New Economics Papers
on Microfinance
Issue of 2013‒05‒19
eight papers chosen by
Aastha Pudasainee and Olivier Dagnelie

  1. The Miracle of Microfinance? Evidence from a Randomized Evaluation By Esther Duflo; Abhijit Banerjee; Rachel Glennerster; Cynthia G. Kinnan
  2. Repayment and Exclusion in a Microfinance Experiment By Jean-Marie Baland; Lata Gangadharan; Pushkar Maitra; Rohini Somanathan
  3. Agent Intermediated Lending: A New Approach to Microfinance By Pushkar Maitra; Sandip Mitra; Dilip Mookherjee; Alberto Motta; Sujata Visaria
  4. The Social Dilemma of Microinsurance: A Framed Field Experiment on Free-Riding and Coordination By Wendy Janssens
  5. Can Basic Entrepreneurship Transform the Economic Lives of the Poor? By Bandiera, Oriana; Burgess, Robin; Das, Narayan; Gulesci, Selim; Rasul, Imran; Sulaiman, Munshi
  6. The Impact of Insurance Provision on Households’ Production and Financial Decisions By Cai, Jing
  7. Do Hypothetical Experiences Affect Real Financial Decisions? Evidence from Insurance Take-up By Cai, Jing; Song, Changcheng
  8. An Overview of Agricultural Credit and Crop Insurance in Bihar By Singh, R.K.P.; Singh, K.M.

