Introduction To Microfinance

by Todd A Watkins

Overview

Microfinance has grown from the obscure efforts of a few philanthropic institutions into a global industry that reaches 150-200 million clients through the branches of thousands of institutions. Microfinance has matured from exclusively funding loans to providing savings, insurance, healthcare, and education. Yet many people still think of it narrowly as microcredit. Understanding remains thin of what the industry does, how it functions and why.Introduction to Microfinance provides a non-technical introduction to the broad array of inclusive financial and non-financial services for the world's poor. It explores the financial lives of those families, and the microfinance institutions and rapidly growing industry that serve them. Written in close collaboration with college students for college students, under the auspices of one of the US's leading undergraduate programs in microfinance, it is the first-ever introductory college textbook about microfinance.What is microfinance? What are its methods and why? Does it work? What are its prospects and challenges? Why is it controversial? This book tackles these questions and more.

Product Details

ISBN-13:	9789813143005
Publisher:	World Scientific Publishing Company, Incorporated
Publication date:	05/30/2018
Edition description:	New Edition
Pages:	472
Product dimensions:	6.00(w) x 9.00(h) x 0.95(d)

About the Author

Todd A. Watkins, PhD, is Professor of Economics and Executive Director of the Martindale Center for the Study of Private Enterprise at Lehigh University. Author of more than 75 related publications, his research and teaching focus on the intersection of microfinance, economic development, innovation, entrepreneurship, and public policy. Co-editor of the book Moving Beyond Storytelling: Emerging Research in Microfinance, Dr. Watkins founded and directs Lehigh's Microfinance Program, and was a founding member of the advisory Faculty Council for Accion International's Center for Financial Inclusion, which seeks to promote innovation and growth of commercial microfinance worldwide. He serves as a Board Member and past President of the Rising Tide Community Loan Fund, which targets the business development credit needs of low-to-moderate-income communities in eastern Pennsylvania, USA. He's won multiple teaching awards at all three institutions where he's taught. Dr. Watkins earned a Bachelor of Science degree in Optics from the University of Rochester and his PhD and Master in Public Policy from Harvard University.

