Micro Level Banking may have strong forces to reduce poverty status in a given society.

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 Abstract:

Program evaluation is sensitive to the methods used in impact assessment. In our earlier study based on cross-section data from Bangladesh, we find that programs make a difference to the poor households who are members of Grameen Bank and similar micro-finance programs in Bangladesh. However, the impact assessments are subject to assumptions such as erogeneity in landholding. The welfare impact of micro-finance is also positive for participating and nonparticipating households, indicating that micro-finance programs help the poor beyond income redistribution and income growth. The programs have spillover effects on the local economy, but the impacts are very small.

 Introduction:

Micro-finance means transactions in small amounts of both credit and saving, involving mainly small-scale and medium-scale businesses and producers. The poor, who cannot run a small business because they lack capital, may also benefit from micro-finance organization. The poor, especially poor women are the prime reason for the micro-finance intervention in many countries, including Bangladesh. The question of whether micro- finance really benefits the poor depends on how we define poverty and what kind of help micro-finance offers to the poor to combat poverty. The face of poverty varies from country to country. Poverty may mean a lack of some or all of the following:

(i)    Entitlement to food and other basic necessities.

(ii)  Access to public provision of economic, social, and human infrastructures.

(iii)            Credit, opportunities for income generation, and consumption stabilization.

(iv)            Empowerment in both private and public resource allocations.

(v)  Access to a social safety net and other resources that help households withstand natural and other shocks, thus safeguarding the very existence of life and families.[1]

Since micro-finance transactions with the poor are very small, the accrued benefits from micro-finance may also be small. In such a case, the important policy question is whether micro-finance is indeed a “real” help to the poor[2]. To understand whether micro-finance really benefits the poor, we must understand who participates in micro-finance programs, how the participants can benefit from these organizations, and whether such benefits are sustainable. The poverty of a household can be characterized by two general factors in many countries: physical and human capital endowments. A person is poor because he or she is poor in physical and human capital resources[3]. For this, Public entities may wish to subsidize the research to make sure the knowledge enters into the public domain, so that social welfare is maximized[4].

Definition of Micro level Banking:

The first step in conducting an evaluation of a microfinance program is, perhaps surprisingly, to ensure that you are conducting an evaluation of a microfinance program. This seems obvious, but is not, since the definition of “microfinance” is less than clear. Broadly speaking, microfinance for loans (i.e., microcredit) is the provision of small- scale financial services to people who lack access to traditional banking services. The term microfinance usually implies very small loans to low-income clients for self- employment, often with the simultaneous collection of small amounts of savings.

How we define “small” and “poor” affects what does and does not constitute microfinance. “Microfinance” by its name clearly is about more than just credit, otherwise we should always call it microcredit. Many programs offer stand-alone savings products, and remittances and insurance are becoming popular innovations in the suite of services offered by financial institutions for the poor. In fact, it is no longer exclusively institutions for the poor that offer microfinance services. Commercial banks and insurance companies are beginning to go downscale to reach new markets, consumer durables companies are targeting the poor with microcredit schemes, and even Wal-Mart is offering remittances services.

Types of Policies to Evaluate of Micro Level Banking:

We discuss three types of microfinance evaluations: program evaluations, product or process evaluations, and policy evaluations. The World Bank’s loans to countries for microfinance typically fit into one of three categories:  (1) loans to programs: either loans to state-owned banks that then directly lend to micro entrepreneurs (e.g., the Crediamigo program), or loans to second-tier lenders, who then on-lend them to banks (private or public), NGOs or other financial institutions who then on-lend to the poor; (2) technical assistance to help microfinance institutions improve their operations so as to lower costs, expand outreach, and maximize impact; and (3) public policies, such as creating and strengthening credit bureaus, establishing stronger regulatory bodies for savings and capitalization requirements.

The first two of these are the easier ones to evaluate. Public policy initiatives, particularly regulation, are quite difficult to evaluate fully. We will discuss a few examples of when it is possible to learn something about the impact of the policy (such as credit bureaus), but we note that some interventions, particularly those that are implemented at the country level, will be difficult if not impossible to have a full and unbiased evaluation.

  Program Impact Evaluations:

Historically, MFI impact evaluations have been program evaluations, i.e., they have attempted to measure the overall impact of an MFI on client or community welfare. In many cases, the full package of program services includes many components: credit, education, social capital building, insurance, etc. Although useful for measuring whether the resources allocated to the program were worthwhile such program evaluations do not clearly identify which particular aspects of successful programs produced the impact.

When evaluating the impact of loans to second-tier lenders, though the policy might affect large numbers of people, the evaluation can be pursued in a straightforward manner as a “program” evaluation described above. Loans to banks or MFIs presumably are intended to help the banks or MFIs expand their outreach. By evaluating the impact of such an expansion on client welfare, the multilateral organization providing funding to the second-tier bank can measure the impact of its loan[5].

