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on Microfinance |
| By: | Dean Karlan; Xavier Giné |
| Abstract: | This working paper by CGD non-resident fellow Dean Karlan explores whether group liability in lending practices improves lender's overall profitability and the poor's access to financial markets. Group liability is a common microcredit lending mechanism that makes a group, rather than an individual recipient, responsible for repayment. It claims to improve repayment rates by providing incentives for peer's to screen, monitor and enforce each other's loans. But some argue that group liability actually discourages good clients from borrowing by creating tension among group members and causing dropouts, jeopardizing growth and sustainability. Also, bad clients can "free ride" off of good clients causing default rates to rise. In this paper, Karlan and his co-authors discuss the results of a field experiment at a bank in the Philippines, where they randomly reassigned half of the existing group liability centers as individual liability centers. They find that converting group liability to individual liability, while keeping aspects of group lending like weekly repayments and common meeting place, does not affect the repayment rate, and actually attracts new clients. This paper is one in a series of six CGD working papers by Dean Karlan on various aspects of microfinance (Working Paper Nos. 106 –111). |
| Keywords: | group liability, lending practices, financial markets, repayment rates, free ride, Philippines |
| JEL: | G10 G21 M20 D81 D71 |
| URL: | http://d.repec.org/n?u=RePEc:cgd:wpaper:111&r=mfd |
| By: | Dean Karlan; Jonathan Zinman |
| Abstract: | Expanding access to credit is a key ingredient of development strategies worldwide, and the microfinance industry is generally credited with success in helping to alleviate poverty and improve the lives of the poor. But there is less consensus on the role of consumer loans in credit expansion initiatives. In fact, many practitioners and policymakers are skeptical about the benefits of consumer lending. This working paper by CGD non-resident fellow Dean Karlan and Jonathan Zinman estimates the impacts of expanding the consumer credit supply using a South African field experiment in which some loan applicants who had been denied credit were randomly selected to be "unrejected" for a loan. They find that compared to those who did not receive credit, borrowers showed increased employment, reduced hunger and reduced poverty. The loans also appear to have been profitable for the lender. This paper is one in a series of six CGD working papers by Dean Karlan on various aspects of microfinance (Working Paper Nos. 106-111). |
| Keywords: | access to credit, microfinance, consumer loans |
| JEL: | G21 M20 |
| URL: | http://d.repec.org/n?u=RePEc:cgd:wpaper:108&r=mfd |
| By: | Dean Karlan; Jonathan Zinman |
| Abstract: | Policymakers often urge microfinance institutions to increase interest rates to eliminate reliance on subsidies. However, existing research provides little evidence on interest rate sensitivities in MFI target markets as well as little guidance on how to derive rates. MFI policymakers generally presume that the poor are largely insensitive to interest rates and recommend that MFIs increase interest rates without fear of diminishing access. In this working paper, CGD non-resident fellow and his co-author test the elasticity of demand for microcredit using field data from South Africa. A for-profit South African lender worked with the authors to randomize 50,000 individual interest rate direct mail offers and tracked gross revenue and repayment, allowing the authors to access the effects on the targeted access margin that interests policymakers. They also worked with the lender to explore a margin of loan contracting that has been largely ignored by academics, policy makers and practitioners: loan maturity. They found that price sensitivity increased sharply when individuals were offered a rate above their prior loan's rate. They also found that loan size is far more responsive to changes in loan maturity than to changes in interest rates. This paper is one in a series of six CGD working papers by Dean Karlan on various aspects of microfinance (Working Paper Nos. 106 –111). |
| Keywords: | interest rates, subsidies,credit elasticity,loan maturity, microfinance, credit market |
| JEL: | G21 M20 E51 E43 H20 |
| URL: | http://d.repec.org/n?u=RePEc:cgd:wpaper:110&r=mfd |
| By: | Dean Karlan; Jonathan Zinman |
| Abstract: | Information asymmetries--which occur when one party to a transaction has more or better information than the other party--such as moral hazard or adverse selection, can cause inefficiency, overinvestment, or poverty traps. Unfortunately, they are difficult to identify in practice. This working paper by Dean Karlan, CGD non-resident fellow, and his co-author provides a microfoundation for studying the real effects of credit constraints by identifying the presence (or absence) of two specific credit market failures: adverse selection adverse selection (where sellers lack information) and moral hazard (where buyers or borrowers lack information). The experiment identifies information asymmetries by randomizing loan pricing using 58,000 direct mail offers along three dimensions: an initial "offer interest rate" featured on the direct mail solicitation, the actual interest rate on the loan contract revealed only after the borrower agreed to the initial offer rate, and the interest rate on future loans offered only to those who remained in good standing. Findings show evidence of moral hazard with weaker evidence of adverse selection. A rough calibration shows that approximately 7% to 16% of default is due to asymmetric information problems. This paper is one in a series of six CGD working papers by Dean Karlan on various aspects of microfinance (Working Paper Nos. 106 –111). |
