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Financial Sector Development
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AGENDA:
1. Introduction
2. Risk
3. Insurances
4. Microcredit
5. Examples
6. Limits
7. Conclusion
Financial Sector Development
Francesca Rinaldi
Maria Mifsud Fons
Sofia Gião Torrinha
INTRODUCTION
What is Microfinance?
It provides tools against poverty by helping low-income individuals reaching financial autonomy.
Microcredit: credit of low amount destined to people with low income
1
to improve living
conditions of the
household
to finance
activities
generating
income
INTRODUCTION
When was Microfinance born?
The Grameen Bank, created by Muhammad Yunus was inspired during the Bangladesh famine of 1974 to make a small loan of US$27 to a group of 42 people in order to stimulate businesses and reduce the widespread rural poverty.
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The hazards of being poor
poverty = risk
Poor are like hedge-fund managers,
but 100% liable for their losses
Title
Apparently, the impact of huge financial crisis
is not as devastating on the poorest
countries as it is elsewhere
Global crisis as
an opportunity
Cataclysmic events
barely affect poor
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- jobs at higher wages: consider migrant construction workers
- little risk added to overall risk of their lives
every year feels like being in the middle of a colossal financial crisis
WHAT CAN POOR DO TO COPE WITH THE RISK?
To work more?
SOLUTION: Diversify activities
- Having more than one job
- More than one plot in a village
- Temporary migration of a part of a family
- Being conservative in the way you manage the farm
- Marriage
- Having a lot of babies
All of these ways in which poor cope with risk tend to be very costly.
OTHER WAYS TO DEAL WITH RISK: Informal insurances -> to help each other out
Title
- They are far from the perfect insurance
- It does not work in health issues
(It goes beyond the basic act of sharing)
WHERE ARE THE INSURANCE COMPANIES FOR THE POOR?
Even only a small profit per policy would make a big business opportunity, since there are millions of people waiting to be insured.
But there are difficulties in providing insurance:
- Moral hazard: people may change their behaviour;
- Adverse selection: those who know they are more likely to have a problem in the future are more interested in getting the insurance;
- Fraud - the example of the market for cow's ears.
Some types of risk are easier to ensure (rainfall insurance)
Microinsurance looks to aid low-income families by offering insurance plans tailored to their needs.
WHY DON'T POOR PEOPLE WANT INSURANCE?
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- The government usually helps in case of large-scale disasters
- Lack of financial education: understanding the concept of insurance
- Credibility
INTRODUCTION
When was Microfinance born?
1
MICROSAVINGS
Why don't people save?
Commitment savings to encourage saving
"Reminders to save - make tomorrow real today"
LENDING TO THE POOR
Very few people get loans from a proper lending institution such as commercial banks or cooperatives
Less poor people
Extremely poor people
Formal sources
Informal sources
WHY SOME PEOPLE WHO ARE MORE LIKELY TO DEFAULT HAVE TO PAY HIGHER INTEREST RATES?
Title
- The lender needs to know many things about the borrower
- This effort takes time, which is money
-> multiplier effect
- Their loans are too small to make it worthwhile.
Microfinance
one of the most visible anti-poverty policies
- 150-200 millions of borrowers worldwide
Profit mission
Social mission
- Microcredit as moneylending reinvented
for a social purpose
World financial inclusion - 2017
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How does microcredit work?
- Methodological procedure: details
- Traditional direct microcredit model
1
Title
Differences in interest rates
1
+ extremely rare defaults
Microcredit stands out as one of main measures to fight against poverty
But does microcredit work?
but no rigorous evidence, only case studies and anecdotes
Evaluations
encouraged by:
- criticism for not entirely rational and aware borrowers
- MFIs, to check the efficiency of their own programs
(over)promises
results
- from 5 to 7% of families started new businesses
- no reckless spending, investment in durable goods
Spadana's program in Hyderabad,2008
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- Radical transformation in gender differences, education, health, ..
- Start of several new businesses
considered as negative findings: microfinance is not as it is promised to be
but denied by the "big six" (Grameen Foundation, Women's World Baking, ..)
Microfinance has its strengths and its limits:
it is only one of the possible arrows in the fight against poverty
THE LIMITS OF MICROCREDIT
In Hyderabad, half of the people still used moneylenders (with higher rates than MFIs). Main reason: rigid rules and time constraints.
Could MFIs do better both socially and commercially by leaving scope for some default?
Data about Spandana (India)
THE DOWNSIDE OF MICROCREDIT
INDIA'S MICRO-FINANCE SUICIDE EPIDEMIC (2010)
- India: 30 million borrowers;
- 10 million in Andhra Pradesh.
- More than 70 people committed suicide from March 1 to November 19 to escape payments
- Individuals had an average debt of $660; average annual income of $1,060: 60% of their fragile, uncertain income is spent paying off loans.
"Loans have been given to rural people without checking whether they had the capacity to repay"
"Selling debt is like selling drugs"
PROBLEMS WITH JOINT LIABILITY
People might not want to “control” other people’s business;
Discrimination against newcomers and risk-takers.
