity and piped water.
Zambia’s long dry season allows for only one harvest per year, which means that the harvest must generate income to last the entire year. Payments for input loans and other debts are often due at the time of the harvest, exacerbating the difficulty of setting aside resources for the next year. As a result, many households turn to off-farm, casual labor during the hungry season (January to March) to cope with short-term financial needs. In the study sample, 60 percent of young men reported engaging in casual labor during the previous season.
Description of Intervention:
Researchers are testing the effects of food and cash loans on labor supply and agricultural productivity. They have completed a preliminary, pilot study to establish the relationship between food shortages and labor supply. A larger study is ongoing.
Pilot study: In the pilot study, researchers tested the effect of  food loans on farming households’ food consumption, casual labor supply, and wages. The loan program offered households one 25-kilogram of ground maize flour per month during the lean season (January to March). Farmers were expected to repay the loan at harvest (in June) with three 50-kilogram bags of unground maize. Each bag of ground maize was worth about 45 Zambian kwacha (US$9) and each bag of unground maize was worth 50-65 kwacha (US$10-13), resulting in an interest rate of 11-44 percent over the loan period.
Researchers evaluated the loan program in 40 rural villages, each within a day’s drive of Chipata town and with 15-25 small-scale farmers. In 10 villages, all eligible households (those with 1-5 hectares of land) were offered the loan (“full treatment villages”). In 20 villages, households that expressed interest in the loan entered a lottery, through which half were selected for the loan program (“partial treatment villages”). Ten additional villages served as the comparison group and did not receive loans.
Households that took up the loan could pick up the maize flour at one of ten distribution centers in January, February, and March. To repay the loan, households brought maize for repayment to a central point in each village in June.
Full study: Over the next two planting seasons, researchers will compare the in-kind maize loans with cash loans and test the impact on farmers’ labor allocation and crop yields. As in the pilot study, loans will be disbursed in January and repayment will be due in June. Regardless of loan type, borrowers will be able to repay with either maize or cash. In order to measure how the effect of receiving loans persists over time, some villages will not receive loans during the second year of the full study.
Results and Policy Lessons:              
Pilot study: There was high take-up of the loans, and villages where loans were offered saw an increase in food consumption, a decline in the number of households engaging in casual day labor, and an increase in wages for those who did engage in casual labor. The impacts were larger in villages where all eligible households could take out a loan.
Take-up and repayment: In full treatment villages, 90 out of 104 eligible households (87 percent) took out a loan. In partial treatment villages, all 104 households that were offered the loan program took out a loan. Ninety-eight percent of borrowers in full treatment villages and 95 percent in partial treatment villages repaid their loans in full.
Food consumption:In full treatment villages, the probability of missing a meal in the previous week was 16.5 percentage points lower than in comparison villages, where 36 percent reported that a family member had to miss a meal. In addition, the number of meals eaten in the previous 24 hours increased by0.2, from a base of 1.7 meals in comparison villages. The loans had no significant effect on the probability of missing a meal or the number of meals eaten in partial treatment villages.
Labor supply and wages: The share of households working in casual labor declined in both full and partial treatment villages. In comparison villages, 60 percent of households engaged in casual labor during the agricultural season, but this figure was 9 and 8 percentage points lower in full and partial treatment villages, respectively. Wages also increased in villages where lean season casual labor fell.
Full study: The study is ongoing. Results are forthcoming.

Relationship Banking in India

Promoting frequent communication between loan officers and clients can help banks learn about the reliability of existing and potential clients. However, there is little evidence on how personalized interactions influence client behavior.  This randomized evaluation tested whether the intensity of personalized interaction between borrowers and loan officers in India influenced borrowers’ repayment behavior and found that clients with personal relationship managers at the bank had better repayment behavior but were not more satisfied with their loans overall.

Policy Issue:

It is difficult for banks to assess the credit risk of small and private firms because financial information on these potential borrowers is often unverifiable or hard to obtain and loan contracts are difficult to enforce if the client decides to default. One solution tested in this paper to substitute for the lack of enforceability by increasing the loyalty of clients by establishing close ties between the bank and the borrower: we test whether relationship lending improves the loan performance by establishing a personal relationship between the borrower and the lender through frequent interactions.

Promoting close relationships between loan officers and their clients might not only help banks learn about the reliability of a borrower but also has the potential to change the borrower’s behavior. For example, a borrower might feel a sense of personal responsibility towards his or her loan officer and hence be more hesitant to default. If having a personal tie with the loan officer makes banking easier, the client may be reluctant to switch to a different bank given that building new relationships takes time and effort. However, past research has overlooked this dimension of relationship lending, and there is little evidence on whether and how personal interactions with lenders change borrowers’ behavior.

Context of the Evaluation:

ICICI bank is the largest commercial bank in India. In 2005, ICICI introduced a small business loan that did not require any collateral and allowed overdrafts, essentially functioning like a credit card. The target group of borrowers included small manufacturers, trading companies, and service providers.

To reduce overhead costs, ICICI wanted to avoid assigning individual loan officers to interact with each client. Instead, the bank relied on computer-based credit scoring and minimal interaction between the borrower and the bank when introducing the product. Credit appraisal was based on characteristics such as business type, information about the client’s reliability as a borrower as inferred from past bank statements, references, credit reports, and financial information based on unaudited financial statements or income tax returns. Accounts with more than three late payments or warnings per year risked losing loan renewals or being closed.

Description of the Intervention:

In partnership with ICICI, the researcher used a randomized evaluation to test whether close personal ties between the bank and the client can affect the loyalty and repayment behavior of clients. The researcher randomly assigned 1,319 borrowers to four groups that varied in the level of personalized attention borrowers would receive:

High Intensity (320 borrowers): The bank matched borrowers with a personal relationship manager who they could contact via phone or email. Each personal relationship manager called their client every other week to establish trust with the client and to check if the client had any administrative issues with the loan (for example, if monthly statements had not been received or if checks had not been deposited). If the client missed a payment deadline, the relationship manager would also remind the borrower to pay on time to avoid late fees.

Medium Intensity (339 borrowers): Borrowers in this group received the exact same treatment as the “high intensity” group with two exceptions: clients did not receive phone numbers of their relationship managers and instead of interacting with a dedicated relationship manager, their contact manager varied randomly with each biweekly call.

Low Intensity (324 borrowers): Borrowers did not receive any regular calls from relationship managers and received only a reminder call when a payment due date was approaching. The bank randomly assigned callers to clients and made no attempt to establish a personal relationship between the caller and the client.

Comparison Group (336 borrowers): Borrowers did not receive regular calls or any other follow up. They received text message reminders in addition to their monthly account statements as part of the standard bank policy.

Results and Policy Lessons:

Overall, clients assigned to personal relationship managers had better repayment behavior compared to those not assigned to any relationship managers, and the bank rewarded them with more favorable loan terms. While borrowers assigned to a dedicated relationship manager were more responsive to calls from the bank compared to borrowers in contact with multiple managers, they also complained more.   

Impacts on repayment behavior: Building a relationship between managers and clients reduced late payments and, in particular, reduced the likelihood of repeated late payments. Borrowers in the “high intensity” and “medium intensity” groups had on average about 0.1 fewer late payments relative to the comparison group. Among borrowers who made at least one late payment, those who were assigned personal relationship managers (i.e. those in the high and medium intensity groups) were more than 20 percentage points less likely to have a second late payment relative to those in the comparison group. The “low intensity” treatment did not have a significant impact on late payments.

Better repayment among borrowers helped them secure more favorable terms with the bank. Borrowers in the “high intensity” and the “medium intensity” groups were more likely to receive a designation from the bank that qualified them for automatic renewals of their loans relative to the comparison group. Borrowers in the “high intensity” group were also more likely than the comparison group to receive an offer to increase their loan size when their accounts were renewed.

Impacts on client complaints and satisfaction: Borrowers with a dedicated relationship manager were 1.6 percentage points more likely to respond to the biweekly calls compared to those with multiple relationship managers, who responded 87 percent of the time. However, borrowers with dedicated relationship managers logged more complaints than borrowers with multiple managers, and they were less likely to have their complaints resolved. One potential explanation is that having a dedicated relationship manager increased clients’ expectations, which in turn made them more likely to make complaints and demand improved service. There was no evidence that borrowers with dedicated relationship managers were more satisfied with their loans overall.

Related Paper Citation:

Antoinette Schoar, “The Personal Side of Relationship Banking.” Working Paper. 

