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Research in Microfinance: A Practitioner s Perspective Vijay Mahajan Founder and CEO, BASIX Social Enterprise Group Chair, Excom, CGAP At CERMi s 5th Birthday, – PowerPoint PPT presentation

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Title: Vijay Mahajan


1
Research in Microfinance A Practitioners
Perspective
  • Vijay Mahajan
  • Founder and CEO, BASIX Social Enterprise Group
  • Chair, Excom, CGAP
  • At CERMis 5th Birthday,
  • 18th March 2013, Brussels

2
Outline
  • (Why am I here?) - How research helped the
    design and evolution of BASIX.
  • Microfinance is closer to engineering than
    science the consequences of this
  • Has research served microfinance well? Comparing
    practitioners priorities with cited research
    papers
  • Some glaring acts of omission and commission by
    researchers.
  • What can be done to improve things?

3
Some Aphorisms We Believe In
  • Nothing is as practical as a good theory Kurt
    Lewin
  • If something is wrong in theory, it will
    definitely be wrong in practice Robert McNamara

4
How research helped the design of BASIX,
established 1996...1
  • We understood from the writings of the Ohio
    School (Dale Adams, Richard Meyer, Claudio
    Gonsalvez-Vega) the perils of old style rural
    credit, and from Jacob Yaron (1992) that our
    subsidy dependence index should be negative or
    zero.
  • Marguerite Robinson (1995) showed the importance
    of savings and how to mobilise them. We
    therefore applied for a banking license at birth!
    Got it five years later and till then worked only
    as non-deposit taking micro-credit lender.
  • We understood from Karla Hoff and Joseph E.
    Stiglitz (1993) that screening -selection of
    the right borrower was only one-third of the
    problem incentives to use the loan well, and
    enforcement of the loan contracts was equally
    important.

5
How research helped the design of BASIX,
established 1996...2
  • Prabhu Ghate and Arindam Dasgupta of the ADB
    (1992) in their book on Informal Finance in Asia,
    educated us about this complex and pervasive
    competition. We decided to be wary of them.
  • Clive Bell and TN Srinivasan (1989) and Kailas
    Sarap (1992) showed the importance of
    intermediaries in agricultural credit. We decided
    to use them as a channel!
  • Patten, Richard H. and Jay K. Rosengard, (1991)
    Progress With Profits on Bank Rakyat Indonesias
    Unit Desas gave many lessons on designing
    operating and incentive systems for rural credit.
  • David Hulme and Paul Mosley, Finance Against
    Poverty (1996) clearly showed the perils of
    credit for the very poor. So we added on a
    livelihood support strategy through a
    non-profit affiliate Indian Grameen Services
    since inception in 1996.

6
How BASIX interaction with scholars and
researchers has benefited both sides...1
  • Malcolm Harper, one the worlds prolific scholars
    on microfinance and microenterprise development
    was Chair of BASIX Board for 10 years. He has
    written several books on the subject and slowly
    moved from a minimalist credit to savings-first
    to a livelihood approach.
  • MS Sriram, one of Indias foremost researchers in
    microfinance, worked with BASIX for two years
    on sabbatical from IIM, Ahmedabad (IIMA). His
    publishes on rural finance and microfinance.
  • Sankar Datta, one of Indias foremost researchers
    in livelihood s, worked with us from 1997 to
    2011 and set up The Livelihood School and
    published a number of papers.
  • Shamika Ravi of the ISB, Hyderabad has studied
    our KBS Bank for savings behaviour and then
    served on our Banks Board. She published
    Savings Lead to Improved Borrowing Empirical
    Analysis of Rural Indian Households.
    http//ssrn.com/abstract986882
  • Somnath Ghosh of IIM Indore/ MDI Gurgaon serves
    on the Boards of the BASIX Bank as well as The
    Livelihood School and Runa Sarkar of IIM Calcutta
    serves on the Board of CTRAN and BASIX
    Consulting.

