The Impact of Microfinance: What do we know?

1. The Impact of Microfinance: What do we know? Dr. Ajay Tannirkulam (CMF -IFMR) Prathap K.B. (JPAL South Asia)

2. CMF and JPAL CMF is a non-profit, non-partisan research centre housed within the Institute for Financial Management and Research in Chennai CMF aims to improve the accessibility and the quality of financial services for the poor through rigorous research, knowledge dissemination and evidence-based policy outreach. J-PAL is a network of 70 affiliated professors around the world using Randomized Evaluations to answer questions critical to poverty alleviation. JPAL’s mission is to reduce poverty by ensuring that policy is based on scientific evidence.

3. Why Microfinance? Access to finance can potentially enhance welfare and productivity by - • helping managing risk (through movement of economic resources across geography and time) • smoothing consumption through resource movement over time • helping ventures expand through access to capital (Merton 1993, Arrow and Debreau 1954, Ananth et al. and references therein - in prep)

4. Components in the microfinance puzzle • Credit • Savings and Pensions • Insurance • Transfers • Wealth-advisory services?

5. Randomized Evaluations • We want to know what would happen to the same group of people in the absence of the programme. • Since we can’t observe the same person at the same time with and without programme, we need a comparison group that creates a similar situation. • By randomly assigning access to financial services, randomized trials ensure that the only difference, on average, between clients and non-clients is access to the program. • Any difference between the groups can be confidently attributed as the impact of the program.

6. Impact of Micro Credit – The Case of Spandana’s Expansion in Hyderabad (Banerjee et al. 2010) • Traditional microcredit program • Group liability • Weekly or monthly repayment • Starting loan is Rs. 10,000 (~$250) • Interest rate changed over the period but was around 12% per year (non declining balance; ~24% APR) • By randomizing the selection, two groups of 52 slums were created which were virtually equivalent along all demographic, social and economic characteristics. • Spandana then offered micro-credit into one group of 52 slums, called the “treatment group,” and for the duration of the study refrained from introducing micro-credit into the other group of 52 slums, “the control group.”

7. Results from Endline 1 • Households surveyed 15-18 months after the offer of credit. • Results heterogeneous. • 1 in 8 new borrowers start a new business • Those who already had businesses invest in durables and restrict their “temptation” consumption • Others consume more. • No discernible effects on measures of health, education, empowerment

8. Results by Business status • Old business owners borrow and invest in durable goods • Among those who didn’t have a business 1 year ago: • Those with high propensity (literate, non-wage-working spouse) borrow and reduce nondurable consumption • Those with low propensity (illiterate and/or wage-working spouse) borrow and increase nondurable consumption

9. What do evaluations from other microcredit programs tell? • Crepon et al. 2011 find similar heterogeneity and impact for a rural-Morocco credit program. • Karlan and Zinman 2011, from an experiment in Philippines found negative impact on business and positive changes in ability to cope with shocks.

10. Credit Withdrawal • The Andhra Crisis of 2010 provides an opportunity to understand the impact of a negative credit shock. • Preliminary findings from a CMF rural AP panel (non experimental) suggest a 15-20% fall in nominal consumption expenses between 2009 and 2012 for MFI clients. • Spandana 3 (survey currently underway) will shed details of impact on an urban sample.

11. Microsavings • Access to formal commitment savings can increase savings substantially (Ashraf et al. 2005) • Access to formal savings can lead to increased business investment and reduce vulnerability to shocks (Dupas and Robinson 2011 – Kenya Study) • Commitment savings increased agriculture input use, the value of agriculture output and household expenditure (Brune et al. 2011 – Malawi Study)

12. Microinsurance Insurance is a complex product – difficult to design well and difficult to market. • Product uptake is extremely price sensitive. Trust plays a very important role in uptake. • Insured farmers do not change input use and shift towards riskier crops with the potential for higher returns. (Gine et al 2010 – AP, Cole et al. 2011 – Gujarat, Karlan et al. in prep)

13. Key Takeaway Bauchet et al. (2011) and references therein • Impact of financial services is heterogeneous and success/failure is mixed. • Men did not show discernible welfare gains in the Dupas and Robinson (2011) savings experiment. Women did. • Product design is extremely important • Karlan and Zinman (2010) show that a cash-credit program in South Africa has positive impacts on household income and food consumption • Flexibility in loan repayment can increase business investment and profits (Field et al. 2010) • Farmers with access to regular savings accounts showed insignificant gains in input use and output. Farmers with commitment savings increased input and showed a 22% gain in value of crop output (Brune et al. 2011).

14. Ongoing Impact Work in India • Health Insurance • The interplay between psychology and savings-product design • Weather Insurance • Micro Pensions - understanding uptake and impact • Agriculture Credit • The impact of access to the full suite of financial products (including wealth advisory)

15. Questions? Thank You