Nabila Tabassum Chowdhury > Recent Status Updates

"The answer obviously depends on what you mean by “work.” According to the more enthusiastic backers of microfinance, it means transformation of people’s lives."

"And so microfinance, with its 150 to 200 million clients, has earned its place as one of the most visible anti-poverty policies. But does it work?"

"The innovation of people like Muhammad Yunus and Padmaja Reddy, then, was not just the idea of lending to the poor at more reasonable rates. It was figuring out how to do it."

"This, combined with the multiplier effect and the monopoly power that moneylenders often enjoy, explains why the poor face such high interest rates. "

"However, although the moneylenders have an advantage in getting their money back, they have to pay a lot more for the money they lend out than the banks. This is because we are happy to give our savings to the bank for safekeeping even if it pays us little or nothing in interest, but few people would think of depositing their savings with a moneylender."

"Because the main constraint on lending to the poor is the cost of gathering information about them, it makes sense that they would mostly borrow from people who already know them, such as their neighbors, their employers, the people they trade with, or one of the local moneylenders, and that is exactly what happens."

'The upward pressure feeds on itself, and interest rates can skyrocket. Or, as often happens in practice, the lender may decide that it is not viable to lend to the poor: Their loans would be too small to make it worthwhile."

"To make matters worse, this creates what economists call a multiplier effect. When the interest rate goes up, the borrower has more reason to try to find a way not to repay the loan. That means the borrower needs to be monitored and screened more carefully, which adds to the cost of lending. This pushes the interest rate up even further, which necessitates more scrutiny, and so on."

"the smaller the loan, the larger the monitoring and screening costs will be as a fraction of loan size, and because these costs have to be covered by the interest collected, the higher the interest rate will be."

"This is simple arithmetic: If a moneylender must get back on average 110 rupees for every 100 rupees he lends just to stay in business (for instance, because this is his cost of funds), without default, he could charge a 10 percent interest rate. But if half of his borrowers default, then he must get back at least 220 rupees from the half that actually do repay and hence charge a 120 percent interest rate overall."

"One standard explanation for why some people might have to pay high interest rates is that they are more likely to default."

"Perhaps the social banking experiment was a failure because the government should not be in the business of subsidized lending. Politicians find it too attractive to use the loans as giveaways, and there is no better giveaway than a loan one does not need to repay."

"Even Burgess and Pande’s generally favorable study concluded that it costs much more than 1 rupee to increase the incomes of the poor by 1 rupee through opening bank branches. Moreover, further work suggested that in the longer term, regions that got more branches may in fact have become poorer."

"Robin Burgess and Rohini Pande showed that where more bank branches were opened as a result of this policy, poverty decreased faster."

"For example, in India starting in 1977, for every branch that a bank opened in a city, the bank had to open four additional branches in rural locations that did not have a bank. Moreover, banks were directed to lend 40 percent of their portfolios to the “priority sector”: small firms, agriculture, cooperatives, and the like."

"Credit from informal sources tends to be expensive. In the Udaipur survey, those living on less than 99 cents a day pay on average 3.84 percent per month (which is equivalent to an annual rate of 57 percent) for the credit they receive from informal sources."

"For all the individual anecdotes of fruit sellers turning into fruit magnates that can be found on the various Web sites of microfinance institutions, there are still many poor fruit sellers in Chennai. Many of them do not borrow from microfinance institutions, even though there are several in their town. Are they forgoing their tickets out of poverty, or is microfinance less of a miracle than we have been told?"

"In this sense, the advocates of microfinance are being too modest: They must be doing something more than introducing competition where there was a monopoly. On the other hand, they may also be too sanguine about the potential of small loans to lift people out of poverty."

"But for the time being, the government should pay a part of insurance premiums for the poor."

"This does not mean the government needs to substitute for a private insurance market, but for a real market to have a chance to emerge, the government will probably need to step in. Private companies could continue to sell exactly the kinds of insurance they are currently willing to sell (catastrophic care with a strict cap, indexed weather insurance, and so forth)."

"There seem to be deep reasons that most people don’t yet feel very comfortable with the kinds of insurance products that the market is willing to offer. On the other hand, the poor clearly bear unacceptable levels of risk. There is thus a clear role for government action."

"The second issue is the problem of time inconsistency, which we already encountered in our chapter on health. When deciding whether or not to buy the insurance, we need to do the thinking now (and pay the premium), but the payout, if any, would take place in the future."

"Credibility is always a problem with insurance products: Because the insurance contract requires the household to pay in advance, to be repaid in the future at the discretion of the insurer, the household must trust the insurer completely."

"The key problem, we think, is that because of the problems we mentioned earlier, the type of insurance the market can offer only covers people against catastrophic scenarios. This creates a number of issues."

"This is the familiar demand-wallah argument: When markets do not work, overprovision by the government or international institutions is probably to blame. The specific argument is that when disaster strikes, these kindly souls step in to help, and as a result, people actually don’t need insurance. "

"Overall, the sign-up rates were extremely low: At most, 20 percent of farmers bought some insurance, and that level of sign-up only occurred when someone from those very well-known MFIs went door to door to sell the product. Moreover, even those who bought some insurance bought very little: Most farmers purchased policies that would cover only 2 percent to 3 percent of their losses if the rains did fail."

"The product was marketed in two regions in India—Gujarat and Andhra Pradesh—both dry and drought-prone. In both cases, it was sold through a well-respected and well-known microfinance organization. The company tried various ways to offer and present the insurance to farmers."

"A group of researchers, including Robert Townsend, our colleague at MIT, tried to measure the impact of access to a very simple weather insurance scheme. Much like the one we described above, it pays a given amount of money when it rains less than a specific amount."

"Because no one controls the weather and there is no judgment to be made about what should be done (unlike in medical care, where someone must decide which tests or treatment is needed), there is no scope for moral hazard or fraud."

"Some types of risk ought to be easier to insure than others. Consider weather, for example. A farmer should value a policy that pays him a fixed amount (based on the premium he paid) when the rainfall measured at the nearby weather station falls below a certain critical level."