7
How BASIX interaction with scholars and
researchers has benefited both sides...2
  • The founding research for BASIX by Vijay Mahajan
    and Bharti Gupta Ramola resulted in a publication
    in the Journal of International Development
    Vol8, No.2, 211-224 (1996), Financial Services
    for the Poor and Women Access and
    Sustainability.
  • Mahajan published Employment and Unemployment in
    Andhra Pradesh with S. Mahendra Dev, Economic
    and Political Weekly , Vol. 38, No. 12/13 (Mar.
    22 - Apr. 4, 2003),
  • Mahajan argued in favour of a paradigm shift
    From Microcredit to Livelihood Finance in
    Economic and Political Weekly , Vol. 40, No. 41,
    (Oct 2005).
  • Braja Mishra of The Livelihood School published
    in Enterprise Development Microfinance Volume
    19, No 4, Oct 2008, a case on BASIX work with
    PepsiCo potato cultivation by farmers in
    Jharkhand.
  • BASIX work in health insurance led Vijay Mahajan
    to be a co-author of Financing health care for
    all challenges and opportunities published in
    The Lancet 2011 377 66879
  • Mahajan and Vasumathis article in An Investment
    Sourcebook on Agricultural Innovation Systems The
    World Bank (2012)

8
How BASIX interaction with scholars and
researchers has benefited both sides...3
  1. Tom Dichter carried out an institutional review
    of BASIX in 2001 and later published a Yale case
    study on BASIX in 2007.
  2. Bhagwan Chowdhry of UCLA/ISB, Hyderabad published
    Monsoon Hedging Economic and Political Weekly,
    August 21, 2004, inspired by the rainfall index
    insurance offered by BASIX.
  3. Sanjay Sinha of M-CRIL and Frances Sinha of EDA
    Rural Systems have carried out a number of
    studies on BASIX which led to a better
    understanding of sustainability, and social
    performance.
  4. An Ivey Case no 9B11M010 on BASIX PepisCo potato
    farming published by Gita Bajaj and Neelu Bhullar
    of MDI, Gurgaon.
  5. Pastakia has studied BASIX work in promoting
    livelihoods in the dairy sector in the Journal of
    Entrepreneurship, 2012
  6. Malcolm Harper, Iyer and Rosser (2011) published
    a whole book on BASIX Whose Sustainability
    Counts BASIXs Long March to Livelihood
    Promotion. Kumarian Press, USA.

9
Microfinance is closer to Engineering than
Science - whats the difference?
  • Hard sciences progress by the spiral of
    falsification
  • Engineering progresses by the spiral of
    working models

Null Hypothesis
Experiment
Observation
Null Hypothesis falsified
New Null Hypothesis
Theoretical understanding
Pilot Testing
Operating Model
Scale Up after improvements
Practice feeds Theory
10
Microfinance is engineering because its focus
is solving a problem poverty
  • This was based on a theory from development
    economics that access to capital (from
    1975-2000 only credit later, a wider set of
    financial services) can lead to increased income
    and reduce poverty.
  • The rest of the effort was to find the right
    model by which credit could be given to
    households.
  • Efficiency parameters were identified early on
    operating cost and loan loss.
  • Effectiveness initially was seen in terms of
    outreach

11
Microfinance is engineering because its focus
is solving a problem poverty
  • This was based on a theory from development
    economics that access to capital (from
    1975-2000 only credit later, a wider set of
    financial services) can lead to increased income
    and reduce poverty.
  • The rest of the effort was to find the right
    model by which credit could be given to
    households.
  • Efficiency parameters were identified early on
    operating cost and loan loss.
  • Effectiveness initially was seen in terms of
    outreach

12
The founding theory of microfinance was weak
how?
  • Access to capital did not always lead to
    increased income (because of poor training,
    missing input-output linkages, adverse markets,
    risks, and so on).
  • Increased income of a household did not always
    reduce poverty cashflows were frittered away.
  • The importance of other financial services
    savings, insurance, payments, etc. became
    clearer.
  • Efficiency parameters - lower operating costs and
    lower loan loss rates turned out to have
    trade-offs.
  • Effectiveness was not just outreach but positive
    impact on poor households and sustainability of
    the provider institutions a dichotomy by
    itself.

13
The theory of microfinance was weak but did
it get any help from research?
  • Not much most insights came from reflective
    practitioners and close associates /consultants
    not from scholars. Grameen Bank, Bangladesh
    visits BRI Indonesias Unit Desa BAAC,
    Thailand Boulder Courses and Basix Quarterly
    Reviews offered lessons to hundreds of early
    practitioners.
  • Most early writing on microfinance was
    explanatory how joint liability groups works
    for credit (Stiglitz, 1990 Bannerjee and Besley,
    1994 Besley and Coate, 1995 Sharma and Zeller,
    1997). Likewise, other financial services
    savings (M. Robinson, 1990) insurance (e.g.
    Townsend, 1992) also focussed on how JLGs
    worked.

