Category: Risks

MICROFINANCE PAPER WRAP-UP: “The Next Stage of Financial Inclusion;” by Dean Karlan; Published by Stanford Social Innovation Review

“The Next Stage of Financial Inclusion;” by D. Karlan; published by the Stanford Social Innovation Review; fall 2014; 9 pages; available at: http://www.ssireview.org/pdf/Fall_2014_The_Next_Stage_of_Financial_Inclusion_1.pdf

This paper investigates the evolving role of nonprofit organizations in providing microcredit to people with low incomes. Dr Karlan argues that the role of nonprofit organizations has changed from providing microcredit to people with low incomes in general as for-profit companies have entered the market and begun to provide these services effectively. Instead, nonprofit institutions are addressing market failures to reach those who continue to be excluded from the market. The article is structured around three issues: (1) reaching individuals not covered by the for-profit sector, including those “too rural,” “too poor” or “too young;” (2) building trust among customers and microcredit providers; and (3) promoting innovation.

The author argues that pursuing poor people living in very rural areas is expensive and in fact unsustainable on a for-profit basis. He suggests that nonprofit organizations should promote savings-led microfinance, such as savings groups in which 10 to 30 people work together to save and loan to each other. Randomized trials conducted in Ghana, Malawi, Mali and Uganda by Innovation for Poverty Action (IPA), with the help of Plan International, Oxfam and Freedom from Hunger (FFH) indicate that savings groups initiatives have a modest, but positive impact on total savings, livestock levels and higher levels of food security.

Dr Karlan further argues that nonprofit institutions are essential to strengthen trust between the financial industry and its future customers, and that they are vital in ensuring a smooth transition for the emergence of for-profit companies. A recent study conducted by IPA in Uganda showed that certain products previously unknown to the public had a purchase rate of 49 percent if sold by nonprofit vendors compared with 31 percent if sold by for-profit vendors. Endorsement or certifications by microfinance institutions (MFIs) can also lead to higher purchase rates. BASIX, an India-based MFI, demonstrated in one instance that the purchase rate for rainfall insurance was 36 percent higher when an MFI-endorsed insurance educator promoted it.

As financial returns of process innovation in the microfinance sector are very low, Dr Karlan argues that nonprofit institutions should be the key agents promoting innovation. The first policy proposed is to replace debt financing by equity financing, as is common in Islamic finance models, such as ijarah, murabaha or musharaka. The second proposed measure is to provide more generous repayment schedules using concepts from corporate project financing. For instance, a company that borrowed money to build a factory would only have to repay its loan once the factory starts generating revenues. A study conducted in India demonstrated that test groups with a grace period of two months had a 4.5 percent likelihood of starting a business compared to 2 percent for control groups that had a two-week grace period. It further showed that after three years, business profits and household incomes were 41 percent and 19.5 percent higher for the group with the longer grace period. However, the study also demonstrated that default rates were up to 6.2 percent for the test group compared with 1.7 percent for the control group.

By Simon Pfanner, Research Associate

[1] Standard Social Innovation Review, “The Next Stage of Financial Inclusion“

MicroCapital, July 12, 2012, Innovations for Poverty Action (IPA), Citi Foundation Issue Call for Financial Capability Research Funding Proposals

MicroCapital, April 29, 2011, Stanford Social Innovation Review (SSIR) Blog, Ignacio Mas, John Staley Offer Regulators, Financial Service Providers Ideas to Increase Financial Inclusion

MicroCapital, November 9, 2010, Microfinance Bank Compartamos Banco, Researchers Dean Karlan of Yale University and Jonathan Zinman of Dartmouth University to Study How Customers Use Microfinance Products

Do you know that MicroCapital publishes the MicroCapital Monitor newspaper each month? Find out more at http://www.microcapital.org/products-page/

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SPECIAL REPORT: Over-indebtedness, Microfinance and Environment Award, Conflict Zones at e-MFP’s European Microfinance Week

MicroCapital: Please describe one of the key issues to be covered this year at European Microfinance Week.

Christoph Pausch: The question of over-indebtedness is still the major risk for the sector, as identified in the most recent Banana Skins survey. We had a very successful plenary last year exploring the issue from a research perspective. This year, we’re taking a very different approach by bringing CEOs of leading microfinance institutions (MFIs) from three countries – Bangladesh, Morocco, and Mexico – to discuss how they’ve been dealing with the issue. Each of these countries has had a different experience, with Bangladesh having successfully averted a potential crisis by slowing market growth (as described in an excellent paper by Stuart Rutherford and Greg Chen). Morocco was one of the original “microfinance crisis” countries during 2008 and 2009, and the MFIs there have had an interesting experience in resolving the problems from that period. Finally, Mexico is a major market with serious concerns regarding over-indebtedness, and MFIs there are working to avert a potential crisis. Continue reading

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MICROCAPITAL BRIEF: Risk Management Initiative in Microfinance (RIM) Announces Launch of Website Promoting Uniform Standards

Risk Management Initiative in Microfinance (RIM), a platform that promotes adoption of risk management standards in microfinance, has announced the launch of its official website, which aims to provide a “hub for the dissemination of risk management standards, information sharing and industry cooperation” [1]. Continue reading