Repayment depends on what everyone else does and on the future of the company:
- The case of the "fake news" about Spandana;
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Therefore, it does make sense that MFIs focus on managing beliefs (and on prioritizing repayment discipline over everything else).
THE MIRACLE OF MICROFINANCE? EVIDENCE FROM A RANDOMIZED EVALUATION (Ester Duflo, Abhijit Banerjee, Rachel Glennerster, Cynthia G. Kinan, 2013)
2005: 52 of 104 poor neighbourhoods in Hyderabad were randomly selected for opening a MFI branch by one of the fatest-growing MFI in the area, Spandana
Elegitibility
criteria:
- To be a woman
- Aged 18-59
- To have resided in the area for at least a year
- 80% must own their own home
- Valid identification and residential proof
Title
Title
2006-2007: Spandana progressively began operating in 52 treatment areas
August 2007-April 2008: First endline survey
2009-2010: Second endline survey
Title
Title
Title
EFFECTS OF THE INTRODUCTION OF MICROCREDITS IN :
- Consumption
- Business
- Labor supply
- Development
Title
KEY RESULT: In order to invest in new business or to get a durable good, some households may sacrifice short or even medium-term consumption and other households may decide to expand their labor supply
- CONSUMPTION
Significant positive impact on the purchase of durable goods
Increase in labor supply
Decrease in "temptation goods"
BUSINESS
- They were not more likely to start any new business
- They were more likely to start several at once
- They invested more in their existing business
LABOR SUPPLY
Access to microcredit can lead to an increase of labor supply for those people who have acquired a durable good.
DEVELOPMENT
- No effect
In short-term
In long-term
- No effect on women's empowerment
- Increase in school fees expenditures
- Decrease in health expenditures
Microfinance beyond self-employment:
Evidence for firms in Bulgaria
Erhardt, Eva
University of Mainz, 2017
Microfinance as a strategy for job creation
access to microcredit to overcome these constraints
start or expansion of businesses
entrerpreneurial individuals are credit constrained
impact on wage-employment
Research questions
- Find evidence of the impact microfinance specifically has on wage-employment, not only on self-employment
- Assess the effects of microfinance in more developed areas, such as Eastern Europe
Context
- access to formal finance and borrowing: 16%
- domestic credit to the private sector: 26%
Bank
Firms
micro enterprises engine of Bulgarian economy
for-profit bank, largest provider of microcredit
Program
objective: job creation
content: individual lending of micro loans (7,092€)
eligibility: enterpreneurs with at least 6 months of experience
Sprint: no collateral required, 24 hours to process
Participants
treatment: disbursement of a business loan from ProCredit Bank in 2004
control: no microcredit before/during 2004
26% of formally registered Bulgarian firms
Treatment effects
Outcome of interest: differences in employees between 2003 and 2006
+ 33% wage-employment
+ almost 10,000 job for a single year
Dynamic effects
The impact of the loans is substantially positive and long-lasting
Heterogeneous effects
- The smaller a firm, the higher the impact of microcredit on employees growth
- No evidence that larger loans = larger effects
Location
The microcredit's
program aims to
broadly increase
access to finance
and
wage-employment
in a development-
oriented manner
THE IMPACT OF MICROCREDIT
In an urban setting – Hyderabad, India:
Did not change amount of consumption but it did change HOW households spent
Impact of Grameen-style group lending
In a rural setting – Morocco:
Changes in farming activities
From the paper: Latest Findings from Randomized Evaluations of Microfinance (December 2011)
Loans have provided a better life quality and autonomy in many cases; but the responsibility of a loan has also lead to psychological problems and even cases of suicide.
Do you think this responsibility should not be given so easily?
How profitable should microfinance be?
Microfinance was created to eradicate poverty. Do you think it is the definitive solution?
SOURCES
- Banerjee, Abhijit V.; Duflo, Esther. Poor Economics. 2011
- Bauchet, Jonathan; Marshall, Cristobal; Starita, Laura; Thomas, Jeanette; Yalouris, Anna. Latest Findings from Randomized Evaluations of Microfinance. 2011
- Erhardt, Eva. Microfinance beyond self-employment: evidence for firms in Bulgaria. University of Mainz, 2017.
- Duflo, Esther; Banerjee, Abhijit; Glennerster, Rachel; G. Kinnan, Cynthia. The Miracle of Microfinance? Evidence from a Randomized Evaluation, 2013.
- http://www.impactinsurance.org/emerging-insights/ei76
- http://www.spandanaindia.com/index.html
- https://www.bbc.com/news/world-south-asia-11997571
- https://economictimes.indiatimes.com/industry/banking/finance/suicides-reveal-how-men-made-a-mess-of-mfis/articleshow/7219687.cms
- https://sustainabledevelopment.un.org/?menu=1300
- https://www.brettonwoodsproject.org/2017/12/banks-push-microcredit-failed-poor/
- https://www.povertyactionlab.org/policy-insight/microcredit-impacts-and-limitations
- https://isbinsight.isb.edu/microfinance-lenders-profit-profit/
- https://www.european-microfinance.org/sites/default/files/document/file/BMF_2018_EN_VFINALE-2.pdf