New Economics Papers
on Microfinance
Issue of 2012‒08‒23
eleven papers chosen by
Aastha Pudasainee and Olivier Dagnelie

  1. Liability Structure in Small-Scale Finance: Evidence from a Natural Experiment By Fenella Carpena; Shawn Cole; Jeremy Shapiro; Bilal Zia
  2. Mitigating environmental risks in small-scale activities: what role for microfinance? A case study from El Salvador By Marion Allet
  3. DETERMINANTS de la pauvreté et genre des bénéficiaires de microfinance au Mali By Koloma, Yaya
  4. The Financial Sector in Burundi By Janvier D. Nkurunziza; Léonce Ndikumana; Prime Nyamoya
  5. Who you train matters : identifying complementary effects of financial education on migrant households By Doi, Yoko; McKenzie, David; Zia, Bilal
  6. Barriers to Household Risk Management: Evidence from India By Robert M. Townsend; Petia Topalova; Shawn Cole; Xavier Gine; Jeremy Tobacman; James Ian Vickery
  7. Sex and Credit: Is there a Gender Bias in Lending? By Beck, T.H.L.; Behr, P.; Madestam, A.
  8. Financial Education, Savings and Investments: An Overview By Sue Lewis; Flore-Anne Messy
  9. Il social banking per le filiere corte: aspetti etici e fiscali. Social banking for short chains: ethical and fiscal aspects By Briamonte, Lucia; Pergamo, Raffaella
  10. Too Much Finance? By Ugo Panizza; Jean-Louis Arcand; Enrico Berkes
  11. Hoping to Win, Expected to Lose: Theory and Lessons on Micro Enterprise Development By Dean Karlan; Ryan Knight; Christopher Udry

  1. By: Fenella Carpena (UC Berkeley); Shawn Cole (Harvard Business School, Finance Unit); Jeremy Shapiro (Yale University); Bilal Zia (World Bank)
    Abstract: Microfinance, the provision of small individual and business loans, has witnessed dramatic growth, reaching over 150 million borrowers worldwide. Much of its success has been attributed to overcoming the challenges of information asymmetries in uncollateralized lending. Yet, very little is known about the optimal contract structure of such loans?there is substantial variation across lenders, even within a particular setting. This paper exploits a plausibly exogenous change in the liability structure offered by a microfinance program in India, which shifted from individual to group liability lending. We find evidence that the lending model matters: for the same borrower, required monthly loan installments are 11 percent less likely to be missed under the group liability setting, relative to individual liability. In addition, compulsory savings deposits are 20 percent less likely to be missed under group liability contracts.
    Date: 2012–08
  2. By: Marion Allet
    Abstract: Small-scale activities in developing countries face environmental risks that represent direct threats to populations’ health and livelihoods. Recently, some donors and experts have claimed that microfinance institutions (MFIs) could play a role in fostering pro-environmental behaviours among their client microentrepreneurs. This paper seeks to identify the challenges that an MFI can face when implementing an environmental risk management program. We based our analysis on a case study of a pilot program in El Salvador, where we conducted 95 semi-structured interviews with microfinance clients, loan officers and managers. Our study first revealed that, despite a real interest from its staff, the MFI had some difficulties in building internal skills and conciliating its environmental and performance objectives, which compromised the effective implementation of the program. Furthermore, we identified that the pilot program, as it was designed, did not sufficiently take into account the psychological and economic barriers to behaviour change. Finally, we found that the effort of the microfinance institution was in some cases countered by external factors out of its reach, such as inadequate national regulations.
    Keywords: Microfinance; Microenterprises; Small Enterprises; Environmental Behaviour; Behaviour Change; Environmental Management; Environmental Risks; Pollution
    JEL: D30 G21 O17 Q53 Q56
    Date: 2012–07
  3. By: Koloma, Yaya
    Abstract: This study is based on the results of the non-monetary poverty estimation of the beneficiaries of microfinance in Mali (Koloma, 2011). Its aim is to examine the determinants of the "gap" of poverty by gender. The regression model according to the approach of decomposition of Blinder-Oaxaca (1973) was used. First, the results show that the poverty gap is largely explained by differences in the characteristics up to 74.7%. Second, the coefficients – result of characteristics – account for 25.3% of the poverty gap. Thus, this would mean that if the differences in the characteristics of men and women beneficiaries were to disappear, the poverty gap would be reduced by 4.9%. Regarding coefficients, the gap would be further reduced by 1.7% if both groups of members presented the same achievements (coefficients). While this not systematic, access to microfinance program could involve a reduction in the poverty gap between men and women beneficiaries.