Challenges in Banking the Poor in Rural Kenya

Policy Issue: 
Access to basic banking services in sub-Saharan Africa remains limited, and lags far behind other parts of the developing world. Such limited access could potentially have important repercussions on people’s lives. If lack of access to a formal bank account makes it more difficult for people to save, they will be unlikely to have enough saved up to cope with unexpected emergencies such as an illness in the household. When such shocks occur, rather than withdraw money or take a loan from the bank, people might have to take much costlier actions, such as cutting back on food consumption or removing their children from school. Lack of banking access may also make it difficult for people to save up large sums or obtain credit for start-up costs for a business, agricultural inputs, or even preventative health products like anti-malarial bednets. Over the past decade, there has been a significant push to understand these impacts more fully and to explore strategies to expand access. Comparatively little attention has been paid to the demand side—why people may choose to stay out of the formal banking system.
Context of the Evaluation: 
In western Kenya, large bank branches are located primarily in major towns, often leaving rural villages with very few options. Villages in the study sample have two options: a “village bank,” owned by share-holding villagers and affiliated with a microfinance organization, and a partial-service branch (essentially a sales and information office with an ATM) for a major commercial bank. Both banks have substantial minimum balance requirements and withdrawal fees, and the village bank also has an account opening fee. The village bank does not pay interest on deposits, and neither does the commercial bank, at least for the poor (interest is only paid if the account balance exceeds 20,000 Ksh, or about US$210).
While both the village bank and the commercial bank offer credit products, the terms for borrowing vary quite a bit across the two institutions. The village bank requires the formation of a group of at least five people who approve the purpose and amount of each other’s loans, and who serve as mutual guarantors. To take out a loan, borrowers must purchase a share (valued at 300 Ksh each, or US$3.20) in the bank, and are then eligible to borrow up to four times the value of shares owned at an interest rate of between 1.25 and 1.5 percent per month. The commercial bank grants microloans to existing businesses or individuals who have had an account at the commercial bank or with another commercial bank for at least 3 months. Two guarantors and full collateral are required for each loan, which must be repaid within 6 months, at an interest a rate of 1.5 percent per month. 
Details of the Intervention: 
To better understand the demand for formal financial services, researchers conducted a randomized evaluation in two phases. In the first phase, 55 percent of the total sample of 989 households was randomly offered a voucher for a free savings account at either of the two local banks. Researchers paid the account opening fees, provided the minimum balance, and arranged for the banks to simplify the account opening procedures for study participants, but did not waive the withdrawal fees. The vouchers were delivered to people in their homes, at which time field officers explained how the bank and the account worked, and how to redeem the voucher.
Nine months later, among those who had not received the savings intervention, half were randomly selected to receive information about local credit opportunities. Trained staff visited these individuals at home and delivered a detailed script explaining the rules and procedures for obtaining a loan from either of the two local institutions. Among those who had received the savings intervention previously, half were selected to receive the same financial information script as well as a voucher redeemable for one free share at the village bank, thereby removing one of the most significant barriers to getting a loan. 
A background survey collected information on demographic characteristics of the household, sources of income, as well as access to financial services, knowledge and perceptions of available financial services, and saving practices more generally. Nine months after the start of the savings intervention, a survey was administered to a randomly selected half of the sample, asking respondents open-ended questions about their current savings practices, perceived barriers to saving, and perceptions of the various saving mechanisms available to them. For those who had received an account voucher but had not redeemed it, the survey also asked why they had not opened an account. The survey also included a number of questions about familiarity with and interest in local credit options.
Results and Policy Lessons: 
At baseline, knowledge of banking options was very limited—only 60 percent of adults knew of the bank branches in the area and almost no one knew the fee schedule for account opening or the conditions for applying for a loan.
Savings intervention: While overall take-up of the savings account was 62 percent, only 28 percent of those who opened an account made two or more deposits in the 12 months after account opening. These results suggest that entry costs—be it the cost of acquiring information, the opening fees, or the administrative hassle—are only part of the explanation of the low banking rates observed in the sample. Qualitative surveys with respondents indicate that the most common concerns with available savings mechanisms were risk of embezzlement, unreliable services, and transaction fees.
Credit intervention: Though the vast majority of respondents took the vouchers when offered, only 40 percent redeemed them and only 3 percent had even started the process of applying for a loan 6 months later. Evidence from qualitative surveys on barriers to borrowing suggests that the fear of losing one’s collateral if one cannot repay the loan is the primary deterrent. 
Overall, the results suggest that simply expanding existing services is not likely to massively increase formal banking use among the majority of the poor unless quality can be ensured, fees can be made affordable, and trust issues are addressed. 
Related Papers Citations: 
Dupas, Pascaline, Sarah Green, Anthony Keats, and Jonathan Robinson. "Challenges in Banking the Rural Poor: Evidence from Kenya's Western Province." NBER Working Paper #17851, Cambridge, February 2012.


Financial Education vs. Access to Finance in Transnational Households

Over three percent of the world’s population now lives outside their country of birth. Officially recorded remittances, from migrants sending funds to those in their countries of origin, exceeded US$400 billion in 2013. Yet little research has been carried out on these financial transactions. In an ongoing study in the Philippines, researchers are examining the effects of financial education and access to savings and loan products on remittance flows, savings, and small enterprise development.
Policy Issue:
The number of individuals living outside their countries of birth reached 230 million people in 2013, representing over three percent of the world. Many of these migrants send remittances back to their countries of origin. In fact, officially recorded remittances to developing countries exceeded US$400 billion in 2013, with top recipients of India (US$71 billion), China (US$60 billion), the Philippines (US$26 billion), and Mexico (US$22 billion). These remittances are an important but poorly understood type of financial transaction. To date, there is little evidence about how migrants make their remittance-sending decisions.
Past studies in Mexico and El Salvador have shown that households receiving international remittances have low savings levels. In many remittance-receiving countries, policymakers are creating programs to encourage households to channel more of their remittance income to savings, education, and investment in small businesses. Providing migrant workers and their families with financial literacy training or access to financial services may be one way to improve their welfare. While researchers have studied the impacts of financial education and financial access independently, no study has looked at the possible complementarities between these two types of programs. This study examines how combining financial skills training with access to savings and loan products impacts financial decision-making and savings of transnational migrant households.
The Philippines is the second largest migrant-sending country and the third largest remittance receiving country in the world. Nearly 90 percent of service sector international migrants from the Philippines in 2010 were women. Among these, 70 percent were domestic workers. The group of recently departed Overseas Filipino Workers (OFWs) and their families left behind in Cabanatuan, Philippines and surrounding localities namely Talavera, Sta. Rosa, Palayan, and Gapan are the primary target group of the study.
Description of Intervention:
Researchers are examining the effect of financial education and access on remittances, savings, and small enterprise development. Researchers partnered with the Overseas Workers Welfare Administration (OWWA) to randomly select a sample of 1,800 transnational households from the full population of workers going abroad to work from Cabanatuan, Philippines and surrounding localities. Participants in the program were then randomly assigned to one of four groups:
  1. Financial education only: The families of migrants in this group were invited to attend a workshop on financial education in the Philippines administered by local partner Alalay sa Kaunlaran (ASKI), Inc. The day-long workshop emphasized the importance of remitting into bank accounts in the Philippines to build long-term savings and investment. Migrants in Singapore or Hong Kong, countries where ASKI is present, from households belonging to the financial education treatment group will also be invited to a financial education workshop. 
  2. Financial services and products only: Migrants and their families in this group were invited to open bank accounts through local partner, the Bank of the Philippine Islands (BPI). Migrant families in the Philippines were also offered microloans for small enterprise investments via ASKI.
  3. Financial education + financial services and products: Migrants’ families and migrants in Singapore or Hong Kong were invited to attend the financial education workshops. They were also offered the savings and loans products by BPI and ASKI at the end of the training. 
  4. Comparison Group: Individuals received no financial training and were not offered financial services or products.
Researchers will conduct follow-up surveys twelve months after the financial education workshops and product offerings to measure their impact on savings, remittances, and small enterprise investment.
Results forthcoming.

Direct and Indirect Impacts of Credit for SMEs

How does access to credit affect the growth of small and medium enterprises – both firms receiving loans as well as their competitors, suppliers and customers? Limited access to credit is commonly identified as a key constraint to SME growth, but little evidence exists of the direct and indirect effects of loans on small firms in a given market. Researchers are working with a large bank in the Philippines, using random assignment to offer loans to SME applicants who fall just below the threshold to be automatically approved for a loan. The researchers will compare the firms that received the loans to a similar group that did not. Comparing the two groups will allow for a better understanding of the impact of loans on firm performance and growth as well as any additional effects on firms in the same market or in the loan recipient’s supply chain.  
For additional information on current SME Initiative projects, click here.
Policy Issue:
Small businesses are often thought to be an important source of employment, innovation, and economic growth. In many developing countries, small and medium enterprises (SMEs) make up a large share of registered businesses, but a much smaller share of GDP. Data from several countries suggest that few SMEs grow to become larger businesses. One reason could be that unlike larger businesses, SMEs have limited access to credit, preventing them from making larger investments to improve their operations, upgrade to new technologies, or expand.
Most SMEs’ financing needs exceed the small loans that microfinance institutions provide. Yet larger commercial banks often find it too expensive to lend to SMEs because the cost of assessing whether an SME is creditworthy is high relative to the return banks could earn by lending to them. Many banks also perceive SMEs as being too risky and more likely to default on loans. Credit scoring has been used extensively in developed countries to reduce the cost and time required to process loan applications and to assess the riskiness of loan applicants in order to make small business and consumer lending profitable for banks. Can a credit-scoring system increase lending to SMEs in emerging markets, and does access to credit improve these businesses’ profitability? How does increased access to credit affect other businesses in the same market, namely the competitors, suppliers, and customers of businesses receiving loans?
Context of the Evaluation:
In the Philippines, the vast majority of registered enterprises are small or medium sized. Nationwide, there are over 800,000 micro, small, or medium enterprises. These businesses span a range of industry sectors, including wholesale and retail trade, manufacturing, and services. Promoting SME growth is a central focus of national policy and all banks are mandated to set aside at least 8 percent of their total loan portfolios for SMEs. The Development Bank of the Philippines (DBP) is a development banking institution mandated to provide medium and long term loans to SMEs. In 2013, DBP began to roll out its new Retail Lending Program for Micro and Small Enterprises in 45 bank branches across the country. Under this program, DBP will make lending decisions using credit scoring software, which will determine loan approvals based on verifiable client information and an objective credit score, replacing the current approval process which relies on loan officers’ perceptions about applicants’ creditworthiness.
Details of the Intervention:
Researchers are conducting a randomized evaluation in partnership with the Development Bank of the Philippines (DBP) to test how access to credit affects both borrowing businesses’ performance and that of their competitors and suppliers.
Each of the 45 DBP branches will advertise the new Retail Lending Program to SMEs in their area and encourage them to apply. The branches will be assigned to either target SMEs in certain randomly chosen industries for loans (e.g. bakeries or water purification plants) or to not target any industries in particular. After SMEs submit an application, the credit scoring software will assign each applicant a score. Applicants whose scores fall in a pre-defined range just below the minimum score that automatically qualifies someone for a loan will be randomly assigned to either receive a loan or serve as part of the comparison group. In branches that are randomly assigned to target certain industries, marginally qualified applicants in the targeted industries will have a 90 percent chance of receiving a loan. This randomized “bubble” will include approximately 250 of these marginally qualified applicants.
DBP’s credit committee will then review all loans approved by the credit scoring system prior to final approval, reserving the right to deny loans based on information not included in the credit scoring model, such as criminal history. Loan officers will separately record whether they would have normally approved the loan without the credit scoring system, allowing researchers to compare credit scoring to the current, more subjective lending approach.
Businesses in the treatment group will receive loans between PHP 300,000–10,000,000 (US$5,590–186,200). The terms of the loans will range from three months to five years. A baseline survey will be conducted with all sample firms prior to loan disbursement. One year after the loans are disbursed researchers will conduct a follow-up survey to measure the SMEs’ investment and profits. Administrative data from DBP will be used to measure loan repayment and default.
Researchers will also survey the SMEs’ competitors and suppliers to examine whether receiving a loan had an impact on those firms. Increased access to credit may make SMEs more efficient and profitable, potentially taking away business from their competitors. On the other hand, if increased access to credit leads some businesses to develop better methods of production that their competitors can copy, access to credit could potentially indirectly benefit their competitors. Similarly, access to credit may have spillovers on a loan recipient’s suppliers as a result of business expansion or adoption of new technologies. This study will examine whether increased access to credit indirectly benefits or harms borrowers’ competitors and suppliers.
Results and Policy Lessons:
Project ongoing.