 Product or Process Impact Evaluations:

Many microfinance institutions test new product designs by allowing a few volunteer clients to use a new lending product or by offering to a small group of particularly chosen clients (often, their best) a new product. Alternatively, a microfinance institution can implement a change throughout one branch (but for all clients in that branch). This is a situation in which impact evaluations, especially randomized controlled trials, are a win- win proposition: less risky (and hence less costly in the long run) from a business and operations perspective and optimal from a public goods perspective, in that the lessons learned from establishing these causal links can be disseminated to other MFIs.

We find that some costless marketing approaches such as presenting only one rather than several loans or including a woman’s photo on the mailer were as effective at increasing demand as dropping the interest rate as much as 4 percentage points per month from an average rate across the sample of 7.9 percent (Bertrand, Karlan, Mullainathan, et al. 2005). In a study in Peru, a village banking organization measured the impact of credit with education to credit without education on both the financial institution (e.g., repayment rates and client retention) as well as client wellbeing (e.g., business profits) (Karlan and Valdivia 2006).

 Policy Evaluations:

Evaluations can also be designed to measure the impact of public policies such as regulatory policies and credit bureaus. Typical regulatory policies include interest rate ceilings and regulation (or prohibition) of savings or savings protection via government deposit insurance programs. However, there are two ways in which “micro”-level studies can shed insight into the impact of a macro-level policy. First, impacts on specific behaviors in response to policies can be estimated through micro- level interventions that inform individuals about the macro policies. Second, by measuring spillovers on non-participants in micro studies, one can provide community-level estimates of the impacts.

Some approaches could be applied to a wide variety of policies, such as savings regulation and interest rate policies, and large-scale donor agency initiatives, such as infrastructure lending for ATMs, smart cards, and cell phone banking. Regarding savings regulation, it can provide important information about specific consequences that were generated and can be expected in the future, from approving MFIs to accept savings, to regulating their management of the deposits. Regarding interest rate policy, there is tremendous confusion on simple matters of interest. For instance, many lenders charge interest over the declining balance (as is common in developed countries), whereas others charge interest over the initial loan size throughout the life of the loan.

  Micro Level Banking Impacts on Village Welfare:

There are four major programs (Grameen Bank, BRAC, ASA, and Proshika) that account for about 65 percent of borrowers (68 percent of membership) and 72 percent of all outstanding loans in 1998/1999. Grameen Bank accounted for one fourth of the market share of the micro-finance industry in Bangladesh. The total loan outstanding was about US$600 million in 1998/1999. This figure shows a large inflow of micro- finance funds into rural Bangladesh and is expected to make an aggregate impact on the local economy. That is, the impacts must extend beyond the program participants.

Many researchers found that their research results may indicate no substantive program impacts on village-level welfare indicators or among nonparticipating households, although household net worth increases with female borrowing and income increases with male borrowing for both cases. The decline in impact due to the inclusion of village-level variables may imply that micro-finance has an impact on all households or non-participants and via changes in village-level attributes such as prices and wages. In order to determine whether this correlation exists, we fit a regression by relating changes in price, wage, and other village attributes to changes in female and male borrowing between 1991/1992, 1998/1999, after controlling for the 1991/1992 level of prices, wages, and other village attributes.

  Conclusion:

The microfinance industry needs reliable data, both to prove to donors, governments, and other stakeholders that microfinance works and to improve their products and processes so that they can accelerate their impact on poverty. Evaluations need not be mere costs to an organization in order to prove their worthiness. Quite to the contrary, a good product or process impact evaluation can help an organization improve its operations, maintain or improve its financial sustainability, and simultaneously improve client welfare. The microfinance industry has experienced tremendous experimentation, and now a plethora of approaches exist around the world. Even if poverty decreases through micro-finance, albeit at a slow rate, poverty is rampant in a country that has the largest presence of micro-finance programs in the world. Micro-finance is not to blame for this high incidence of poverty.

 Bibliography:

1. Hashemi, Syed M., Sidney R. Schuler, and Ann P. Riley, 1996, “Rural Credit Programs and Women’s Empowerment in Bangladesh” World Bank 24 (April): 635-53.
2. Alexander-Tedeschi, G. and D. Karlan (2006). “Microfinance Impact: Bias from Dropouts,” working paper.
3. 3.       Ashraf, N., D. Karlan, et al. (2006a). “Deposit Collectors,” Advances in Economic Analysis & Policy 6(2): Article 5.
4. Coleman, B. (1999). “The Impact of Group Lending in Northeast Thailand,” Journal of Development Economics 60: 105-141.
5. World Bank (1998). World Bank Operational Manual OP 8.30 – Financial Intermediary Lending.
6. Zeller, M. (2005). “Developing and Testing Poverty Assessment Tools: Results from Accuracy Tests in Peru,” IRIS working paper.
7. Deaton, A. (1997). The Analysis of Household Surveys, World Bank.