    Keywords: Microfinance, Pauvreté non monétaire, Modèle de décomposition Blinder Oaxaca, Mali
    JEL: I3 J16 C2 G21
    Date: 2012–04–30
  4. By: Janvier D. Nkurunziza; Léonce Ndikumana; Prime Nyamoya
    Abstract: This study investigates the performance of the financial system in Burundi in mobilizing and allocating resources. Although the study does not presume that finance is the most binding constraint to growth and socio-economic development in Burundi, it takes the view that unlocking the financing constraint could alleviate other impediments to growth and poverty reduction. We use a blend of methodological approaches drawing from: (1) industrial organization in examining the structure of the banking sector, and the behavior and profitability of financial intermediaries; (2) macroeconomic analysis with a focus on the effect of economic performance and policy framework on the performance of the financial sector; and (3) political economy analysis highlighting the role of political governance and political instability, as well as ownership of financial institutions on allocative and distributional inefficiencies. The paper finds that the core of the financial sector that has survived the worst of the economic and political crises of the last decades is highly profitable. Bank profitability, however, hides several weaknesses of the financial sector: a high level of fragmentation; a narrow credit market that favors “insiders” who are mostly affiliated with the political elites, at the expense of “outsiders”; a severe shortage of long-term stable resources; inefficient allocation of resources relative to social returns and risk; and weak supervision and regulation which largely explain the failure of several financial institutions in the past and the fragility of the banking sector today. Access to finance remains an important challenge, especially for the “stranded middle” (middle income households and medium size firms) due to the “missing middle credit market” which is not filled by either banks or microfinance institutions. Recent developments in the financial sector, particularly the increasing penetration of foreign banks, may potentially boost competition, financial innovation, and access to finance with positive effects on growth and poverty reduction.
    JEL: E44 G21 O16 O55
    Date: 2012–08
  5. By: Doi, Yoko; McKenzie, David; Zia, Bilal
    Abstract: There has long been a concern among policymakers that too much of remittances are consumed and too little saved, limiting the development impact of migration. Financial literacy programs have become an increasingly popular way to try and address this issue, but to date there is no evidence that they are effective in inducing savings among remittance-receiving households, nor is it clear whether such programs are best targeted at the migrant, the remittance receiver, or both. The authors conducted a randomized experiment in Indonesia which allocated migrants and their families to a control group, a migrant-only training group, a family member-only training group, and a training group in which both the migrant and a family member were trained. Three rounds of follow-up surveys are then used to measure impacts on the financial knowledge, behaviors, and remittance and savings outcomes of the remaining household. They find that training both the migrant and the family member together has large and significant impacts on knowledge, behaviors, and savings. Training the family member alone has some positive, but smaller effects, whilst training only the migrant leads to no impacts on the remaining family members. The results show that financial education can have large effects when provided at a teachable moment, but that this impact varies greatly with who receives training.
    Keywords: Financial Literacy,Access to Finance,Education For All,Access&Equity in Basic Education,Primary Education
    Date: 2012–08–01
  6. By: Robert M. Townsend; Petia Topalova; Shawn Cole; Xavier Gine; Jeremy Tobacman; James Ian Vickery
    Abstract: Why do many households remain exposed to large exogenous sources of non-systematic income risk? We use a series of randomized field experiments in rural India to test the importance of price and non-price factors in the adoption of an innovative rainfall insurance product. Demand is significantly price sensitive, but widespread take-up would not be achieved even if the product offered a payout ratio comparable to U.S. insurance contracts. We present evidence suggesting that lack of trust, liquidity constraints and limited salience are significant non-price frictions that constrain demand. We suggest contract design improvements to mitigate these frictions.
    Keywords: Demand , Household credit , Insurance , Risk management ,
    Date: 2012–07–27
  7. By: Beck, T.H.L.; Behr, P.; Madestam, A. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: We exploit the quasi-random assignment of borrowers to loan officers using data from a large Albanian lender to show that own-gender preferences affect both credit supply and demand. Borrowers matched to officers of the opposite gender are less likely to return for a second loan. The effect is larger when officers have little prior exposure to borrowers of the other gender and when they have more discretion to act on their gender beliefs, as proxied by financial market competition and branch size. We examine one channel of influence, loan conditionality. Borrowers assigned to opposite-sex officers pay higher interest rates and receive lower loan amounts, but do not experience higher arrears. Together our results imply that own-gender preferences in the credit market can have substantial welfare effects.
    Keywords: Group identity;gender;credit supply;credit demand;loan officers.
    JEL: G21 G32 J16
    Date: 2012
  8. By: Sue Lewis; Flore-Anne Messy
    Abstract: Savings and investments by individuals are important both for personal financial well-being and for economic growth. Many governments try to encourage their citizens to save more, or to save more appropriately, by preferring formal institutions to informal saving and by promoting more diversification. However, there are considerable barriers to saving, including limited access to financial markets by some groups, complexity of financial products and information asymmetries. Knowledge and understanding of saving and investment concepts is particularly low in many countries. In addition, there are behavioural and cultural factors which may limit people’s propensity to save. As a consequence, policy makers have developed several strategies to influence whether and how individuals save. Policy responses typically involve a combination of prudential regulation and consumer protection legislation, financial incentives, financial education and awareness initiatives, as well as behavioural techniques to encourage people into sound saving decisions.<P>Education financière, épargne et investissement : Vue d'ensemble<BR>L’épargne et les investissements des particuliers sont importants, à la fois pour le bien-être financier personnel et pour la croissance économique. De nombreux pays s’efforcent d’encourager leurs citoyens à épargner davantage ou mieux, en préconisant des structures officielles plutôt qu’une épargne informelle et en favorisant une plus grande diversification. Il existe toutefois des obstacles considérables à l’épargne, notamment l’accès limité de certains groupes aux marchés financiers, la complexité des produits financiers et les asymétries d’information. La connaissance et la compréhension des notions d’épargne et d’investissement sont particulièrement faibles dans de nombreux pays. En outre, des facteurs comportementaux et culturels peuvent limiter la propension des ménages à épargner. Par conséquent, les responsables publiques élaborent diverses stratégies visant à influer sur l’épargne des particuliers. Les mesures prises associent en général réglementation prudentielle et législation en matière de protection des consommateurs, de même que des incitations financières, des programmes d’éducation financière et de sensibilisation, et des techniques comportementales encourageant les particuliers à prendre des décisions appropriées en matière d’épargne.