Evaluating Village Savings and Loan Associations in Malawi

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.

Policy Issue:

Although during the last decades microfinance institutions have provided millions of people access to financial services, provision of access in rural areas remains a major challenge. It is costly for microfinance organizations to reach the rural poor, and as a consequence the great majority of them lack any access to formal financial services.  Traditional community methods of saving, such as the rotating savings and credit associations called ROSCAs, can provide an opportunity to save, but they do not allow savers to earn interest on their deposits as a formal account would.  In addition, ROSCAs do not provide a means for borrowing at will because though each member makes a regular deposit to the common fund, only one lottery-selected member is able to keep the proceeds from each meeting.

Village Savings and Loan Associations (VSLAs) attempt to overcome the difficulties of offering credit to the rural poor by building on a ROSCA model to create groups of people who can pool their savings in order to have a source of lending funds.  Members make savings contributions to the pool, and can also borrow from it.  As a self-sustainable and self-replicating mechanism, VSLAs have the potential to bring access to more remote areas, but the impact of these groups on access to credit, savings and assets, income, food security, consumption education, and empowerment is not yet known. Moreover, it is not known whether VSLAs will be dominated by wealthier community members, simply shifting the ways in which people borrow rather than providing financial access to new populations.

Context of the Evaluation:

The Village Savings and Loans program in this study is implemented in rural communities in the Mzimba, Zomba, Mchinji and Lilongwe districts in Malawi.  Community members in these four districts are predominantly engaged in agricultural activities.  With little access to formal financial institutions, these small farmers do not have the opportunity to invest in agricultural inputs like fertilizer that could increase their income.

Description of the Intervention:

Three hundred eighty villages were selected to participate in this study and randomly assigned to a treatment or comparison group. Half of the villages in the treatment group were introduced to the VSLA model by field officers trained by CARE and its local implementing partners.  Local village agents were subsequently selected from each village and trained to replicate the VSLA training in a second village in the treatment group.

Field officers and local village agents present the model to villagers at public meetings. Those interested in participating are invited to form groups averaging about twenty and receive training.  These groups, comprised mostly of women, meet on a regular basis, as decided by members, to make savings contributions to a common pool.  At each meeting, members can request a loan from the group to be repaid with interest. This lending feature makes the VSLA a type of Accumulating Savings and Credit Association (ASCA) providing a group-based source of both credit and savings accumulation. CARE’s VSLA model also introduces an emergency fund, allowing members to borrow money for urgent expenses without having to sell productive assets or cut essential expenses such as meals.

This study will assess the impact of VSLA trainings and group membership on access to credit, savings and assets, income, food security, consumption education, and empowerment.

Results and Policy Lessons:

Results forthcoming.  

We are also working with CARE to evaluate their VSLA programs in Ghana and Uganda.

Urban Property Rights in Mongolia

Do property and land rights lead to better access to credit and increased investments in one’s land? It is widely assumed so, but there is little evidence to support this assumption. In this study, researchers go to Mongolia where many recent migrants to urban areas lack property rights. Researchers are evaluating the impact of two versions of a program that provides direct assistance to households seeking to privatize and register land plots. They will measure the program’s impact on the migrants’ access to credit, investment in land and housing, property values, labor market outcomes, and household income.

Policy Issue

Having a well-defined system of land and property rights is thought to be extremely important for increasing investment, as ownership of land may incentivize investment by ensuring that tenants receive the long-term returns from improving their land. Property rights may also be an important component in access to credit, since land can be used as a collateral asset and increase the likelihood of a borrower receiving a loan. Large land-titling policies have been undertaken in several developing countries, particularly in South America and Southeast Asia in order to increase land investments and income security. However, the linkage between property rights, access to credit, and increased investments has not been well-established empirically.

Context of the Evaluation

More and more poor rural Mongolians are abandoning traditional nomadic herding practices and migrating to the cities in search of better lives. The bulk of these migrants are moving to Mongolia’s three biggest cities – Ulaanbaatar, Erdenet and Darkhan – where they either settle in suburban “ger areas” or peri-urban rangeland areas, often creating informal settlements. Mongolian laws give ger area residents the right to obtain ownership to the land upon which they live. However, the complexity and expense of this process make it difficult to become an owner and thus use the land as a marketable asset.

The Urban Property Rights Project aims to improve the formal system for recognizing and transferring land rights to ger area residents. This effort includes legal and regulatory reform, upgrading the technology necessary for accurate land parcel mapping, and providing direct assistance to households to privatize and register their land plots. The project is being carried out in Ulaanbaatar and eight other regional centers. 

Details of the Intervention

This evaluation focuses on the land titling component of the project known as the Privatization and Registration of Ger Area Land Plots Activity. This component will provide direct assistance to 75,000 households seeking to privatize and register land plots in urban ger areas. A random subset of eligible houses in the area will be randomly chosen to receive door-to-door assistance with the registration process. This assistance will include support for both the necessary paperwork as well as the registration fees.     

After the program is implemented, the researchers will evaluate its impact on access to credit, investment in land and housing, property values, labor market outcomes and household income using both household level surveys and aggregate institutional data.

Results and Policy Lessons

Results forthcoming.

Moving Beyond Conditional Cash Transfers in the Dominican Republic

Conditional cash transfers have proven effective as incentives for the extreme poor to visit a health clinic or send their children to school. But are such programs sustainable? If the cash assistance is taken away, will families find themselves back where they started before the program? In this study, researchers evaluate if financial education and business training can help recipients graduate from a conditional cash transfer program, and what type of training is most beneficial.

Policy Issue:
Cash transfer programs are increasingly common across developing countries. These programs provide income support to those living in extreme poverty, and in the case of conditional cash transfer (CCT) programs, provide incentives for parents to invest in the human capital of their children by making the transfers conditional on certain behaviors, like attending school or visiting a health clinic. Despite their established benefits in terms of improving health and educational achievement, many policymakers and development practitioners remain concerned about the extent to which households may become dependent on cash transfers to maintain their living standards. Even with greater access to healthcare and education, it can be difficult for beneficiary households to manage their personal finances, find and maintain a stable job, or start a new business. It is not clear whether families will revert to pre-program poverty levels when the transfers are no longer provided, or whether the transfers enable more permanent changes in household and business finances, ultimately allowing beneficiaries to graduate from the program.
Context of the Evaluation:
Solidaridad is a CCT program in the Dominican Republic that provides cash transfers to poor households if they invest more in education, health, and nutrition. Eligible families receive around US$75 every three months if they comply with certain conditions, including the school enrollment and attendance of all household children, and regular health check-ups for children under the age of five years old. Approximately 20 percent of the Dominican population lives in moderate or extreme poverty, and are eligible to receive trimonthly transfers from the program.[1] The beneficiaries receive these transfers via a debit card to be used to purchase basic food products at authorized stores, and meet every three months in community groups (núcleos) to receive training in nutrition and preventive health. However, Solidaridad does not currently have a graduation strategy to encourage beneficiaries to improve their household financial management and develop stable income sources from jobs or small business creation.
Description of the Intervention:
Researchers are using a randomized evaluation to assess whether providing financial literacy and business training to CCT beneficiaries can help them graduate from the program, and what type of training is most beneficial.
Two hundred and forty núcleos, with a total of 3,600 individuals, will be selected from government administrative data and randomly assigned to either the treatment or comparison group. All members of the treatment group will receive financial literacy training intended to improve household financial management skills. In addition, núcleos in the treatment group will also be randomly selected to receive one or more of the following:
  • Professional vs. peer trainers. Of the 120 núcleos in the treatment group, half will receive financial literacy training from professional trainers, while the other half will receive the training from their peers.
  • Business vs. job skills training.In addition to the financial literacy training, half of the núcleos in this treatment group will receive an additional training session on financial management for businesses, while the other half will receive additional training on job skills (finding, acquiring, and maintaining employment).
  • Budgeting notebooks. Within each núcleo, a random subset of beneficiaries will be selected to receive notebooks that can be used to maintain household and/or business budgets to test whether the notebooks increases the impact of the training.
  • Access to formal financial services. Of the beneficiaries who already own a business and are interested in and eligible to receive a loan, a random subset will be offered a loan and an accompanying savings account from a local commercial bank.
Key outcome measures include knowledge and management of household and business finances, household and business assets, and the employment status and conditions of household members.
Results and Policy Lessons:
Results forthcoming

[1]Government of the Dominican Republic. “Programa Solidaridad.”

