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Can Microfinance Save the World?

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Can Microfinance Save the World – PowerPoint PPT presentation

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Title: Can Microfinance Save the World?


1
Can Microfinance Save the World?
  • Bruce Wydick
  • Professor of Economics
  • University of San Francisco

2
  • No, microfinance cannot save the world.

3
  • Can Microfinance Save the World?
  • What is microfinance?
  • Personal experience
  • Why dont free markets provide credit to the
    poor?
  • Growth of microfinance
  • What drives high repayment rates?
  • Does it help alleviate poverty?
  • New issues in microfinance

4
  • What is microfinance?
  • Movement with origins in Bangladesh
  • Muhammad YunusWhy doesnt economic theory work
    for the poor?
  • Beginning of Grameen Bank, 1976
  • http//www.youtube.com/watch?vYxpTFwQx-A8

5
KQED Studios, January 2008
6
  • What is microfinance?
  • Many very small loans to the poor (10 up to
    10,000)
  • Typically weekly, bi-weekly, monthly
    installments
  • Loans go for small-scale entrepreneurial
    activity
  • Usually for existing businesses, skills
  • Urban, rural areas
  • Allow the poor to participate in capitalism

7
  • Personal Experience
  • Dominican Republic 1988, Costa Rica 1989
  • Berkeley Dissertation
  • Dozen or so research articles related to group
    lending, impact of microfinance, credit
    information systems

8
  • Growth of Microfinance
  • As of January 1, 2007, 133,030,913 households
    reportedly reached with microfinance, up from
    13,478,000 reported in 1997. (Microfinance
    Summit)
  • 92,922,574 were among the poorest when they took
    their first loan.
  • 85.2 percent (79,130,581) are women
    entrepreneurs.
  • Assuming 5 persons per family, the 92.9 million
    poorest clients reached affected some 464,612,870
    family members.

9
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10
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11
  • What is responsible for growth in microfinance?
  • Not because of proof that it reduces poverty
  • Appealing to all ends of political spectrum!

12
  • What is responsible for growth in microfinance?
  • Not because of proof that it reduces poverty
  • Appealing to all ends of political spectrum!

The Political Spectrum
Liberals Empowers Women Reaches
Poorest Pro-Artesian Benign on Environment
Pragmatists Requires little/no subsidy Less
costly than a revolution Non-controversial
Conservatives Not a handout, welfare Incentives
for work Property rights based Pro-Capitalism
13
  • What makes credit markets unique?
  • In some markets we have full information
  • Asymmetric Information in other types of
    transactions
  • Problem of Adverse Selection
  • Problem of Moral Hazard
  • Strong theoretical basis for intervention in
    credit markets
  • (See SL crisis, sub-prime mortgage crisis.)
  • Underlying reason why the poor are denied credit!

14
  • What about repayment rates?
  • Typically very high, 95-99 if best practices
    followed.
  • Some problems
  • government programs with giveaways
  • correlated shocks to areas
  • poor portfolio management

15
  • What drives high repayment rates?
  • 1. Skilled use of loan officers

Branch Office
Branch Office
Branch Office
MAIN OFFICE
Branch Office
Branch Office
16
  • What drives high repayment rates?
  • 2. Group Lending

Can Social Cohesion be harnessed as collateral
for loans?
(Jointly Liable Groups)
Branch Office
Branch Office
Helps address Adverse Selection Moral
Hazard Administrative Costs
17
  • What drives high repayment rates?
  • 3. Dynamic Incentives










Problem What happens when there are multiple
lenders?
18
  • Does microfinance make a difference?
  • This is a more difficult question than one might
    think
  • Several problems
  • Self-selection bias
  • Non-random program placement
  • Measuring long-term effects (problem with
    experiments)

19
  • How do we measure microfinance program impact?
    (Crummy Ways)
  • "Super Naïve" method Ask people if program is
    helping them.
  • "Naïve" method Survey non-borrowers vs.
    borrowers
  • "Still Pretty Lousy Method" Compare Old vs New
    borrowers
  • "Sophisticated, but Still Pretty Lousy Method"
    Use matching models and propensity scoring to
    obtain a control group.

20
  • How do we measure microfinance program impact?
    (Better Ways)
  • Use "Difference-in-Differences" method on
    treated and untreated groups (Problem require
    baseline surveys)
  • Use an "Instrumental Variable" to achieve
    identification of impacts correlated with uptake
    but not impact. (Problem a good IV is often
    hard to find.)
  • Run a "Randomized Field Experiment" in which
    treatment groups are randomly offered credit.
    (Problem hard to hold off borrowers from credit)
  • Use "retrospective data" focused on the
    probability of fundamental events to a household
    borrowed from finance "event studies".

21
  • Does microfinance make a difference?

22
  • Does microfinance make a difference?

23
  • Does microfinance make a difference?

24
  • Does microfinance make a difference?

25
  • Does microfinance make a difference?

26
  • Does microfinance make a difference?

27
  • New Innovations Credit Information Systems
  • Problem with too many microfinance lenders
  • Difficult to ascertain debt load of a new
    borrower
  • Need credit information system Allows lenders to
    view both positive and negative information about
    borrowers.
  • Greatly facilitated by the Web.

28
  • New Innovations Credit Information Systems
  • Implemented a field experiment in Guatemala to
    test the effects of a credit information system
    among microfinance providers.
  • Involves installation of hardware and software
    used for the credit bureau between March 2002 and
    January 2003 in 39 branch offices of microfinance
    institution in Guatemala.
  • Had significant effect on both delinquent
    payments and defaults.

29

30
  • New Innovations Kiva.org


31
  • New Innovations Kiva.org


32
  • New Innovations Kiva.org


33
  • New Innovations Kiva.org


Name Virginia Chiquito
Business Name Gabinete de Belleza
Location Guayaquil, Ecuador
Primary Activity Beauty Salon
Loan Requested 1,000.00
Repayment Term 10 months - repaid monthly
Loan Use Invest in furniture for the shop
Date Posted May 7, 2007
Date Funded May 9, 2007
Disbursal Date May 12, 2007
Loan Ended Mar 12, 2008
34
  • New Innovations Kiva.org


Name Victor Cisse
Business Name 1169 -imcec thies
Location THIES, Senegal
Primary Activity Manufacturing
Loan Requested 950.00
Repayment Term 12 months - repaid monthly
Loan Use Purchase of leather and hides to strengthen stock
Date Posted Mar 12, 2008
Date Funded Mar 13, 2008
l
35
  • Conclusion
  • Can microfinance save the world?
  • No, but it can make it a better place.
  • Proper way to view microfinance As a stepping
    stone.

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