nep-mfd New Economics Papers
on Microfinance
Issue of 2014‒11‒07
four papers chosen by
Olivier Dagnelie
Université de Namur

  1. Saving for a (not so) Rainy Day: A Ramdomized Evaluation of Savings Groups in Mali By Lori Beaman; Dean Karlan; Bram Thuysbaert
  2. Interest rate caps around the world: still popular, but a blunt instrument By Maimbo, Samuel Munzele; Henriquez Gallegos, Claudia Alejandra
  3. De la finance éthique à l'éthique dans la finance By Michel LELART
  4. Index-based weather insurance for developing countries: A review of evidence and a set of propositions for up-scaling By Michael R. CARTER; Alain de JANVRY; Elisabeth SADOULET; Alexandros SARRIS

  1. By: Lori Beaman (Northwestern University); Dean Karlan (Economic Growth Center, Yale University); Bram Thuysbaert (Ghent University)
    Abstract: High transaction and contracting costs are often thought to create credit and savings market failures in developing countries. The microfinance movement grew largely out of business process innovations and subsidies that reduced these costs. We examine an alternative approach, one that infuses no external capital and introduces no change to formal contracts: an improved “technology” for managing informal, collaborative village-based savings groups. Such groups allow, in theory, for more efficient and lower-cost loans and informal savings, and in practice have been scaled up by international non-profit organizations to millions of members. Individuals save together and then lend the accumulated funds back out to themselves. In a randomized evaluation in Mali, we find improvements in food security, consumption smoothing, and buffer stock savings. Although we do find suggestive evidence of higher agricultural output, we do not find overall higher income or expenditure. We also do not find downstream impacts on health, education, social capital, and female decision-making power.Could this have happened before, without any external intervention? Yes. That is what makes the result striking, that indeed there were no resources provided nor legal institutional changes, yet the NGO-guided, improved informal processes led to important changes for households.
    Keywords: Micro-savings, Savings groups impact
    JEL: O12 D12 D91
    Date: 2014–10
  2. By: Maimbo, Samuel Munzele; Henriquez Gallegos, Claudia Alejandra
    Abstract: Among other common forms of government financial control, caps on interest rates have been declining over the past several decades as most industrialized countries and a rising number of developing countries continue liberalizing their financial policies. However, in several countries the last financial crisis reopened the debate on interest rate controls as a tool for consumer protection. This paper undertakes a stock-taking exercise to determine the number of countries currently capping interest rates on loans. The paper looks at the main characteristics of the regimes countries have used, including the source of rate-setting authority, the methodology, and the criteria for establishing the cap. The paper finds at least 76 countries around the world currently use some form of interest rate caps on loans -- all with varying degrees of effects, including the withdrawal of financial institutions from the poor or from specific segments of the market, an increase in the total cost of the loan through additional fees and commissions, among others. The paper concludes that there are more effective ways of reducing interest rates on loans over the long run and of improving access to finance: measures that enhance competition and product innovation, improve financial consumer protection frameworks, increase financial literacy, promote credit bureaus, enforce disclosure of interest rates, and promote microcredit products. Such measures should be implemented in an integrated manner. However, if caps are still considered a useful policy tool for reducing interest rates on loans and increasing access to finance, they should be implemented in accord with the caveats described in the paper.
    Keywords: Access to Finance,Financial Literacy,Debt Markets,Banks&Banking Reform,Investment and Investment Climate
    Date: 2014–10–01
  3. By: Michel LELART
    Keywords: éthique, finance éthique, finance islamique, finance solidaire, microfinance, finance informelle
    Date: 2014
  4. By: Michael R. CARTER (Université du Wisconsin); Alain de JANVRY (Université de Californie à Berkeley); Elisabeth SADOULET (Université de Californie à Berkeley); Alexandros SARRIS (Université d'Athènes)
    Abstract: Index-based weather insurance is a major institutional innovation that could revolutionize access to formal insurance for millions of smallholder farmers and related individuals. It has been introduced in pilot or experimental form in many countries at the individual or institutional level. Significant efforts have been made in research to assess its impacts on shock coping and risk management, and to contribute to improvements in design and implementation. While impacts have typically been positive where uptake has occurred, uptake has generally been low and in most cases under conditions that were not sustainable. This paper addresses the reasons for this current discrepancy between promise and reality. We conclude on perspectives for improvements in product design, complementary interventions to boost uptake, and strategies for sustainable scaling up of uptake. Specific recommendations include: (1) The first-order importance of reducing basis risk, pursuing for this multiple technological, contractual, and institutional innovations. (2) The need to use risk layering, combining the use of insurance, credit, savings, and risk-reducing investments to optimally address different categories of risk. For this, these various financial products should be offered in a coordinated fashion. (3) Calling on a role for state intervention on two fronts. One is the implementation of public certification standards for maximum basis risk of insurance contracts; the other is “smart” subsidies for learning, data accumulation, initial re-insurance, and catastrophic risks. (4) Using twin-track institutional-level index insurance contracts combined with intra-institution distribution of payouts to reduce basis risk and improve the quality of insurance. For this, credible intra-institutional rules for idiosyncratic transfers must be carefully designed. Finally (5), the need for further research on the determinants of behavior toward risk and insurance, the design of index-based insurance products combined with others risk handling financial instruments, and rigorous impact analyses of on-going programs and experiments.
    JEL: O16 Q12 Q14
    Date: 2014–09

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