Evaluating the Impact of Business Registration in Malawi

Millions of people in developing countries work in the informal sector, and in many countries there are significant barriers to registering one’s business and entering the formal sector. Researchers are carrying out a randomized evaluation in Malawi to measure the impact of formalization on the business performance of micro-, small and medium enterprises (MSMEs).

Policy Issue:

Businesses in the informal sector typically grow more slowly, have poorer access to credit, and employ fewer workers than those in the formal sector.Household and business resources also tend to be strongly intertwined for those in the informal sector, resulting in the depletion of working capital. Bringing more businesses into the formal sector, which begins with business registration, may have numerous benefits, such as the ability to open a business bank account, acquire an export license, access business bank loans, and become eligible for government programs. This study assesseswhether becoming formal improves enterprise performance. It aims to determine if the benefits of business registration outweigh the costs, if both male and female-owned enterprises gain equally from registration, and if business bank accounts add value to formalization by helping business owners separate business from household money.

Context of the Evaluation:

In Malawi, the informal sector represents 93 percent of the non-farm small-scale enterprises.[1] Businesses in Malawi have faced significant barriers to formalization in the past. Malawi is streamlining its registration process to increase the registration rate amongst MSMEs. The Business Registration Impact Evaluation (BRIE) is a direct response to the interest of the Government of Malawi in evaluating whether or not business registration improves business performance. If a positive impact is detected in this study, the government plans to use the results of this study to promote registration. If no impact is identified, it plans to identify the corresponding bottlenecks that affect enterprise performance.

Details of the Intervention:

This study evaluates the impact of formalization—through business registration, tax registration, and business savings accounts—on enterprise performance.Participants consist of 3,000 informal MSMEs located in Blantyre and Lilongwe, the major commercial cities in Malawi. The study is being conducted over a four year period.

All 2,250 firms in the treatment groups are being offered free registration with the Department of the Registrar General (DRG) – which is the main step to firm formalization in Malawi. A random group of 300 firms is also being offered to register for taxes and obtain a tax identification number from the Malawian Tax Authority, allowing the researchers to test the additional value, if any, of this step in the formalization process. The remaining 1,200 firms in the treatment group were invited to information sessions by a local bank on the benefits of separating business from household money and offered business savings accounts. In short, the firms were randomly assigned to one of the following groups:

1)    Offered free business registration only (750 firms)

2)    Offered free business registration and tax registration (300 firms)

3)    Offered free business registration, invited to information sessions, and offered business savings accounts (1,200 firms)

4)    Comparison group – no intervention (750 firms)

The team is collecting extensive data over a four-year period to estimate the impact of the various interventions on business expansion, access to finance, and productivity of MSMEs. The outcomes of interest include measures of firms’ financial performance, investments in the business, survival rates, number and skill composition of employees, access to finance, number of customers, and harassment levels.

Results and Policy Lessons:

Results forthcoming.

The Impact of Credit Constraints on Exporting Firms

Improving access to credit is thought to help small- and medium- sized businesses participate in international trade, but existing evidence on the link between financing and exportation is mixed. This study evaluated the impact of credit constraints on exporting firms by examining two policy changes in India—one in 1998 that extended subsidized credit to businesses, and another in 2000 that revoked the subsidized credit for a portion of these businesses. Results showed that the 1998 credit expansion increased borrowing and improved export earnings for newly eligible businesses, and that businesses continued to borrow and earn more from exporting even after the subsidized credit was revoked.

Policy Issue:

Exportation is widely considered to be an important way for small and medium enterprises (SMEs) in developing countries to expand their markets, scale up production, acquire new technology, and mitigate risk. In many developing countries, the banking sector tends to under-lend to SMEs, meaning that businesses would be able to make additional profit if they could access more credit. This financing constraint is thought to be a possible barrier to increased exportation, as well as a constraint to SME growth in general. For this reason, governments in some developing countries work to promote SME financing through various reforms and interventions. However, there is mixed evidence on the link between access to finance and the propensity to export.[1] This study aims to shed light on the causal relationship between financing and exportation by looking at the impact of changes in the availability of subsidized loans to SMEs in India.

Note: This study is not a randomized controlled trial.

Context of the Evaluation:

The banking sector in India is largely dominated by public sector banks, which are corporate banks in which the government is the majority shareholder. Seventy eight percent of total deposits are collected by public banks, and 77 percent of total loans and advances are made by these banks. Until 1997, the Reserve Bank of India intensely regulated the amount of financing offered by banks, and they continue to be involved in determining bank lending policies. These rigid banking policies are thought to be one of the reasons that banks in India lend less than the amount that businesses would use to maximize profit.

In addition to the rigid policies discussed above, two other characteristics of the Indian banking sector are thought to cause under-lending. First, banks in India are slow to respond to changes in lending patterns, so banks will not necessarily start lending to certain types of firms even if recent data suggests that it would be profitable. Second, because the public sector is the majority shareholder of most banks in India, bank employees are considered public servants, and are therefore held to strict anti-corruption laws. Research shows that the fear of being prosecuted significantly reduces lending.[2]

To promote lending to the agriculture sector and small scale industries, sectors that the Indian government considers priorities, all banks in India are required to lend 40 percent of their credit at a subsidized rate to these sectors. Prior to 1998, small-scale industries were considered firms with investments below 6.5 million rupees. In January 1998, the cut off was raised, making larger firms suddenly eligible for subsidized credit. In January 2000, the 1998 reform was partially undone when the cut off was lowered again.

Details of the Intervention:

To measure the impact of increasing the amount of available credit on SMEs, researchers used the policy changes in 1998 and 2000 as the basis for a natural experiment. Data from the Center for Monitoring Indian Economy on 1000 firms in the manufacturing sector in India was used to assess changes in the international trade habits of exporting businesses when they were made eligible for credit subsidies and when those subsidies were revoked.

For the years 1999 and 2000, all new firms that became eligible for the subsidy formed the treatment group, while from 2001 to 2006 all firms that lost their eligibility formed the treatment group. Firms that were not affected by these policy changes were considered the comparison group in this evaluation.

Results and Policy Lessons:

Results show that the firms affected by the 1998 policy change were credit constrained. The rate of short-term bank credit for newly eligible firms increased by 18 percent and total bank borrowing increased by about 20 percent. Borrowing from other sources also increased, meaning that firms were taking advantage of more credit rather than substituting other sources of credit with subsidized credit.

The availability of credit for newly eligible firms led to a 22 percent increase in export earnings for these businesses. This supports the view that increased access to credit can cause higher levels of exportation. The study further shows that there is a positive relationship between exportation and firm growth and financial health.

The policy reversal in 2000 had little to no effect on bank borrowing and export earnings for the firms whose eligibility was revoked. This supports the view that the Indian banking sector tends to under-lend, since the increased credit access granted to the newly eligible firms in 1998 allowed these firms to grow rapidly. Given the positive performance of these firms, the banks had no reason to reduce their credit limit when the policy was reversed in 2000 and firms continued to borrow at the market interest rate.

It is important to note that while the 1998 policy change increased borrowing for newly eligible firms, it decreased borrowing for small firms that were already eligible for subsidized credit and larger firms that never qualified. Hence, the policy change resulted in a reallocation of credit from these firms to the newly eligible firms.


[1] Paravisini, Daniel, Veronica Rappoport, Philipp Schnabl, and Daniel Wolfenzon.Dissecting the effect of credit supply on trade: Evidence from matched credit-export data. No. w16975. National Bureau of Economic Research, 2011.

Bridges, Sarah, and Alessandra Guariglia. "Financial constraints, global engagement, and firm survival in the United Kingdom: evidence from micro data." Scottish Journal of Political Economy 55, no. 4 (2008): 444-464.

[2] Banerjee, Abhijit V., Shawn Cole, and Esther Duflo. "Bank financing in India." (2003).


Mudit Kapoor

Financial Literacy, Access to Finance and the Effect of Being Banked in Indonesia

Poor people in low-income countries often exhibit a low demand for formal financial services. Is that due to limited financial literacy, or to the high cost of accessing such services? In this study in Indonesia, researchers measured household financial literacy and its impact on demand for financial services. Participants who had received a standard financial literacy training program were no more likely to open a bank account than those who were not offered the program. In contrast, small financial subsidies worked: an offer of a $14 reward (relative to a $3 reward) significantly increased the share of households opening a formal savings account.

