By Brett E. Coleman, published by World Development, Vol. 34, No. 9, September 2006, 27 pages, available by subscription through Science Direct: doi:10.1016/j.worlddev.2006.01.006.
This paper examines the results of a survey of two Northeast Thailand “village bank” programs that target the poor, and is an extension of a previous paper written by Coleman in 1999, entitled “The Impact of Group Lending in Northeast Thailand”*. It extends the same methodology employed in the first to include more in-depth analyses on outreach success and differential impact on two types of village bank members. Coleman concludes that the programs surveyed were not reaching the poor as much as the relatively wealthy, and that the estimated impacts on wealthier committee members were significantly more positive than on poorer rank-and-file members.
The two Thai non-governmental organizations (NGOs) running the surveyed village bank programs are Rural Friends Association (RFA) and Foundation for Integrated Agricultural Management (FIAM). Both receive financial and technical assistance from the American NGO Catholic Relief Services (CRS) and follow the “village bank” group-lending methodology pioneered by the Foundation for International Community Assistance (FINCA). Both NGOs and the villages they serve are located in the provinces of Surin and Roi-Et in Northeast Thailand, the country’s poorest region. The original survey was conducted from 1995 to 1996 to measure the impact of two village banks based on a group lending model.
Coleman seeks to address two main problems that have often biased previous attempts to evaluate the impact of microfinance programs. The first is self-selection of participants. In addition to observable differences between villagers who select to be village bank members and those who select to be nonmembers, such as wealth and age, there are also unobservable differences, like entrepreneurship and trustworthiness. Thus, in a direct comparison of village bank members and nonmembers, these unobservable differences often bias estimates of the village bank impact by incorrectly attributing positive outcomes to the bank program.
Another common problem in studies on microfinance program is endogenous program placement. Member villages that are better organized and have more dynamic leaders may have higher measures of welfare than other member villages, even without the banking program. And because studies that focus on program impact often require that households be surveyed after the program has operated for some time, it is difficult to determine whether or not the household was truly relatively poor prior to program enrollment.
As solution to these problems, Coleman utilizes a survey sample of 444 households in fourteen villages, including six villages without any bank support that served as “controls”, one village that was just beginning to receive loans, and seven villages that were already receiving loans (eight “treatment” villages). The unique characteristics of the survey sample permit a controlled direct comparison of differences in initial wealth of members and nonmembers in all villages.
Coleman concludes that the village banks were failing to reach the poor, and supports this claim with various results from the survey. First, he found that village bank members, prior to any village bank support, tended to be wealthier than nonmembers, with the probability of the wealthiest group (wealth based on value of household land owned five years earlier: >1,000,000 baht or >USD 32,413) selecting into the program nearly twice that of the poorer groups (0 – 399,999 baht, or USD 0 – 12965). This wealth difference is primarily attributed to the value of land owned by the women in the household.
Another possible factor in the failure of the banks to reach the poor lies in the selection process. In most villages, the NGO field worker was uninvolved in member selection, which was usually left up to the village chief and the leading women of the village. Because these leaders were generally among the wealthiest residents of the village, their influence extended to the selection of the members, such that wealthier residents were selected to become committee members and the less wealthy were selected as rank-and-file members.
In addition, in order to circumvent borrowing limits, one method commonly employed by committee members was to use multiple accounts, each under a different name. Even though the committee members made up 15.6 percent of the village bank members, they used their position to borrow 27 percent of total loan volume. This manipulation of the system caused many rank-and-file members to drop out.
A final indicator of the fact that the programs were not reaching the target population was the informal interviews with nonmembers, which revealed that none of them identified the village bank as a program that targeted the poor.
With regard to differential impact, Coleman found that, when controlling for endogenous member selection and program placement, impact estimates for rank-and-file members were insignificant. He also found a lack of impact on savings for rank-and-file members, which can be attributed to two possibilities. First, because the NGOs started reducing loan size after the third year, members had little incentive to continue saving to increase access to loans. Second, rank-and-file members may be further disinclined to save due to the monopolization of member savings funds by committee members.
On the other hand, Coleman found that estimated impact on committee members is significant and positive on a range of dependent variables, such as physical assets, savings, self-employment sales and labor, and outside moneylending. This differential impact on rank-and-file and committee members could be the result of differential access to loans, with the village banking programs benefiting the latter group significantly more than the former.
The paper concludes with several policy proposals. First, in order to more actively target the poor, Coleman urges programs whose intention is to reach the poor to impose and enforce membership eligibility criteria, such as maximum allowable land holdings or other measures of wealth. Coleman also proposes more frequent turnovers of committee members to encourage more equality between committee and rank-and-file members. In addition, he proposes more frequent public pronouncement of village bank goals and rules by NGO fieldworkers to eliminate information asymmetries that currently exist within the villages. Finally, Coleman suggests that increasing the loan sizes may eliminate program manipulation by wealthier members who are trying to circumvent loan ceilings.
Brett E. Coleman is a Project Economist with the Mekong Department of the Asian Development Bank, a multilateral development financial institution established in 1996 to improve the welfare of people in Asia and the Pacific.
For additional MicroCapital stories on outreach and impact of microfinance programs, please visit the links below:
MicroCapital.org Paper Wrap-Up, 10/29/07: “Sustainability of Self-Help Groups in India: Two Analyses”, by Jennifer Isern and Robert Peck Christen
MicroCapital.org Paper Wrap-Up, 10/22/07: “Group Lending and the Role of the Group Leader: Theory and Evidence From Eritrea”, by Remco van Eijkel, Niels Hermes and Robert Lensink
MicroCapital.org Paper Wrap-Up, 9/26/07: “MDGs and Microcredit: An Empirical Evaluation for Latin American Countries”, by Ricardo Bebczuk and Francisco Haimovich
MicroCapital.org article, 10/25/06: ““Capturing Remittances in Central America”, by Sam Logan
MicroCapital.org Paper Review, 1/25/06: “Does Microfinance Really Reduce Poverty? What You Should Know Before Investing”
MicroCapital article, 11/14/2005: “Does Microfinance Help the Hard-core Poor?”
MicroCapital.org Paper Review, 10/3/05: “MicroCapital Paper Review: “Great Expectations: Microfinance and Poverty Reduction in Asia and Latin America”, by John Weiss and Heather Montgomery
By Mary Fu
Additional Resources:
Catholic Relief Services (CRS)
Foundation for International Community Assistance (FINCA): Microfinance and Village Banking
Bloomberg.com: Currency Calculator
Asian Development Bank: About
*Published by Journal of Development Economics, Vol. 60, No. 1, October 1999, 37 pages, available by subscription through Science Direct: doi:10.1016/S0304-3878(99)00038-3). In this paper, Coleman (1999) demonstrates how “naïve” estimates that failed to account for inherent biases significantly overestimated impact, and found that bank loans were actually having little impact on most household outcomes in Northeast Thailand.
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