    Keywords: investment, saving, financial education, financial literacy, consumer protection, investissement, épargne, éducation financière, connaissance financière, protection des consommateurs
    JEL: D14 D18 E21 I28
    Date: 2012–07
  9. By: Briamonte, Lucia; Pergamo, Raffaella
    Abstract: The relationship between banking system and agricultural sector is marked by several difficulties related to firm size, variability in agricultural incomes, technical risks and strict evaluation rules for creditworthiness. On the other hand, a progressive moving away of production from consumers is observed within the main production chains, with weakening of product identity and of production with respect to other actors in the chain. Rediscovering in the Nineties of integration among operators has brought in the spotlight the concepts of traceability and sustainability of productions and the “principle of proximity”, for which one of the main consumer’s objectives is purchasing directly by the producer. A widespread awareness has contributed to an increase in local production and consumption circuits and has determined the awakening of interest in some banks, which have identified social banking instruments for economic activities presenting difficulties in accessing ordinary bank loans. The analysis refers to Toscana, a regional context in which short chain examples coexist with a particular microcredit system. In particular, the aim is evaluating approaches to social banking adopted by short chains and identifying the main entrepreneurial advantages and socio-economic results. The methodology, therefore, took as a reference the entrepreneurial forms of short chain in Tuscany and has done focused interviews to Banca Etica and to Consorzio Fidi Toscana in order to capture their vision of the widespread business model, though not strictly agricultural, and their 'identification of special needs and expectations expressed by the short chain segment as well as their motivation to move the boundaries of services. The final perspective was to understand what banking services and how they can increase the distribution of short chain and their permanence in the territory. The starting point was the identification of the main manifestations of existing short chain (direct sales to consumers, producers andmarkets solidarity purchase groups) and on the basis of their characteristics, the main banking services practiced to the subjects before mentioned have been investigated, trying to take the attitude of respondents towards the hypothesis of social banking for food processing, not meant as an offer of banking services for marginal subjects, but as a targeted approach for the short chain segment characterized by low levels of income and by financial innovative needs which are accessible and inexpensive, at the same time. Results allow to highlight the key role of social banking in local production and consumption circuits in terms of both activities start-up and delivery of technical assistance and training services. Moreover, short chain is not only associated to shorter distances, but also to higher transparency and responsibility in production-consumption relationships.
    Keywords: social banking, short chains, microfinance, microcredit, Agribusiness, Agricultural Finance, Financial Economics, Q13, Q14, R51,
    Date: 2012–08–06
  10. By: Ugo Panizza; Jean-Louis Arcand; Enrico Berkes
    Abstract: This paper examines whether there is a threshold above which financial development no longer has a positive effect on economic growth. We use different empirical approaches to show that there can indeed be "too much" finance. In particular, our results suggest that finance starts having a negative effect on output growth when credit to the private sector reaches 100% of GDP. We show that our results are consistent with the "vanishing effect" of financial development and that they are not driven by output volatility, banking crises, low institutional quality, or by differences in bank regulation and supervision.
    Keywords: Cross country analysis , Development , Economic growth , Financial sector , Financial systems ,
    Date: 2012–06–20
  11. By: Dean Karlan; Ryan Knight; Christopher Udry
    Abstract: Many basic economic theories with perfectly functioning markets do not predict the existence of the vast number of microenterprises readily observed across the world. We put forward a model that illuminates why financial and managerial capital constraints may impede experimentation, and thus limit learning about the profitability of alternative firm sizes. The model shows how lack of information about one’s own type, but willingness to experiment to learn one’s type, may lead to short-run negative expected returns to investments on average, with some outliers succeeding. To test the model we put forward first a motivating experiment from Ghana, and second a small meta-analysis of other experiments. In the Ghana experiment, we provide inputs to microenterprises, specifically financial capital (a cash grant) and managerial capital (consulting services), to catalyze adoption of investments and practices aimed towards enterprise growth. We find that entrepreneurs invest the cash, and take the advice, but both lead to lower profits on average. In the long run, they revert back to their prior scale of operations. The small meta analysis includes results from 18 other experiments in which either capital or managerial capital were relaxed, and find mixed support for this theory.
    JEL: D21 D24 D83 D92 L20 M13 O12
    Date: 2012–08

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