Table of Contents

List of Co-Authors v

List of Figures xiii

List of Tables xvii

List of Boxes xix

Chapter 1 An Introduction to Microfinance 1

1.1 Microfinance Begins 2

1.2 Microfinance Defined 5

Can the Poor Really Use Financial Services? 5

Microcredit: The Roots of Microfinance 8

Group Lending 10

Savings and Beyond 13

1.3 Microfinance as an Industry 18

How Big Is Microfinance and Who Uses It? 18

Who Provides Microfinance? 19

Commercialization: Does It Undermine Social Missions? 21

Outreach 23

Key Players and Intermediaries 25

Microfinance Institutions and Networks 25

MFI Funders and Service Providers 28

Chapter 2 Daily Financial Lives of the Poor 35

2.1 The Portfolios of the Poor 36

One Poor Family's Financial Story 36

Meet Khadeja and Hamid 37

Finance without Money 40

The Need for Financial Services 43

Ensuring Daily Consumption 44

Emergencies and Other Big Ticket Expenses 47

2.2 Informal Mechanisms of Savings, Lending, and Insurance 52

Saving Up 53

Saving Down 54

Saving Through 55

The Demand for Microfinance 60

2.3 Patterns of Global Poverty 63

Where and How Poor Are the Poor? 63

Wealth Distribution and Income Inequality 66

Chapter 3 Barriers to Financial Services for the Poor 75

3.1 Patterns of Access to Financial Services 76

3.2 Two Worlds: Formal Finance and Informal Markets 82

Banking Business Models vs. the Informal Sector 82

Dead Capital and the Informal Economy 82

The Primacy of Flow Transactions 88

Information Asymmetries and Agency Problems 89

Adverse Selection 91

Moral Hazard 94

Limited Liability 96

3.3 Behavioral Barriers 98

Social and Cultural Norms 99

Psychological Tendencies 100

Self-Control 101

Mental Accounting 103

Misestimating Risk 104

3.4 Problems of Costs and Risks 107

Transaction and Opportunity Costs 107

Last Mile Problem and Complementary Infrastructure 110

Challenges of On-Demand Access 111

Managing Risks 114

Subsidized Credit 116

Chapter 4 Informal Finance 125

4.1 Savings Clubs 126

ROSCAs: Rotating Savings and Credit Associations 127

Basic ROSCAs 128

Other Forms of ROSCAs 130

Motivations for Joining ROSCAs 132

ASCAs: Accumulated Savings and Credit Associations 135

Non-Time-Bound ASCAs 138

Flexibility and Issues with ASCAs 140

4.2 Savings Handlers and Credit Providers 144

External Managers 144

Deposit Collectors 146

Informal Moneylenders 149

How Much Do Moneylenders Charge and Why? 153

Credit under Contract 156

Chapter 5 Microlending 165

5.1 Group Lending 166

Group Lending Approaches 167

Classic "Grameen-Style" Group Lending 168

Solidarity Group Approach 173

Village Banking 174

Village Savings and Loan Associations 177

Self-Help Groups 177

5.2 Group Lending as a Tool to Overcome Market Failures 180

Social Implications and Moral Hazard 180

Gender and Group Lending 183

Implications for Forming Groups 184

Strangers vs. Community and Friends: What Works? 186

5.3 Limitations of Group Lending 188

The Inflexibility of Group Lending 188

Opportunity Costs 190

Free Riding 192

Joint Liability's Double Edge 192

Collusion Risk 196

5.4 Individual Lending 198

Individual vs. Group Lending from the MFI's Perspective 199

Individual vs. Group Lending from the Client's Perspective 204

Graduation 205

Chapter 6 Beyond Microcredit 211

6.1 The Emerging Array of Microfinance Services 212

6.2 Microsavings 214

Why Do the Poor Need to Save? 214

Types of Microsavings Services 215

Compulsory Savings 215

Voluntary Savings 217

Commitment Savings 221

The Benefits of Savings Mobilization 223

Benefits to the Individual 224

Benefits for the MFI 226

External Challenges to Savings Mobilization 227

6.3 Microinsurance 233

Why Microinsurance? 233

How Widespread Is Microinsurance? 235

Who Provides Microinsurance? 238

Potential Market Failures and Microinsurance 239

Adverse Selection 240

Moral Hazard and Limited Liability 240

Fraud 241

Covariate Risk 241

Technical Challenges in Microinsurance 242

Loan Protection Insurance 243

Life Microinsurance 244

Savings-Linked Microinsurance 245

Health Microinsurance 249

What's Covered? Balancing Costs and Demand 250

Adverse Selection and Health Insurance 253

Why Isn't Health Microinsurance More Widespread? 254

Agricultural Index Microinsurance 255

Chapter 7 Gender Issues in Microfinance 263

7.1 The Focus on Women 264

Regional Patterns 265

Commercialization and Gender 266

7.2 Why the Focus on Women? The Demand Side 271

Why Might Women Demand Microfinance More Than Men? 271

Wage Gaps and Informal Economy Financial Patterns 273

7.3 The Supply Side: Why Do MFIs Prefer Women? 277

Are Women Better for Business? 277

The Family Impact Motive 281

The Empowerment Motive 285

Might Microfinance Dis-empower Women? 292

Chapter 8 The Evolution of Commercial Microfinance 305

8.1 Profitability, Transformation and Scale 307

Demonstrating MFI Profitability 307

Transformation of Non-Profits into Regulated Banks 311

The Distortion Potential of Subsidies 314

Achieving Scale and Mass Outreach 314

Efficiency and Pricing Incentives in Competitive Markets 319

How Much Does Microcredit Cost? 321

8.2 The Ecosystem of Intermediaries 327

International Financial Institutions and Investment Funds 327

Information Providers and Other Professional Services 333

8.3 Accessing International Capital Markets 336

Public Equity 337

Commercial Debt 342

8.4 The Social Mission Debate 348

Chapter 9 Measuring the Impact of Microfinance 365

9.1 Challenges to Measuring Impact-Part I 369

Correlation vs. Causation: What's the Difference? 370

Selection Bias Explains Some Correlations 371

Establishing the Counterfactual to Determine Causation 374

9.2 Methodology of Impact Assessments 378

Model of the Causal Impact Chain 378

Levels of Analysis 378

Specification of Types of Impact to Assess 381

Gathering Information: Qualitative vs. Quantitative Studies 382

Randomized Control Trials 383

9.3 Challenges to Measuring Impact-Part II 388

Tradeoff between Depth and Breadth 388

Problems with Mathematical Models 390

9.4 Evidence of Impact 393

Evidence on the Impact of Microcredit 394

Experimental Evidence 396

Evidence from Quasi-Experiments 400

Evidence on the Impact of Microsavings 404

The Poor Want Formal Ways to Save 405

Commitment Savings vs. Basic Savings Accounts 406

Microfinance's Macroeconomic Effects Remain Unknown 411

References 417

Index 431