Policy Issue: 
Savings and investment are widely thought to be important factors in a country’s economic growth. However, the determinants of demand for financial services are not well understood, particularly in low-income countries where a large proportion of the population still uses informal financial services such as moneylenders or savings groups. There are two plausible theories that may explain this limited demand for formal financial services in low-income countries. First, because these services involve high fixed costs and are therefore expensive to provide, low-income individuals may not be find the services provide sufficient value compared to the user cost. Alternatively, limited financial literacy – knowledge or understanding of financial services and products – may serve as a barrier to demand for financial services: if individuals are not familiar or comfortable with financial products, they are unlikely to try to use them. While these two ideas are not mutually exclusive, they have significantly different implications for the development of financial markets around the world, and suggest very different actions for those wishing to expand financial services use.
Context of the Evaluation: 
In Indonesia, financial literacy is believed to be one of the most important barriers to accessing credit. This may in part be explained by low levels of education: measured as a share of GDP, education expenditures in Indonesia are the lowest in the world. However, and in contrast to many developing countries where access to credit is sparse, the Indonesian banking system has a wide geographical reach. Moreover, Indonesian banks have traditionally offered savings accounts with low minimum deposits designed to serve the needs of low-income customers. The minimum deposit to open a savings account is the nation’s largest bank, Bank Rakyat Indonesia (BRI), is only US$0.53, and interest is paid on balances greater than US$1.06. This is significant, considering that the per-capita income in Indonesia is approximately US$1,918. Yet only 41 percent of the total population and 32 percent of rural Indonesia households have a formal savings account.
Details of the Intervention: 
In order to measure household financial literacy and its impact on demand for financial services, researchers conducted a household survey in Indonesia between July and December 2007. Around 3,300 households across 112 villages in Indonesia were randomly selected to participate in the survey, which covered financial literacy as well as other household characteristics that might be important determinants of financial behavior, including cognitive ability, educational status, risk aversion, asset ownership, and demographics. The survey results were supplemented by data from a comparable 2006 survey of 1,500 households in India.
After completing the financial literacy survey, each of the unbanked households in Indonesia was invited to participate in a follow-up field experiment, designed to directly test the relative importance of financial literacy and prices in determining demand for banking services. If a respondent agreed to participate, he or she was subsequently randomly assigned a financial incentive level, ranging from US$3-$14, to open a savings account with Bank Rakyat Indonesia. Half of the respondents were then randomly chosen to attend a two-hour financial training session to be held in the village on a weekend within the month. Researchers worked with Microfinance Innovation Center for Resources and Alternatives (MICRA), an organization that provides consulting and training programs to banks and microfinance organizations in Indonesia, to develop a targeted training curriculum and a two-day training program for all trainers.
Household surveys were complemented by administrative data from Bank Rakyat Indonesia to measure the impact of incentives and the financial education program on savings account take-up.
Results and Policy Lessons: 
The survey results from both India and Indonesia suggest that, while financial literacy is low, especially in India, it is an important predictor of household financial behavior and well-being. Moreover, the demand for financial education seems to be quite high: 69 percent of those invited to participate in the financial education program choose to attend the course.
However, the experimental results indicate that the financial education program was not an effective tool for promoting the use of bank accounts. The program had no effect on the probability of opening a formal savings account, except for households with no schooling, for whom training increased the probability of opening an account by 12.3 percentage points.
Modest financial subsidies, in contrast, had large effects, significantly increasing the share of households that opened a formal savings account within the subsequent two months. An increase in the incentive from US$3 to US$14 increased the share of households that open a formal savings account from 3.5 percent to 12.7 percent, an almost three-fold increase. Follow-up analysis conducted two years after the intervention also showed that households that received the highest incentive were significantly more likely to still have used their bank accounts in the past year compared to those who received the lowest incentive.
Overall, the results suggest that take-up of formal financial services may be more easily achieved through measures designed to reduce the price of financial services, rather than through large-scale financial literacy education. 
Related Papers Citations: 
Cole, Shawn, Thomas Sampson, and Bilal Zia. 2011. "Prices or Knowledge? What Drives Demand for Financial Services in Emerging Markets?" The Journal of Finance 66(6): 1844-67.


The Role of Mobile Banking in Expanding Trade Credit and Business Development in Kenya

Policy Issue:

Access to finance is a critical constraint for small businesses everywhere.  Credit provided by up-stream suppliers to down-stream firms (“trade credit”) can relax the constraints on capital. Trade credit can help small businesses, like retail shops and kiosks, to purchase non-perishable goods for resale and free up resources for short- and long-term uses.  However,the provision of this type of credit may be limited by high transaction costs, up-stream liquidity constraints, and concerns over repayment.  As trade credit agreements in low-income countries usually involve small amounts, judicial systems are unlikely to enforce repayment of loans in court. Without a system to distribute small loans in an economically feasible manner and manage repayment, suppliers have little incentive to extend this service. This project evaluates a new method of extending trade credit facilitated by mobile banking and inventory management technologies and will shed light on its potential to foster small business development in a developing country context.

Context of the Intervention:

Working with Financial Sector Deepening (FSD), a Kenyan Trust focusing on development of financial services for the poor, researchers will evaluate a trade credit product that uses a mobile network to increase the efficiency of loan origination and repayment.  In collaboration with FSD, a large supplier of non-perishable products (the Coca Cola Bottling Company (CCBC)), and a Kenyan bank (Equity Bank), researchers will conduct a randomized evaluation of the new trade credit product.

This technology has the potential to overcome two particular challenges.  First, by reducing the transactions costs of making repayments, new mobile technologies make it economically feasible to offer trade credit products requiring small, frequent repayments. Second, the centralized information system allows centralized monitoring of both credit and repayment histories.

Description of the Intervention:

CCBC uses 240 independently owned distributors to deliver its products to about 40,000 retail outlets in Kenya. These retailers typically make purchases (in cash) and take delivery of product once every few days, depending on expected demand and available cash on hand.  There is presently no pre-ordering of any sort in the supply chain, and no short-term credit. All payments are made in cash at or just prior to the time of delivery.

CCBC will automate their supply chain, enabling every case of product to be recorded and tracked at the retailer level.  A natural next step in the automation process is to integrate financial transactions.  This project takes advantage of this advance in supply chain automation to build in a trade credit product.  In particular, the tracking system will allow real-time monitoring of both cash and mobile phone-based transactions, and hence enable more efficient administration of credit contracts. Critically, the trade credit will be provided not by the independently owned distributors, but by Equity Bank via its in-house mobile banking platform. This is the feature that makes the trade credit product viable for a larger number of retailers.

The project will involve working with 1,200 retailer selling Coke products in and around Nairobi, Kenya. Of these, two thirds will receive the trade credit while one third will serve as a comparison group.  While all credits will be repayable to Equity Bank, the distributors of Coke products will be given explicit incentives to ensure repayment for half the retailers to whom the credit is offered.  The study will assess the commercial viability of the product, the role of distributors in administering it, and its impact on business development and employment creation.  If the intervention is profitable for lenders and borrowers, the project partners are keen to expand the credit product at a much larger scale and to other suppliers.

Results and Policy Lessons:

Results forthcoming.

Microfinance Repayment Schedules in West Bengal, India

Most microfinance institutions follow a rigid contract model: clients repay loans in weekly installments beginning shortly after disbursement. Researchers tested two features of these contracts, repayment frequency and the time of the first repayment, to determine if characteristics of the loan contract affect borrowers’ repayment behavior and the types of investments they make. They found that less frequent repayments did not increase defaults. A two-month grace period before beginning repayment raised the default rate slightly, but allowed entrepreneurs to invest more in their businesses, resulting in long term economic gains.

Policy Issue: 

Most microfinance institutions (MFIs) structure their credit contracts in a similar way: clients meet in groups and repay loans in weekly installments beginning shortly after disbursement. The Grameen Bank, one of the first and best-known MFIs, established this model in Bangladesh in the 1970s, and it has since become the classic model of micro-lending in many countries. Group lending and weekly collection of repayment installments are widely seen as the key features of microfinance that reduce default risk, making lending to the poor financially viable. Repayment at weekly meetings, MFIs argue, imposes fiscal discipline, helping clients form repayment and savings habits. Initiating repayments immediately likewise imposes discipline and reduces the likelihood that a client will take the money and run. In addition, the classic repayment schedule increases interactions with loan officers, which may help build trust between clients and banks.

Yet, there may be advantages to offering more flexible repayment schedules for the lenders as well as the borrowers. Collecting weekly installments is costly for MFIs. If MFIs can lower costs by reducing the frequency of repayments, they may be able to lower interest rates, scale up operations, and reach additional clients in remote or previously underserved locations. Early initiation of repayment may reduce the amount entrepreneurs invest in their businesses, since they often set aside a portion of the loan for immediate repayment. As a result, they may be less likely to invest in raw materials or inventory, purchases that have high returns in the long run but are risky because they tie up cash in the short run. Despite the potential to better meet the needs of MFIs and their clients, there is limited evidence on the effects of deviating from the traditional microfinance contract design.

Context of the Evaluation: 

Village Financial Services (VFS) is an MFI operating in peri-urban neighborhoods of Kolkata, India. Most of the loans VFS offers resemble traditional micro-credit contracts, made to groups of women and repaid weekly. Access to credit or savings, both formal and informal, is limited in these neighborhoods, and VFS faces almost no competition from other lenders. VFS works exclusively with women, most of whom have a household income of less than two dollars a day. There is a high rate of business ownership, and selling and tailoring saris are common occupations.

Details of the Intervention: 

Researchers examined variations microfinance contract design in partnership with VFS. They compared weekly and monthly repayments in one evaluation, tested a two-month grace period before initiating repayment in another, and expanded the repayment frequency experiment to evaluate the effect on financial stress in a third.

Monthly repayments: Researchers examined how repayment frequency affected default and late payment rates. VFS offered loans of Rs. 4000 (about US$100) with a fixed Rs. 400 interest payment to 1026 first-time borrowers in 100 groups. These were randomly assigned to one of three different repayment schedules: 

  1. Standard weekly repayment: 30 groups repaid Rs. 100 every week for 44 weeks

  2. Monthly repayment: 38 groups repaid Rs. 400 every month for 11 months

  3. Monthly repayment with weekly meetings: 32 groups repaid monthly, but met with a loan officer every week for the first three months

Two-month grace period: Researchers examined how delaying the first payment until two months after disbursing the loan affected investment in businesses and loan repayment. Eight hundred and forty-five clients in 169 loan groups received loans ranging from Rs. 4000 (about US$90) to Rs. 10,000 (about US$225). The groups paid the same amount in interest but were assigned to two different repayment schedules:

  1. Standard schedule: 85 groups began repayment two weeks after receiving the loan

  2. Grace period: 84 groups began repayment two months after receiving the loan

Monthly repayments with a focus on financial stress: Researchers replicated the repayment frequency experiment and included additional questions on levels of financial stress. Seven hundred and forty clients in 148 groups were assigned to weekly or monthly repayment frequencies. A subgroup of 213 clients was surveyed by cell phone every 48 hours for seven weeks, and they were asked questions about their confidence in their ability to repay the loan, their anxiety about loan repayment, arguments with their spouse about finances, and the amount of time they spent thinking about loan repayment.

