Another Piece to the Microfinance Puzzle

<p>This is my first post, so I want to start by saying a bit about who I am, and why I&rsquo;m writing this.&nbsp;Second, I want to describe a looming puzzle about microfinance. First, about me: I&rsquo;m a <a href="http://wagner.nyu.edu/faculty/facultyDetail.php?whereField=facultyID&amp... at NYU</a>, where I teach in the <a href="http://wagner.nyu.edu/">Wagner Graduate School of Public Service</a>.&nbsp;NYU is fueled by the energy of downtown New York.&nbsp;The ethos is very entrepreneurial, and my colleagues share commitments both to ideas and to action.&nbsp;<br /> <br /> In the past few years, Wagner has created new programs on <a href="http://www.nyu.edu/reynolds/index.flash.html">social entrepreneurship</a> and <a href="http://wagner.nyu.edu/international/">global development</a>&mdash;and that&rsquo;s been my focus too.&nbsp;I teach a course on International Economic Development which aims to help students better understand why so much poverty persists amidst so much wealth on the planet&mdash;and what can be done about it.My sharpest focus has been on microfinance, driven by a particular interest in the financial lives of poor households.<br /> <br /> Two years ago, I helped launch FAI, the <a href="http://www.financialaccess.org/">Financial Access Initiative </a>, a consortium of researchers at NYU, Yale, Harvard, and <a href="http://www.poverty-action.org/">Innovations for Poverty Action</a> (IPA is a research-focused NGO), and I&rsquo;m now Managing Director.&nbsp;The Gates Foundation gave us a running start toward reaching twin goals.&nbsp;First, to do cutting-edge research on the big unknowns of microfinance.&nbsp;(IPA now has research teams in the Philippines, India, Peru, Ghana, Mexico, and elsewhere, piloting new financial products and putting ideas to the test.)&nbsp;Second, to communicate lessons beyond the ivy-covered walls of academia.&nbsp;(Or, at NYU, beyond our graffiti-covered walls.)&nbsp;I advise non-profit networks like <a href="https://promujer.org/">Pro Mujer</a> and the <a href="http://www.grameenfoundation.org/">Grameen Foundation</a>, and international institutions like the World Bank and <a href="http://www.uncdf.org/english/microfinance/advisors_group/">United Nations</a>.#break#<br /> <br /> The first job has been to show that most poor people <em>do</em> in fact have financial lives, even if they&rsquo;re living on under $2/day or $1/day in countries like India or Bangladesh or South Africa&mdash;three countries in which an amazing set of &ldquo;<a href="http://knowledge.allianz.com/en/globalissues/microfinance/microcredit/fi... diaries</a>&rdquo; show this with rich texture. &nbsp;The diaries follow households over the course of a year, and show how the households <a href="http://www.microfinancegateway.org/content/article/detail/30615">save </a>and borrow and insure in varying (and often clever) ways.&nbsp;The second job is to find ways to improve those strategies.&nbsp;I&rsquo;m excited about new technologies like mobile telephone banking and smart cards, but also about doing better at basics: like designing savings accounts with features that help people save more (no surprise: <a href="http://library.financialaccess.org/pdf/karlan_savings.PDF">discipline helps!</a>).&nbsp;Which takes me to the puzzle.&nbsp;I just wrote&nbsp;a <a href="http://library.financialaccess.org/pdf/morduch_returnstocapital.pdf">short piece for FAI</a> on what we know about how much financial access improves the profits of small businesses.&nbsp;This is the heart of the idea of microfinance, the idea that won Muhammad Yunus and Grameen Bank their Nobel Peace Prize in 2006.&nbsp;Yunus argues that the benefits of financial access can be huge, raising incomes and transforming lives.<br /> <br /> The anecdotes are inspiring.&nbsp;Consider, for example, the story of <a href="https://promujer.org/dynamic/lang_EN/press_kit_5_Pdf_5.%20Vidalia%20Mama... Mamami</a>, a 43 year-old vegetable seller in Tacna, Peru.&nbsp;She sells vegetables from a stand in a local market, and her earnings help support her husband and five children.&nbsp;She had been in business for 21 years, but only recently turned to Pro Mujer&rsquo;s Peruvian branch for a business loan:<br /> <br /> With my first loan I was able to buy more merchandise for my business and I was able to add vegetables and condiments, which have increased my earnings. Before, I earned 18 to 20 soles per day by selling only fruit, but now that I have added vegetables and condiments, I earn an average of 30 to 35 soles per day. This money has allowed my family to eat better and allows me to do things for my children that I could never do before. I remember how my older children were not able to go to school because we didn&rsquo;t have enough money.<br /> <br /> The story puts together a dramatic increase in earnings and ties it to broader social impacts.&nbsp;But it&rsquo;s not just anecdotes.&nbsp;New work from Mexico shows huge returns to expanding capital in small-scale businesses, both in national surveys and in regional experiments: entrepreneurs are increasing profits by an extra 15 percent per month (or more) thanks to expanded capital access.&nbsp;These results don&rsquo;t hold everywhere or all the time, but they do show that microfinance rests on more than cherry-picked stories.&nbsp; The big puzzle is: where the returns to having more capital are so high, why aren&rsquo;t the entrepreneurs saving more (and then investing their savings in their businesses)?&nbsp;If, as a poor entrepreneur, you could catapult your livelihood just through access to a bit of extra capital, why wait for a microfinance institution?&nbsp;Why not save your way to a better life?<br /> <br /> The biggest part of the answer has to be that saving is hard.&nbsp;Saving is hard for all of us, and especially hard if you&rsquo;re living on tight economic margins.&nbsp;Improving ways to save isn&rsquo;t necessarily more important than expanding access to loans, but it&rsquo;s fundamental.&nbsp;Improving ways to save will mean more than spreading bank branches, though that&rsquo;s a start.&nbsp;It will also mean developing products that are reliable, can work in poor communities, be amenable to regulation, and build on understandings of both the economics and <a href="http://library.financialaccess.org/pdf/gatesconceptnote_april8.pdf">psyc... of saving</a>.&nbsp;The Gates Foundation is interested in the savings agenda, and field work is showing promising leads.&nbsp;Odds are that this is the next Big Thing in microfinance.</p>