| Keywords: | Information asymmetries, adverse selection, moral hazard, microfinance, credit market |
| JEL: | G21 M20 E51 D82 |
| URL: | http://d.repec.org/n?u=RePEc:cgd:wpaper:109&r=mfd |
| By: | Dean Karlan; Martin Valdivia |
| Abstract: | Can one teach basic entrepreneurship skills, or are they fixed personal characteristics? Most academic and development policy discussions about microentrepreneurs focus on their access to credit, and assume their human capital to be fixed. The self-employed poor rarely have any formal training in business skills. However, a growing number of microfinance organizations are attempting to build the human capital of micro-entrepreneurs in order to improve the livelihood of their clients and help further their mission of poverty alleviation. Using a randomized control trial, we measure the marginal impact of adding business training to a Peruvian group lending program for female microentrepreneurs. Treatment groups received thirty to sixty minute entrepreneurship training sessions during their normal weekly or monthly banking meeting over a period of one to two years. Control groups remained as they were before, meeting at the same frequency but solely for making loan and savings payments. We find that the treatment led to improved business knowledge, practices and revenues. The program also improved repayment and client retention rates for the microfinance institution. Larger effects found for those that expressed less interest in training in a baseline survey. This has important implications for implementing similar market-based interventions with a goal of recovering costs. |
| Keywords: | entrepreneurship, microentrepreneur, business skills, business training, credit |
| JEL: | M13 M0 M40 |
| URL: | http://d.repec.org/n?u=RePEc:cgd:wpaper:107&r=mfd |
| By: | Lucia Dalla Pellegrina |
| Abstract: | Using data from a World Bank survey carried out in Bangladesh during the period 1991-1992, we compare the impact of microfinance programs and other types of credit on agricultural investment. After controlling for several measurable determinants of credit agreements, such as interest rates and collateral, estimates still show that microfinance programs are more likely to increase variable input expenditure than informal and bank credit are able to do. This provides evidence that microfinance incentive devices (joint responsibility, peer monitoring, social sanctions, future credit denial in case of default, etc.), perhaps together with other services associated with programs, are effective in order to promote a productive use of funds. |
| Keywords: | Microfnance, Banks, Informal lending, Investment. |
| JEL: | O16 O17 G21 |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:mis:wpaper:20070401&r=mfd |
| By: | Ricardo Bebczuk (Centro de Estudios Distributivos, Laborales y Sociales (CEDLAS) - Universidad Nacional de La Plata; Washington University in St. Louis); Francisco Haimovich (Universidad de San Andrés) |
| Abstract: | This study uses for the first time household survey data from a number of Latin American countries to investigate the degree and effects of the access to credit on the income and education of poor households. With this goal in mind, multivariate regressions are run to estimate the impact of the credit to the poor on their labor income and on the probability of their children to stay at both primary and secondary school. Afterwards, based on these results, alternative credit policies are simulated. Much in line with the available microcredit evidence, the study provides mixed results: while no negative effects are identified, positive and significant loadings are found in several, but not all cases. The simulation exercises support the claim that microcredit might be a relatively powerful but still limited tool for meeting the MDGs. |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:dls:wpaper:0048&r=mfd |
| By: | Cuong H. Nguyen |
| Abstract: | This paper analyses the Vietnam's rural credit market to understand the determinants of credit choices and to measure impacts of borrowing activities on borrower's consumption in the 1992-1998 period. There are three main results. First, there exists uniform access to formal credit among rural households in Vietnam. Households' financial activity is found to be determined by household size and agricultural work rather than education or distance from the commune to the nearest bank branch. Education level seems to have an inverse U-shape effect on credit taking possibility; the least and the most educated households borrow least. Second, there is evidence of money lenders being crowded out by formal institutions via competition. Finally, we apply fix-effected regression and propensity score matching estimation on cross-sectional and panel data to assess impact of credit taking on household consumption. Our study demonstrates that formal credit positively affects borrowers' consumption while informal finance has mixed results. |
| Keywords: | rural credit, credit participation, Vietnam |
| JEL: | O12 O16 O17 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:hwe:certdp:0703&r=mfd |