Results and Policy Lessons: 

Taken together, the results from these evaluations indicate that MFIs can improve upon the standard contract model that uses weekly repayment beginning shortly after disbursal.

Monthly repayments: Switching from weekly to monthly repayments did not affect the repayment rate. There was no difference in the default rate or the frequency of late payments between groups.

Two-month grace period: The grace period increased clients’ economic activity. Grace period clients invested Rs. 364.9 (roughly 6 percent) more in their businesses compared to regular clients and were twice as likely to start a new business. After three years, these clients reported weekly profits that were 57.1 percent higher than the comparison group mean of Rs. 1,587 per week and household incomes that were 19.5 percent higher than the comparison group mean of just over Rs 20,000 per week. Grace period clients also reported roughly 80 percent more business capital. However, grace period clients were more than three times more likely to default than regular clients, which is consistent with the theory that the grace period allows for riskier investments that, if successful, have a higher rate of return.

Monthly repayments with a focus on financial stress: Clients with monthly repayments were no more likely to default in the short term, and they scored 45 percent lower on an index of financial stress than clients with weekly repayments. Compared to weekly clients, monthly clients worried about repayment 51 percent less often, they were 54 percent less likely to lack confidence in their ability to repay, and were 60 percent less likely to spend significant time thinking about repayment. Monthly clients also reported investing more in their businesses and having higher income, which suggests that the flexibility encouraged more profitable investments.

These results suggest that the microfinance sector can gain by moving away from the traditional contract model. Switching to lower frequency repayment schedules could allow MFIs to save on the costs of repayment collection, with no added risk of default, while also reducing clients’ stress levels. Although offering a grace period before beginning repayment increased the default rate, it allowed entrepreneurs to make larger investments in their businesses, resulting in longer term economic gains. This is an area with large potential for further research, and the researchers are planning to conduct follow-up surveys to determine the long term effects of these contract modifications on participants’ business outcomes.

The Return to Capital for Small Retailers in Kenya

Throughout the developing world, the family owned business is the most common form of enterprise. Though these types of businesses are prevalent, there is tremendous heterogeneity in the success of such firms. For instance, in the retail sector, some firms hold large inventories and earn significant profits, while others hold minimal stocks and provide little more than subsistence income for their owners. Given the importance of small enterprises in poor countries, it is important to understand why some firms are more successful than others and to identify potential ways to address the constraints that keep some firms from becoming more profitable.

This project takes advantage of the characteristics of the retail industry to explicitly estimate the rate of return to a marginal increase in inventory for a set of small retail firms in rural Kenya. The empirical strategy is based on the fact that retailers should set inventories such that the marginal benefit from holding the last unit (the expected profit) is exactly equal to its marginal cost (the opportunity cost of holding capital). We estimate the marginal rate of return in 2 ways. First, we measure sales lost due to insufficient inventories. Second, we use an administrative dataset to observe whether firms buy enough inventory to qualify for quantity discounts.


Preliminary results suggest that returns to inventory capital in the Kenyan retail sector are likely far greater than returns to investment in developed country equity markets and suggest that these returns likely differ significantly across firms. Implementation of other surveys and interventions is ongoing.

Supply Chain Financing for Dairy Farmers

Policy Issue:

Farming entails long cycles of production which require up-front investment in animals, equipment, seeds, fertilizers, and other inputs. However, small farmers may have problems securing access to credit if they are located in remote areas that are not served by traditional financial institutions. Many small farmers manage their businesses informally and frequently do not have records or financial information that banks require for lending. Some microfinance institutions have tried to expand their usual urban activities to rural clients, but the costs of doing business in rural areas are still high and limit their scope. However, farmers often have stable relationships with agriculture processing companies and traders who purchase their crops, and these relationships may provide an opportunity to facilitate loan distribution and repayment.

For additional information on current SME Initiative projects, click here.

Context of the Evaluation:

In Colombia, less than 8% of rural households and enterprises are thought to have access to formal loans[1]. Nevertheless, there are about 400,000 families engaged in small and medium agribusiness for the production of milk in rural Colombia.[2] Milk production requires daily contact between the producer and the buyer, with payment occurring frequently. Buyers tend to attract the best dairy producers by providing access to inputs for production, or other services, or rewarding quality with higher prices.

Description of Intervention:

Bancamía, a bank specializing in microfinance, partnered with Alquería, a Colombian dairy company, to offer an individual loan product to small dairy farmers. Four hundred thirty five small dairy farmers who sell milk to Alquería via three intermediaries were randomly assigned to a treatment group, receiving a loan product offering, or a comparison group, receiving no product offering.

Bancamía offered the farmers in the treatment group a micro-loan with  a unique repayment process. Each month when the loan installments were due, farmers did not have to travel to the bank office to make the payments. Instead, the Alquería dairy deducted the value of the monthly installment from the farmer’s milk transfer payment and paid the bank directly. This scheme reduced risk for the bank as well as transportation, planning and transaction costs for the farmers. Loans ranged from about one to five million COP (about 560-2,800 USD) and were granted over a one to three year period.

To promote the credit program, meetings were held at the offices of three of the Alquería buying intermediaries to introduce farmers to the program, the benefits of the product, the rules and obligations, and the loan application and repayment process.  At the end of the meetings, milk farmers in the treatment group were provided with bank contact information and the opportunity to file a credit application.  Both those who participated in the meetings and selected participants who could not attend the promotional meeting received a phone call reminder about the program.  Before, during, and after the program, surveys were administered to collect socioeconomic information, household wellbeing, and loan data.

Results and Policy Lessons:

Low levels of loan product take-up led to a discontinuation of the evaluation.  Two main issues affected the implementation.  Firstly, two Alquería intermediaries offered their own loan products, very similar to the product offered by Bancamía, which lowered the demand. Secondly, the beginning of the rainy season was unexpectedly devastating that year, causing major flooding, damage to farmland, and death of livestock.  While the evaluation was discontinued, Bancamía, Alquería, and the intermediaries have continued to service the 33 clients who applied and received loans.

[1]Colombia Rural Finance: Access Issues, Challenges and Opportunities. Rep. no. 27269-CO. World Bank, Nov. 2003. Web. 16 Mar. 2010

[2]Rivera, José Félix Lafaurie, “TLC…la batalla no ha terminado.” Carta Fedegan N. 117.

Providing Collateral and Improving Product Market Access for Smallholder Farmers: A Randomized Evaluation of Inventory Credit in Sierra Leone

Policy Issue:

Inter-seasonal fluctuation of agricultural prices is widespread throughout the developing world. For many crops, prices decrease at harvest season, owing to the availability of large quantities of crop, while prices increase in the lean season.  However, small farmers are often unable to benefit from this price increase due to a lack of proper storage facilities and credit constraints. Inventory credit products address both storage and credit constraints by allowing small farmers to store their harvest in a secure warehouse as collateral for a loan. Such products have had successful small-scale test cases in West Africa, including Ghana (Technoserve), Niger (Food and Agriculture Organization) and Mali (World Bank). Yet, to date there have been no rigorous evaluations to assess inventory credit’s cost-effectiveness and sustainability.

Context of the Evaluation:

In Sierra Leone, palm oil is an essential component of rice consumption and exhibits large and predictable seasonal price changes, creating inter-temporal arbitrage opportunities, which remain largely unexploited by small farmers. Pilot data shows 72% of farmers sell a majority of their output within two months of harvest, despite an expected price increase of over 70% within six months.

The Sierra Leone National Program Coordinating Unit (NPCU) at the Ministry of Agriculture plans to implement a palm oil inventory credit scheme in collaboration with three Rural and Agricultural Banks (RABs). IPA will use the rollout of this program to conduct a randomized evaluation of the intervention.

Details of the Intervention:

The three participating RABs identified 120 communities that would be eligible to receive the inventory credit product. These communities will be randomly assigned to three groups with 40 communities each: The first will receive the inventory credit product, the second will receive assistance with management of a community storage space, but no access to inventory credit, and the third will serve as a comparison group.

In inventory credit communities, farmers will receive harvest time loans in exchange for storing their palm oil as collateral. The loan amount will be 70% of the palm oil’s harvest-time value, or around $5.50 per 5 gallon container of palm oil. The bank will store the collateral in a secure room provided by and located within the community, which will have two locks: the key for one will be controlled by the community; the key for the other will be controlled by bank staff. The banks will provide containers for the storage space, in which the palm oil will be stored. In the lean season (nine months later), when prices are typically more than 50% higher, the banks will assist the farmers with selling the collateral. The bank will recoup its loan and interest. The farmer will keep all additional revenue.

In storage communities, farmers will receive storage containers for the community store space and assistance with management of the space: NPCU staff will control the key to one lock, while the community will control the key to a second one. However, no inventory credit will be offered.

The study seeks to rigorously evaluate this intervention to examine the relation between storage, credit and access to markets for small farmers. The questions it seeks to answer are: a) Do farmers’ take-up the credit product? b) To what degree do farmers modify their sales patterns when using the credit product? c) Does inventory credit affect prices received by farmers in different seasons of the year?


Results forthcoming. 