  1. By: Esther Duflo; Abhijit Banerjee; Rachel Glennerster; Cynthia G. Kinnan
    Abstract: 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: D21 G21 O16
    Date: 2013–05
  2. By: Jean-Marie Baland; Lata Gangadharan; Pushkar Maitra; Rohini Somanathan
    Abstract: Microfinance groups often engage in a variety of collective activities not directly related to credit. Groups can sanction members who default on their loans by excluding them from these activities. Our experiment is designed to explore the effectiveness of such sanctions in improving repayment incentives. Groups of 10 members are provided with joint-liability loans for a specific investment project. If groups repay their loans, contributing members have the option of excluding other members and those that remain play a public goods game. By varying loan sizes across groups and allowing for heterogeneous gains from the public good within groups, we identify the role of incentives in repayment decisions. In line with theoretical predictions, groups with the largest repayment burdens have the highest default rates and within groups, individual decisions to contribute to loan repayment depend on gains from the public good game.
    Keywords: Microfinance, Joint Liability, Social Exclusion, Public Good, Heterogeneous Productivity, Laboratory Experiments.
    JEL: C9 G21 O12
    Date: 2013–05
  3. By: Pushkar Maitra; Sandip Mitra; Dilip Mookherjee; Alberto Motta; Sujata Visaria
    Abstract: We study trader agent intermediated lending (TRAIL), a new version of microfinance where local intermediaries (lenders) are appointed as agents to recommend borrowers for individual liability loans designed to allow the financing of agricultural operations. The scheme involves no peer monitoring, group meetings or savings requirements. In a randomized evaluation conducted in West Bengal, India, TRAIL loans have higher take-up rates and higher repayment rates than traditional group-based joint liability loans. This can be explained by a model of segmented informal credit markets with adverse selection, in which repayment-based commissions deter collusion and motivate agents to recommend low-risk borrowers.
    Keywords: Microfinance, Agent Based Lending, Group Lending, Selection, Takeup, Repayment
    JEL: D82 O16
    Date: 2013–05
  4. By: Wendy Janssens (VU University Amsterdam)
    Abstract: This paper analyzes free-riding and coordination problems in microinsurance. Our proposition is that the demand for insurance suffers from a social dilemma when formal insurance is introduced in existing risk-sharing networks. Less risk averse individuals offered welfare-improving insurance are tempted to free-ride on the enrollment of their network members while the more risk averse may fail to coordinate. This results in suboptimal demand. Group insurance binds both types to the social optimum. A framed laboratory experiment in Tanzania elicits demand for group versus individual insurance among microcredit clients who typically share risk through joint liability. The experiment demonstrates substantial free-riding but only limited coordination failures. These findings extend the literature on strategic decisions in the presence of a public good and provide a potential explanation for the low take-up of microinsurance.
    Keywords: Framed field experiment, micro health insurance, microfinance, risk-sharing, public good game
    JEL: D71 G21
    Date: 2012–12–18
  5. By: Bandiera, Oriana (London School of Economics); Burgess, Robin (London School of Economics); Das, Narayan (Bangladesh Rural Advancement Committee (BRAC)); Gulesci, Selim (Bocconi University); Rasul, Imran (University College London); Sulaiman, Munshi (Bangladesh Rural Advancement Committee (BRAC))
    Abstract: The world's poorest people lack capital and skills and toil for others in occupations that others shun. Using a large-scale and long-term randomized control trial in Bangladesh this paper demonstrates that sizable transfers of assets and skills enable the poorest women to shift out of agricultural labor and into running small businesses. This shift, which persists and strengthens after assistance is withdrawn, leads to a 38% increase in earnings. Inculcating basic entrepreneurship, where severely disadvantaged women take on occupations which were the preserve of non-poor women, is shown to be a powerful means of transforming the economic lives of the poor.
    Keywords: asset transfers, capital constraints, vocational training, occupational choice, structural change, poverty
    JEL: O12 I30 D50
    Date: 2013–05
  6. By: Cai, Jing
    Abstract: Taking advantage of a natural experiment and a rich household-level panel dataset, this paper tests the impact of an agricultural insurance program on household level production, borrowing, and saving. The empirical strategy includes both difference-in-difference and triple difference estimations. I find that, first, introducing insurance increases the production area of insured crops by around 20% and decreases production diversification; second, provision of insurance raises the credit demand by 25%; third, it decreases household saving by more than 30%; fourth, the effect of insurance on borrowing persists in the long-run, while the effect on saving is significant only in the medium-run; and fifth, the impact of insurance is greater on larger farmers and on households with lower migration remittance.
    Keywords: Insurance; Production; Borrowing; Saving
    JEL: D14 G21 G22 O16 Q12
    Date: 2013–05–09
  7. By: Cai, Jing; Song, Changcheng
    Abstract: This paper uses a novel experimental design to study the effect of hypothetical personal experience on the adoption of a new insurance product in rural China. Specifically, we conduct a set of insurance games with a random subset of farmers. Our findings show that playing insurance games improves insurance take-up in real life by 48%. Exploring the mechanism behind this effect, we show that the effect is not driven by changes in risk attitudes, changes in perceived probability of disasters, or learning of insurance benefits, but is driven mainly by the experience acquired in playing the insurance game. Moreover, we find that, compared with experience with real disasters in the previous year, the hypothetical experience gained in the insurance game has a stronger effect on insurance take-up, implying that the impact of personal experience displays a strong recency effect.
    Keywords: Insurance, Take-up, Game, Experience, Learning
    JEL: D03 D14 G22 M31 O16 O33 Q12
    Date: 2013–05–09
  8. By: Singh, R.K.P.; Singh, K.M.
    Abstract: Bihar has a large agrarian economy of over Rs 250 billion with more than 80 percent of rural population subsisting on farming. Agricultural work force increased more than two-fold from 126 lakh in 1981 to 265 lakh in 2006 whereas net sown area declined by about one lakh hectares and gross cropped area has been stagnating at 80 lakh hectares during the period. Due to increase in number of agricultural labour force in Bihar, per agricultural worker annual real productivity (at 1980 prices) has declined from Rs 1977.00 in 1980-81 to Rs 1278.00 in 2005-06. Among the major states in India, Bihar is at the lowest ladder in terms of proportion of institutional loan to total loan disbursement to farmers. The high indebtedness to money lenders may be an important reason for indifferent attitude of farmers towards lending institutions, resulting in low investment and low productivity in Bihar. An assessment of the situation at ground level indicates that recourse to non-institutional credit continues to dominate as far as rural areas and agriculture sector are concerned. The study recommends interest rate on co-operative agricultural loans be reduced to 3 per cent in Bihar for benefit of farmers. It will motivate farmers to approach cooperatives for agricultural loans who are still not inclined to contact commercial bank branches. Agricultural insurance offers protection against losses caused by fluctuations in the output of a crop from one year to another or from one crop season to another. Its objective is to stimulate and support the production of principal crops in the country. Providing financial support to farmers in the event of crop failure, it makes farmers credit-worthy for the next crop season. It has been observed that the majority of small and marginal farmers, as well as tenant farmers and farm laborers bear the brunt of crop failure. However, the performance of National Agricultural Insurance Scheme has also been unsatisfactory in Bihar. Despite change in form of crop insurance scheme and establishment of Agricultural Insurance Company Ltd. the regional disparities in crop insurance still persist. It is accordingly recommended that a campaign be launched in rural areas to create awareness among farmers about crop insurance involving, inter alia, non-loan taking farmers because a large number of farmers are still not in a position to avail crop loan facility from institutional agencies in Bihar.
    Keywords: Agricultural credit, Crop insurance, Weather-based insurance Bihar, India
    JEL: Q1 Q14 Q18
    Date: 2013–01–09

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