14
The theory of microfinance was weak but did
it get any help from research?
  • There were some notable exceptions Hulme and
    Mosley (1996) warned against the credit fix in
    Finance Against Poverty (Routledge, Chapman
    Hall, Inc.)
  • Mahajan and Ramola, (Journal of International
    Development,1996) showed the trade-off between
    access and sustainability in a World Bank study.

15
How the microfinance field has evolved in practice
  • Slide taken from a presentation by Tilman
    Ehrbeck, CEO, CGAP, 2013.

16
How the field of microfinance research has
evolved... theory trailed practice
17
Sharing Lessons for Policy Matters Example -
Countries with Interest Rate Ceilings (23 vs 7)
had Low Access to Microfinance (5 vs 20)
Number of microfinance borrowers shown as
percentage of population living on less than
US 2 per day
Source CGAP Focus Note 2004 The Impact of
Interest Rate Ceilings on Microfinance
18
Some acts of omission by microfinance
research
  • One of the early assertions of theory was that
    interest rate caps on micro-credit will only
    squeeze supply (supported by data, e.g. CGAP
    Focus Note 2005).
  • But the related assertion that competition will
    bring down interest rates has not been borne
    out.. No work has been done to explain this,
  • Over USD 1.5 billion lost in AP alone. Do
    researchers not have a responsibility to study
    the impact of this on the poor of AP and on the
    industry?
  • Effect of insurance on reduction in loan defaults
  • Effect of support services (training, extension,
    market linkages) on loan default rates.

19
Some acts of commission by microfinance
research
  • The impact of the study of the impact of
    microfinance on poor households based on research
    techniques like randomised control trials (RCTs)
    has been far out of proportion than the views of
    hundreds of practitioners.
  • The results of the early (imperfect?) studies
    were amplified by antagonists of microfinance and
    mixed with the heady dose of allegations of
    malpractice from over-lending to coercive
    recoveries to abetting suicides
  • This created a justification for the actions of
    the Government of Andhra Pradesh to ruin a
    whole sector built over 15 years of painstaking
    work. AP today has 10 million defaulters and 120
    pa loans from moneylenders.
  • Recent corrections in methodology and tone may be
    too late.
  • --------------------------------------
  • For example the Impact Study of Spandana by
    Banerjee, Duflo et al (2009) was unable to
    measure effects after 15-24 months due to
    problems with control, yet most effects of
    microfinance begin to have effect after two or
    three years.

20
How Practitioners Use Microfinance Research
21
How Practitioners Use Microfinance Research
  • This is the cover of a recent CGAP publication,
    which has surveyed the literature on randomised
    control studies in microfinance.
  • It shows that of the 12 RCTs studies reviewed on
    microfinance, all but one show the MF has a
    positive impact (dark means high correlation,
    and light means some correlation).
  • All services have a positive impact, except for
    consumption credit, for which the evidence is
    mixed.

22
The way forward
  • We need research at all three levels micro
    (households, products, methodologies) meso
    (provider institutions, livelihood eco-systems)
    and the macro (full microfinance industry) level.
    At present focus is mainly on the micro level.
  • The use of economic theory and statistical
    techniques to study microfinance rest on the
    pretence of knowledge (Hayek, 1989, Nobel
    lecture). The field requires other disciplines -
    anthropology, sociology, social psychology and
    even philosophy.

23
The way forward for microfinance research
  • Now that even Esther Duflos has discovered the
    power of hope (watch http//www.youtube.com/wat
    ch?vQxKdc8snnlw Duflo talking about the Lack of
    Hope and the Persistence of Poverty )
  • techniques like
  • Positive psychology (Seligman, Learned Optimism,
    1991)
  • Appreciative enquiry method, (Stowell and West.
    1991) where they talk of discover, dream, design,
    and deliver
  • Rational Reconstruction of Society(James
    Coleman, 1992) and the
  • Positive Organisation School (Cameron, Dutton and
    Quinn, 2003)
  • need to be used for more useful and meaningful
    research.

24
Thank You
  • vijaymahajan_at_basixindia.com
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