Lorenzo Casaburi

Encouraging Adoption of Rainwater Harvesting Tanks Through Collateralized Loans in Kenya

Policy Issue:
Over the last decade, billions of dollars have been invested in the development of new agricultural technologies, which have the potential to contribute to economic growth and poverty alleviation amongst the poor. However, in Sub-Saharan Africa, the adoption of these promising agriculture technologies has been limited. Low adoption rates may be explained in part by credit constraints, which prevent many smallholder farmers from making the often large, initial investment in a new technology. A sizeable initial deposit or a guarantor is often required to receive a loan, restricting access for most. In developed countries, guarantor requirements are uncommon; instead, loans for purchase of houses, vehicles, and small business equipment often use the assets themselves as loan collateral. Using assets as collateral is rare in developing countries, where credible and efficient institutions and processes to seize collateral may be lacking. But in certain environments or for certain products—like water tanks, which are large and difficult to hide or relocate, making repossession feasible—can asset collateralization expand access to credit without affecting repayment rates?
Context of the Evaluation: 
Almost 80 percent of the Kenyan population lives in rural areas, where many suffer from significant water constraints. About 96 percent of cropland in Kenya is rain-fed and the rains are both seasonal and unpredictable. In recent years, much of rural Kenya has been hit by extreme droughts, which can be particularly problematic for dairy cattle, which require a consistent and regular water supply. Dairy farming is common in Kenya’s Central and Rift Valley provinces, the sample area for this study. The smallholder dairy farmers in the study sample had an average herd size of two cows, but 32 percent of households reported loosing at least one cow to drought in the year prior to the study, and 52 percent of households had a cow get sick. Without easy access to water, sample farmers reported spending a considerable amount of time (ten hours per week) taking cows to a water source. Technologies, such as rainwater harvesting tanks, that help to give dairy farmers reliable and convenient access to water, could improve their productivity and other economic outcomes.
Details of the Intervention: 
Researchers used a randomized evaluation to examine the effect of asset collateralized loans on the take-up of rainwater harvesting tanks and any subsequent impacts on dairy production, time use, or girls’ enrollment in school.
In partnership with a local dairy cooperative, researchers offered smallholder dairy farmers in central Kenya a loan to purchase a durable, 5,000-liter rainwater harvesting tank. The market price of the tanks at the time of the study was Ksh 24,000 (US$320), or roughly 13 percent of annual total household consumption in the sample. A full tank would last between 17 days and 6 weeks depending on whether the water was used for livestock, domestic use, or both.
From a sample of 3,000 farmers who sold milk to a local dairy cooperative, researchers randomly assigned 1,804 to receive one of four initial loan offers. The value and terms of the loan were the same for all four offers: the loan could only be used to purchase a water tank, the value of the loan was set equal to the market price of the tank (US$320), and all borrowers had to make a minimum deposit of Ksh 1,000 (US$15).
The four different loan offers varied in the deposit and guarantor requirements, and whether the asset was pledged as collateral. 
(i) 100 percent secured joint-liability loan - required borrowers to make a deposit equivalent to one-third of the value of the loan in their savings account. Three guarantors were also required to insure two-thirds of the loan amount through savings or shares in the dairy cooperative. This offer was essentially the same as the standard contract used by the cooperative when it gave out loans.
(ii) 4 percent deposit loan - used the water tank asset as collateral but carried no other up-front requirement apart from the small, Ksh 1000 (US$15) deposit, equivalent to 4 percent of the loan amount, required of all borrowers.
(iii) 25 percent deposit loan – used the water tank asset as collateral and required a larger deposit of Ksh 6,000, equivalent to 25 percent of the loan amount.
(iv) 25 percent guarantor loan – used the water tank asset as collateral and also required a single guarantor to pledge 21 percent of the loan amount (Ksh 5,000), in addition to the Ksh 1,000 deposit from the borrowing farmer.
Researchers anticipated that take-up rates would vary across these groups due to differences in the perceived profitability of borrowing under the given terms, differences in access to guarantors, and differences in farmer productivity and characteristics. In order to distinguish between these factors, farmers in groups iii and iv were randomly divided into two subgroups. Half of the farmers who received offer iii or iv had the requirements waived after the loan contract was signed; in group iii, the deposit amount in excess of the minimal 4 percent deposit was returned, and in group iv, the guarantor was absolved of any responsibility for the loan and his deposit was returned.
For all six resulting treatment groups, the timeline for the loan was 24 months and monthly repayments consisted of a fixed amount (Ksh 1,000) plus interest (1 percent per month) on the declining principal balance.  
The default procedures were the same across all treatment groups. When a farmer fell two months behind, he received a letter warning him that he was pending default and had two months to pay off the late amount. If the payment was still outstanding after 60 days, the cooperative applied any deposits held to the balance. If a balance still remained, the farmer was given an additional 15 days to clear it, after which the cooperative would repossess the tank and sell it to cover the farmer’s loan obligations. 
Results and Policy Lessons: 
Take-up rates: Take up of the 100 percent secured joint-liability loan was low, with only 2.4 percent accepting the offer. Asset collateralization significantly increased take up—nearly 28 percent of those who received the 25 percent deposit loan offer accepted, 23.5 percent of those who received the 25 percent guarantor offer accepted, and 44 percent of those who received the 4 percent deposit offer accepted.
Loan repayment rates and timing: About 63 percent of the farmers who took out a loan were late on their payments at least once during the course of the loan, but repayment performance did not vary significantly between treatment groups. The only major difference was the time taken to repay the loan: the average time taken to repay the 100 percent joint-liability loan was only nine months, while the other loans took between 17 and 22 months to pay off. No farmers defaulted on their loans and no tanks were repossessed. These preliminary results suggest that access to credit can be improved at little cost to lenders.
Impact on economic and welfare outcomes: Preliminary results show that access to asset-collateralized loans (through the 4 percent deposit offer) improved milk production specifically for those without access to piped water before the start of the study. In addition, it reduced the time girls in treatment households spent fetching water by 35 percent, and increased the probability that girls were enrolled in school by 4 percentage points. This latter effect is striking because enrollment rates in the sample area were already high—girls’ enrollment at baseline was 94.6 percent. This was not the result of households being able to borrow to pay school fees (a common use of microfinance loans), but rather the ability to invest in an asset that reduced the demands on girls’ time.

Informal Finance - Mapping Global Savings and Lending Practices

To understand the potential gains from formal banking, we must first understand the risks and returns that the poor face from financial-service options in the informal sector. Yet, while informal financial products dominate the financial lives of the poor, we have scant data and analysis on either informal savings or informal debt. This project aims to fill that gap by collecting detailed information on a range of informal financial vehicles from countries across various regions of the world.

Policy Issues:

This study aims to improve our understanding of several long-standing puzzles about the demand and supply of both informal moneylending and savings.

Informal Moneylending

Although MFIs and other formal financial institutions now offer and deliver loan services to the poor, many of these poor still continue to access capital informally, notably from moneylenders. Often referred to as “loan sharks”, informal moneylenders are frequently criticized for lending money at exorbitantly high interest rates and preying on poor people in dire situations. Are the observed high interest rates actually usurious, or do they simply reflect high lending costs? Which characteristics of informal loans account for the fact that even in areas with high formal finance saturation, informal lending is still prevalent? What are the characteristics of informal lending models? The fact that we are not as of yet capable of confidently answering these important questions points to a knowledge gap. This lack of systematic data across many countries in the developing world to facilitate studying informal loans and comparing them to their counterparts offered in the formal sector is at odds with the fact that informal financial products dominate the financial lives of the poor. The study aims to collect accurate information by using innovative survey instruments, to compare the costs of formal and informal lending services available to the poor.

Informal Savings

Poor households typically use a myriad of informal financial mechanisms to satisfy diverse financial needs. However, informal financial options alone are unable to meet all of a household’s savings needs, and households often report that having access to a savings account is their greatest financial need (Kendall, 2010). Informal schemes often entail high risk and as a consequence tend discourage medium and long-term accumulation. Few existing studies analyze the risks and returns of using informal financial tools, and the factors that influence behaviors in different contexts.One of the reasons for this dearth in knowledge is the difficulty in collecting accurate information. This explorative study aims to create and test high-quality instruments to collect both quantitative and qualitative data about informal savings practices, in order to analyze the contours of demand in these markets, evaluate the risks and returns that the poor face when using the products offered to them, and understand the heterogeneity in informal savings arrangements around the world.

Context of the Evaluation:

Seventeen summer interns spent three months into the field in several developing countries - Bangladesh, India, Philippines, Peru, Ghana, Malawi, Mali, Morocco, Rwanda, Ethiopia, Tanzania, Uganda and Senegal -  in order to collect quantitative and qualitative data. Of this group, six of them participated in the third year of ongoing research about informal moneylending,  while the remaining eleven started up an explorative study about informal savings, taking the first steps for further research.

Details of the Intervention:  

Informal Moneylending

From 2009 to 2011, IPA has been gathering data in eleven countries on the business practices of informal moneylenders operating in both urban and rural areas. The crux of this work has been qualitative surveys of moneylenders and their clients with a focus on activities and business cycles. In the spring of 2011, we conducted pilot studies to test various methods of tracking the daily activities of informal lenders, such as in-person shadowing, asking lenders to maintain daily diaries, text-message communication, and other technology-based instruments. These ongoing methods returned more accurate data than self-reported surveys.Over the summer of 2011, we expanded the information-gathering process, resulting in a more precise measure of the direct and opportunity costs of informal lending.  Additionally, we interviewed formal financial organizations, which compete with informal services in order to further understand the relative costs and benefits of different forms of finance. These interviews covered organizations such as MFIs, banks, and other loan associations. In the process, information on ROSCAs and other informal loan and savings vehicles was also collected.

Informal Savings

2011 was the first year of data collection on informal savings. In each country,interns visited three areas -  rural, semi-urban and urban -  and interviewed several respondents from different backgrounds, with the goal of developing an understanding of how the poor manage household income and expenditure flows, in terms of how they make decisions, which savings instruments they use and what their costs and returns are. The information was gathered both through informal interviews and a structured survey instrument, the latter being piloted all along the summer. It was continually updated with improvements and will serve as a basis for further research.