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MICROFINANCE PUBLICATION ROUND-UP: Digital Financial Services Risk Assessment for Microfinance Institutions, Microinsurance Awareness in Ghana, G2P for Financial Inclusion: A Job Half Done

“Digital Financial Services Risk Assessment For Microfinance Institutions – A Pocket Guide;” by Tom Shaw, Marcella Willis, Daryl Skoog, Sonia Arenaza, Sudha Garg, Susan Salerno, Eve Hamilton and Shailee Adnolfi; published by The Digital Financial Services Working Group; September 2014; 15 pages; available at https://lextonblog.files.wordpress.com/2014/09/dfs_risk_guide_sept_2014_final.pdf

The authors of this “pocket guide”[1] argue for the importance of “Digital Financial Services (DFS)”[1] to reach low-income individuals who do not have access to traditional banking solutions. Continue reading

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MICROCAPITAL BRIEF: United Nations’ International Labour Office, World Bank Group (WBG) to Provide Index Microinsurance in Developing Countries in Africa, Asia

The International Labour Office (ILO), an agency of the United Nations
that deals with labour standards, and the World Bank Group (WBG), a
group of five multilateral organizations that invest in developing
countries, reportedly have entered into a three-year partnership with
the aim of providing index microinsurance products in Africa and Asia
through ILO’s Microinsurance Innovation Facility (MIF), which provides grants to organizations to develop microinsurance products, and WBG’s Global Index Insurance Facility (GIIF), a trust fund that supports disaster and weather index insurance markets. Continue reading

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MICROFINANCE PUBLICATION ROUND-UP: Microfinance “Banana Skins” Risk Assessment; Effects of Microloans from Compartamos in Mexico; Youth Financial Inclusion Video

“Microfinance Banana Skins 2014: Facing Reality;” published by Centre for the Study of Financial Innovation; July 2014; 84 pages; available athttp://csfi.org/files/Microfinance_Banana_Skins_2014_-_WEB.pdf

This report, which is based on data collected by surveying 306 people associated with the microfinance industry, examines 19 risks faced by microfinance institutions (MFIs) across the globe. Continue reading

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MICROFINANCE PUBLICATION ROUND-UP: Over-indebtedness in Mexico; Achieving Customer Centricity; Managing Over-indebtedness

“Over-Indebtedness in Mexico: Its Effect on Borrowers;” published by Microfinance CEO Working Group; May 2014; 32 pages; available at http://microfinanceceoworkinggroup.org/wp-content/uploads/2014/05/Over-Indebtedness-in-Mexico-Its-Effect-on-Borrowers-552014.pdf

This report cautions lending institutions in Mexico about rising levels of over-indebtedness – meaning more borrowers cannot reasonably repay their debts – which can threaten the financial system as well as the economic outlook of low-income individuals. Continue reading

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MICROCAPITAL BRIEF: Entrepreneurial Finance Lab Offers Microfinance Institutions (MFIs) Credit Scores for Micro-, Small Enterprises (MSEs) Based on Psychometric Tests

In an effort to promote financing to self-employed entrepreneurs and micro- and small enterprises (MSEs) in emerging economies, Entrepreneurial Finance Lab (EFL), a US-based company, is employing psychometric analyses to assess the creditworthiness of loan applicants. Continue reading

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OPINION: No Silver Bullet: While Microfinance Alone Won’t End Poverty, It Is Making an Impact – So Let’s Re-focus It to Serve the Poor

The debate about the contributions that microfinance is making to global poverty alleviation is an interesting one. But it’s also getting a little tedious.

We are all disappointed that microfinance has not, as the popular culture has promoted it, proven to be the “silver bullet” for poverty alleviation. If, however, we challenge ourselves to really understand (and be transparent about) the strengths and limitations of microfinance, and begin to think about it as just one part of a more comprehensive package of development services, the debate (and potential for impact) becomes much more interesting. Continue reading

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MICROFINANCE PAPER WRAP-UP: “Using Subsidies for Inclusive Insurance: Lessons from Agriculture and Health;” by Ruth Vargas Hill, Gissele Gajate-Garrido, Caroline Phily, and Aparna Dalal; Published by International Labour Organization

“Using Subsidies for Inclusive Insurance: Lessons from Agriculture and Health;” by Ruth Vargas Hill, Gissele Gajate-Garrido, Caroline Phily, and Aparna Dalal; published by International Labour Organization; January 2014; 55 pages; available at http://www.microinsurancefacility.org/publications/mp29

This report was published by the Microinsurance Innovation Facility, a nonprofit research institution housed within the UN’s International Labour Organization (ILO) that promotes the development of insurance products and risk-mitigation markets in developing economies. Continue reading

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MICROCAPITAL BRIEF: MFX Solutions, Fonds pour l’Inclusion Financière en République Démocratique Congo to Provide Technical Assistance to Banks, Microfinance Institutions (MFIs)

MFX Solutions, a US-based company that provides currency hedging solutions for microfinance institutions (MFIs) and microfinance investment vehicles (MIVs), recently announced that it has entered into a two-year technical assistance partnership with Fonds pour l’inclusion financière en république démocratique Congo, a nonprofit microlending organization in the Democratic Republic of Congo (DRC) that is known by its English acronym FPM, in an effort to help financial institutions better manage risks. Continue reading

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