Written by Dean Karlan and Jonathan Zinman published July 2009 as a cooperative effort by Financial Access Initiative and Innovations for Poverty Action, 33 pages, available at:
http://financialaccess.org/sites/default/files/Expanding%20Credit%20Access%20Manila.pdf
and
http://poverty-action.org/sites/default/files/expandingaccess_manila_jul09.pdf
This paper examines the effect of the extension of micro credit in Manila, Phillipines. The people who received loans, or the treatment group, were selected randomly from a group of first-time applicants deemed “marginally creditworthy” based on personal financial data. Those not randomly selected, the control group, did not receive loans. Loans ranged from 5,000 to 25,000 Philippines Pesos (PHP), the equivalent of over USD 100 to over USD 500, and were of individual-liability. The survey took place at the end of one year, and referenced the month just prior.
Extension of credit seems to have led to an increase only in the borrowing of small loans (less than USD 1020) with no collateral requirement. Credit access did not increase investment and actually caused a shrinking of business size. Profits increased in the treatment group but no increase in household income or consumption was observed. Male children became more likely to go to school as opposed to working at home or at a paid job. There was move to informal insurance, and no change in subjective well-being. Lastly, the positive results in borrowing and profits are stronger in men and those with incomes above the median of the study. This is notable as microfinance has generally been intended to help women and the poorest of society.
In terms of borrowing impact, extension of credit led to a 9.6 percent increase in borrowing from First Macro Bank, the bank used in the study, or places like it, i.e., banks with small, no-collateral loans. Therefore, any small, overall increase in formal sector borrowing for the treatment group can probably be explained solely by an increase in micro borrowing. Furthermore, the increase in borrowing of this kind was stronger in males (16.3 percent) than in females (7.8 percent), and stronger in those with incomes above the median (10.5 percent), than those below the median (8.4 percent). The change in informal borrowing appears negative (3.6 percent), while total borrowing change is almost zero.
Business outcomes were surprising to the authors as investment in neither labor, inventory, nor fixed capital saw significant change. In fact, there was evidence of an overall shrinking in business size due to a reoptimization of labor levels. The authors hypothesize that as credit was extended, employers were more likely to shed employees that were only employed as a result of necessary favor trading with a friend or relative of said employee. So, despite the lack of increase in investment, profits of those treated were USD 50 higher in the month before the survey than those in the control group, and the profit increase for men was greater than that for women, USD 260 compared to USD 45. Additionally, those above the median income level produced a USD 98 increase relative to the control group, while those below the median produced only a USD 14 increase.
Treated households also became less likely to use formal insurance, with the likelihood of having any type of insurance decreasing by 7.9 percent. Informal insurance, however, seemed to increase, and households were nine percent more likely to say that they “could get unlimited financial assistance from family or friends in an emergency.”
The study also tested subjective measures of well-being such as “optimism, calmness, (lack of) worry, life satisfaction, work satisfaction, job stress, decision making power, and socio-economic status” based on “responses to standard batteries of questions.” There appears to be no significant change after credit access. Additionally, more objective measures of well-being such as household income and consumption showed no increase despite the fact that profits increased. The authors see this as evidence that profits were instead used to send male children to school as opposed to having them work to supplement income. This is evidenced by the fact that those in the treated group became 16.8 percent more likely to send a male child to school.
Overall, the authors see these results as an indication that the microfinance world should question some standard beliefs. The fact that men and relatively higher income people saw positive results, for the authors, takes to task the tradition that microfinance should necessarily target women and the “poorest of the poor”. They also feel that the move away from formal insurance, as well as the lack of increase in income or consumption, shows that targeting business as opposed to providing loans for investment at the household level should perhaps not be the standard.
By Christopher Maggio, Research Assistant
Financial Access Initiative: http://www.financialaccess.org/
Innovations for Poverty Action: http://poverty-action.org/
First Macro Bank: http://www.firstmacrobank.com/
First Macro Bank on the MIX Market: http://www.mixmarket.org/mfi/first-macro-bank
Microfinance Council of the Philippines: http://www.microfinancecouncil.org/
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