In Summer 2012 we conducted a second wave of data collection. Sixteen interns conducted research on informal savings in eleven different countries using quantitative and ethnographic methodologies. In the quantitative component, interns interviewed respondents from a representative sample to develop an understanding of which informal and formal savings instruments people use in each country, and assessed what are the costs, risks and returns associated with each of these instruments. The information was gathered through a structured survey instrument that was piloted in the beginning of the summer. In the ethnographic component, interns conducted a mix of immersion, observation, semi-formal interviews and focus groups in order to further understand savings behavior in the study locations. Interns focused in particular on research gaps that had been highlighted in the context of existing projects.

Results and Policy Lessons:

Results Forthcoming.

Group vs. Individual Micro-Lending in Peru

One of the most famous innovations of microfinance was the idea of “social collateral” – a way to guarantee the loans of people who have limited physical assets. However, it’s not clear that requiring group liability is actually a good thing. For instance, it can drastically raise the cost of a loan for a good client if she is forced to cover for other loans. Furthermore, it can force someone to guarantee people who take out much larger loans, which may prove to be impossible. It’s possible that, at least for some clients, individual liability loans may be better if the other mechanisms of microfinance (such as social embarrassment of being a debtor) ensure high repayment rates.

IPA ran a study in the Philippines testing this question, and found that repayment rate under individual liability did not go down, while growth increased. We are replicating the study in Peru.

The first phase of the study, in 2010, is to convert pre-existing communal banks (depending on if the group is in a rural area, the associations range from around 8-20 clients who all guarantee each other) to individual liability products, maintaining the rest of the group structure. Depending on the results, it’s possible that as Pro Mujer expands to new regions we’ll test impact with new associations.

We hope to implement financial diaries in the field in order to see, among other things, if clients under different liability structures have different approaches towards repaying their debts.

Evaluating Village Savings and Loan Associations in Uganda

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.

Policy Issue:

Although during the last decades microfinance institutions have provided millions of people access to financial services, provision of access in rural areas remains a major challenge. It is costly for microfinance organizations to reach the rural poor, and as a consequence the great majority of them lack any access to formal financial services.  Traditional community methods of saving, such as the rotating savings and credit associations called ROSCAs, can provide an opportunity to save, but they do not allow savers to earn interest on their deposits as a formal account would.  In addition, ROSCAs do not provide a means for borrowing at will because though each member makes a regular deposit to the common fund, only one lottery-selected member is able to keep the proceeds from each meeting.

Village Savings and Loan Associations (VSLAs) attempt to overcome the difficulties of offering credit to the rural poor by building on a ROSCA model to create groups of people who can pool their savings in order to have a source of lending funds.  Members make savings contributions to the pool, and can also borrow from it.  As a self-sustainable and self-replicating mechanism, VSLAs have the potential to bring access to more remote areas, but the impact of these groups on access to credit, savings and assets, income, food security, consumption education, and empowerment is not yet known. Moreover, it is not known whether VSLAs will be dominated by wealthier community members, simply shifting the ways in which people borrow rather than providing financial access to new populations.

Context of the Evaluation:

The Village Savings and Loans program in this study is implemented in rural communities across seven districts in Eastern, Western, and South-Western Uganda.  Community members are predominantly engaged in farming or animal breeding depending on the region. With little access to formal financial institutions, these small farmers do not have the opportunity to invest in agricultural inputs like fertilizer that could increase their income.

Description of the Intervention:

Three hundred ninety-two villages were selected to participate in this study and randomly assigned to a treatment or comparison group. Half of the villages in the treatment group were introduced to the VSLA model by community-based trainers who received an orientation by CARE and its local implementing partners. 

Community-based trainers present the model to villagers at public meetings. Those interested in participating are invited to form groups averaging about twenty and receive training.  These groups, comprised mostly of women, meet on a regular basis, as decided by members, to make savings contributions to a common pool.  At each meeting, members can request a loan from the group to be repaid with interest. This lending feature makes the VSLA a type of Accumulating Savings and Credit Association (ASCA) providing a group-based source of both credit and savings accumulation. CARE’s VSLA model also introduces an emergency fund, allowing members to borrow money for urgent expenses without having to sell productive assets or cut essential expenses such as meals.

This study will assess the impact of VSLA trainings and group membership on access to credit, savings and assets, income, food security, consumption education, and empowerment.

Results and Policy Lessons:

Results forthcoming.  

We are also working with CARE to evaluate their VSLA programs in Ghana and Malawi.

Microcredit for Women in Mexico

Few studies have rigorously quantified the impact of microcredit loans. IPA partnered with Compartamos Banco to evaluate the social and economic impact of their principal village banking loan product by randomizing which new communities the bank entered. After an average of 26 months later, economic impacts were modest, with increases in business activity but not in profits or household income. The data show few negative economic effects, and increased happiness and well-being for the group with access to loans. However, lower income individuals and first-time borrowers reported lower well-being outcomes, including higher stress. Future research and policy would benefit from better understanding the particular effects of access to credit for these individuals.
See the full results in an executive summary here and the full paper here (PDFs).
Policy Issue:
Microcredit is one of the most visible innovations in poverty alleviation programming in the last half-century, and in three decades it has grown dramatically. Now with more than 200 million borrowers,1 microcredit has been successful in bringing formal financial services to the poor. While microcredit has received praise for its potential to lift clients out of poverty, this recognition is often based on generalizations about the microfinance movement or on simple comparisons of borrowers and non-borrowers. Attempts to determine the true impact of microcredit programs are complicated by the fact that the choice to become a microfinance borrower may itself be a sign of increased ambition and ability to improve one’s economic situation. To date, few studies have rigorously quantified the impacts of microcredit loans on the beneficiaries and their communities. 
Context of the Evaluation:
The study took place in the northern Mexican state of Sonora in the cities of Nogales, Caborca, and Agua Prieta, as well as surrounding towns. Although agriculture, mining, and wage labor in factories along the U.S. border provide some employment opportunities, most people are underemployed and strive to make ends meet through various informal employment opportunities. Many residents lack the income or collateral to qualify for loans from traditional bank services.
In 1990, Compartamos Banco began offering credit in an effort to promote economic development by spurring the growth of micro-businesses. It converted to a commercial bank in 2006 and became a publicly traded company in 2007. Today, Compartamos Banco is the largest microfinance institution in Mexico with branches in every state and over two million borrowers. Crédito Mujer, the principal village banking product of Compartamos is offered to groups of 10 to 50 Mexican women over the age of 18 who either have some kind of business or would like to use the loan money to start one. Compartamos does not verify whether individuals are currently engaged in an income-generating activity or planning to start one once given the loan, instead they depend on other group members to screen out uncreditworthy women.
Description of the Intervention:
This project evaluates the social and economic impact of access to credit, taking advantage of Compartamos’ decision to offer Crédito Mujer in the north of Sonora, where it had not previously offered loans. Researchers divided the study region into 250 geographic clusters and then randomly assigned half to a treatment group and the other half to a comparison group.  In treatment clusters, Compartamos began offering loans in April 2009: loan officers targeted self-reported female entrepreneurs and used a variety of channels, including door-to-door promotion, radio ads, promotional events, and distributing fliers, to promote the Crédito Mujer product. Crédito Mujer loans in the sample ranged from 1,500 pesos to 27,000 pesos (US$125 to US$2,250), with first-time borrowers qualifying for lower amounts. The annualized interest rate for Crédito Mujer was approximately 110 percent in 2009 and borrowers repaid the loans over 16 weekly payments. In comparison group areas, Compartamos did not begin offering credit until almost 3 years later. 
Baseline and endline data is from socioeconomic surveys administered to women 18-60 who had or were likely to start a business in both treatment and comparison areas. Researchers conducted follow-up surveys between 2011 and 2012, an average of 26 months after Compartamos entered the treatment areas.
Impact on Loan Take-Up and Financial Access: Women in treatment areas reported taking out more loans and borrowing more from Compartamos than their peers in comparison areas. Around 17 percent of women in treatment areas borrowed from Compartamos, compared to 5.8 percent of women in comparison areas. There was no evidence that increases in borrowing from Compartamos was offset by decreases in borrowing from other lenders.
In areas where Compartamos offered Crédito Mujer, participation in informal savings groups expanded to 6.2 percent of the treatment group, a 1.1 percentage point increase over those who did not receive a microcredit offer. Researchers theorized that this may be due to Compartamos loans not fully meeting credit demands, or potentially a result of some borrowers needing to find credit elsewhere to pay off Compartamos debt. 
Impact on Business Outcomes: Expanded credit access increased the size of some existing businesses: in the treatment areas, there was a 0.08 percentage point increase in using loans to grow an existing business, and in the two weeks before the household survey these businesses saw a 27 percent increase in revenue and a 36 percent increase in expenditures, respectively. However, there were no increases in new business ownership or profits.
Impact on Household Finances and Well-Being: While there were no significant changes in household income, households in treatment villages were able to avoid selling assets in order to pay down debt more than their peers in comparison villages, maintaining a more stable level of economic well-being. Expanded credit access had generally positive effects on well-being: depression fell, trust in others rose, and female household decision power increased.
There was no strong evidence that credit expansion caused a significant number of people to experience negative microcredit effects, such as asset sales to counter debt traps.While researchers found little evidence to support microcredit’s negative effects, they did observe that microcredit generally had a larger effect on households that already enjoyed relatively high business revenues, profits, and household decision-making. Microcredit offers also improved happiness and increased trust in people more for women who already reported higher levels of happiness and trust. 
Overall, increased access to microcredit allowed some existing businesses to expand, and enabled customers to use formal financial services to manage their cash flows over time, although it did not increase their business profits or prompt people to start new businesses. Further research is needed to explore potential screening criteria or effective guidance to first-time borrowers.
[1] CGAP. “Financial Inclusion” Accessed: 2015. 01.20
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