Behavioral Microfinance: Evidence from a Field Experiment in Cairo (Conference Presentation) (original) (raw)

Behavioral Microfinance: Evidence from a Field Experiment in Cairo

Understanding the behavior of the poor has long been an important focus of microfi nance (MF) research. On the one hand, several studies have been conducted to understand the fi nancial decisions of MF clients related to the construction of trustworthiness and social collateral (which replaces fi nancial collateral in MF loans). On the other hand, the natural counterpart of trustworthiness (i.e., risk taking) has been another main point of focus when evaluating MF clients ' behavior. Yet, most of these studies remain observational, use standard surveys about behavior, or make use of fi nancial information only -as found in many qualitative impact assessments and econometric studies. Th erefore, the usual biases when reporting stated behavior, in particular about items that are diffi cult to rationalize (such as trustworthiness and risk taking), are diffi cult to capture. Only recently have experimental games become popular in MF to gain deeper insights into MF clients and reduce these biases.

The Miracle of Microfinance? Evidence from a Randomized Evaluation

2013

This paper reports on the first randomized evaluation of the impact of introducing the standard microcredit group-based lending product in a new market. In 2005, half of 104 slums in Hyderabad, India were randomly selected for opening of a branch of a particular microfinance institution (Spandana) while the remainder were not, although other MFIs were free to enter those slums. Fifteen to 18 months after Spandana began lending in treated areas, households were 8.8 percentage points more likely to have a microcredit loan. They were no more likely to start any new business, although they were more likely to start several at once, and they invested more in their existing businesses. There was no effect on average monthly expenditure per capita. Expenditure on durable goods increased in treated areas, while expenditures on "temptation goods" declined. Three to four years after the initial expansion (after many of the control slums had started getting credit from Spandana and other MFIs), the probability of borrowing from an MFI in treatment and comparison slums was the same, but on average households in treatment slums had been borrowing for longer and in larger amounts. Consumption was still no different in treatment areas, and the average business was still no more profitable, although we find an increase in profits at the top end. We found no changes in any of the development outcomes that are often believed to be affected by microfinance, including health, education, and women's empowerment. The results of this study are largely consistent with those of four other evaluations of similar programs in different contexts. JEL codes: O16, G21, D21 * This paper updates and supersedes the 2010 version, which reported results using one wave of endline surveys. The authors wish to extend thanks to Spandana, especially Padmaja Reddy whose commitment to understanding the impact of microfinance made this project possible, and to numerous seminar audiences and colleagues for insightful suggestions. The Centre for Micro Finance at IFMR oversaw the experiment and the data collection. Aparna Dasika and Angela Ambroz provided excellent assistance in Hyderabad. Justin Oliver at the Centre for Micro Finance and Annie Duflo at Initiatives for Poverty Action shared valuable advice and logistical support.

A CRITIQUE ON THE EMPIRICS OF MICROFINANCE: WHAT DO WE KNOW BY Niels Hermes and Robert Lensink

Lack of collateral and access to credit has been one of the reasons why the traditional banking institutions do not extend credit to the poor. This has led to the increment in the poverty level of these individuals. For this reason, MFIs came into existence to play the role of providing financial services to the poor. The requirement of no collateral increases the risk of default and information asymmetry. Thus, the joint liability group lending model was developed to curb this. There have been debates on whether MFIs can provide services to the poor in a sustainable way and communicate the benefits of these services so as to reach those left out by the traditional banking institutions. Robinson (2001) stated that there is an absurd gap between the supply and demand for microfinance services. Among the economically active poor of the developing world, there is strong demand for small-scale commercial financial services for both credit and savings but the demands for these services are rarely met by the formal financial sector. One reason is that the demand is generally not perceived. Another is that many actors in the formal sector believe wrongly that microfinance cannot be profitable for banking institutions (Robinson 2001). In this critique, we will be analyzing and evaluating the effectiveness of joint liability group lending in reducing information asymmetries and also looking at the relationship between the financial performance of MFIs and their outreach services to the poor in developing countries.

Importance of Trust in Microfinance

The Importance of Building Trust for the Success of Microfinance Institutions

In the 1970's, Nobel Peace Prize winner Muhammad Yunus demonstrated that an act as simple as trusting the poor facilitated successful loans and repayments, in spite of common opinion to the contrary. This essay reviews current literature on the role of social capital, and trust in particular, as a driver in the success of Microfinance Institutions (MFI's) in terms of self-sustainability and poverty alleviation. It has been shown that trust is in fact a necessary condition for MFI's to achieve success. This is primarily because trust building in communities enables MFI's to successfully overcome market failures such as high transaction costs, asymmetric information, and lack of collateral among the poor. It moreover appears that while higher levels of social capital in a community can improve MFI success, MFI's are in a unique position to shore up existing levels of social capital and trust. Because social capital and especially trust are important elements at all levels of MFI interactions, MFI success can potentially have a mutually re-enforcing effect with social capital. Nevertheless, more research is needed to understand the relationship between social capital and microfinance, levels of trust in MFI interactions, and the mechanisms which can promote higher levels of social capital and trust in communities. If these mechanisms and relationships between social capital and microfinance can be understood better, it bodes well for higher MFI success rates and improved economic growth among the world's poor.

Exploring Bilateral Trust Relationship Between the Poor Borrowers and Micro Finance Institutions

"The research explores bilateral trust relationship, defined here as trust of the poor borrower in the MFI and vice versa, to understand how trust works as social collateral in the context of society and economics. The topic of research is novel in that it uses social psychology as a means of analysis of trust and microfinance. The research is an attempt to apply the theory of trust and group dynamics in a social psychological context. It draws from the work on trust as social capital and uses that knowledge in the framework of group dynamics. The objectives are the following: • Examine past literature on trust as social capital and its importance in microfinance. • Explore trust relationship between the poor borrowers and MFIs using data from non-borrowers for a richer understanding of the relationship. • Use group dynamics to examine the dynamics of group-concepts like joint liability, and peer pressure that have led to higher rates of loan repayment. "

Microfinance, vulnerability and risk in low income households

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