THE IMPACT OF FINANCIAL ACCESS
Existing And Ongoing Impact Evaluations by researchers at the World Bank’s
Finance and Private Sector Research Group, World Bank
Innovations to Induce Greater Use of Formal Financial Services
Financial Literacy and Use of Financial Services
Country: Indonesia
Methodology: Randomized Experiment
Researchers: Shawn Cole and Bilal Zia
Access to financial services is increasingly recognized as critically important to the micro-foundations of economic development. While much attention has been focused on access to credit, very little work has been conducted on what determines individuals in developing countries to open and maintain bank savings accounts. Savings accounts are likely the first and most obvious way in which household participation in the formal financial sector begins. This research focuses on providing basic financial literacy training about bank savings accounts to households in a group-class setting. We employ randomized evaluations to answer the following questions: (a) Does financial literacy training influence the willingness of households to open bank accounts, and save? (b) Do peer effects significantly influence household decisions about financial product consumption? And (c), what impacts do (a) and (b) have on household welfare?
Status: Ongoing
Changes in business inputs
Returns to Capital in Microenterprises
Countries: Sri Lanka and Mexico
Methodology: Randomized Experiment
Researchers: David McKenzie, Chris Woodruff and Suresh de Mel.
The rapid expansion of microfinance services is based on the belief that microenterprises have productive investment opportunities and can enjoy high returns to capital if given the opportunity. However, measuring the return to capital is complicated by unobserved factors such as entrepreneurial ability and demand shocks, which are likely to be correlated with capital stock. Randomized experiments in Sri Lanka and Mexico have been used to overcome this problem and measure the return to capital. We accomplish this by providing cash and equipment grants to a panel survey of small firms, and measuring the increase in profits arising from this exogenous (positive) shock to capital stock. We find the average real return to capital to be around 6 percent per month in Sri Lanka and at least 20 percent per month in Mexico, substantially higher than the market interest rate. Returns are found to be highest for the most credit constrained.
Status: 2 Working Papers available
Gender and Microenterprise Returns
Country: Sri Lanka
Methodology: Randomized Experiment
Researchers: David McKenzie, Chris Woodruff and Suresh de Mel.
Many microfinance organizations lend predominately or almost exclusively to women. Many of the justifications are economic in nature, and are based on the assumption that female entrepreneurs are more credit constrained and use resources more efficiently. If so, then the return to capital should, at the margin, be higher in female-owned enterprises than in male-owned enterprises. We provide the first test of the hypothesis using the randomized experiment on returns to capital described above. The startling finding is that while returns to capital average 9 percent per month for male firms, the average female firm has a zero or negative return from our treatments. The low returns do not appear to be a result of females taking the grants out of the business and spending them on household investments. Nor are they due to differences in ability of male and female owners. Part of the effect is due to females working in different industries than males, but we find female returns to be lower than male returns even for females working in the same industries as men.
Status: Preliminary paper available
Impact Evaluation of Microfinance Contracts and Operation
Testing the Impact of Joint Liability Contracts
Countries: Philippines, Bolivia
Methodology: Randomized Field Experiment
Researchers: Xavier Gine, Dean Karlan
Group liability is often portrayed as the key innovation that led to the explosion of the microcredit movement, which started with the Grameen Bank in the 1970s and continues on today with hundreds of institutions around the world. Group liability claims to improve repayment rates and lower transaction costs when lending to the poor by providing incentives for peers to screen, monitor and enforce each other’s loans. However, some argue that group liability creates excessive pressure and discourages good clients from borrowing, jeopardizing both growth and sustainability. We worked with a bank in the Philippines to conduct a field experiment to examine these issues. We randomly assigned half of the 169 pre-existing group liability “centers” of approximately twenty women to individual-liability centers (treatment) and kept the other half as-is with group liability (control). We find that converting to individual liability from group liability but keeping other aspects of group lending such as weekly repayment meeting does not affect the repayment rate, but leads to higher outreach by attracting new clients.
Status: 2 Working Papers available (one using one-year results and another using 3-year results for the Philippines. Bolivia is still work in progress)
What Works in Microfinance Contracts?
Countries: Peru
Methodology: FramedField Experiment
Researchers: Xavier Gine, Dean Karlan, Jonathan Morduch, Pamela Jakiela
Microfinance has been heralded as an effective way to address imperfections in creditmarkets. From a theoretical perspective, however, the success of microfinance contractshas puzzling elements. In particular, the group-based mechanisms often employed arevulnerable to free-riding and collusion, although they can also reduce moral hazard andimprove selection. We created an experimental economics laboratory in a large urbanmarket in Lima, Peru and over seven months conducted eleven different games that allowus to unpack microfinance mechanisms in a systematic way. We find that risk-takingbroadly conforms to predicted patterns, but that behavior is safer than optimal. Theresults help to explain why pioneering microfinance institutions have been moving awayfrom group-based contracts. The work also provides an example of how to use framedfield experiments as a methodological bridge between laboratory and field experiments.
Status: 1 Working Paper available
The Impact of an Incentive Scheme to Credit Staff
Countries: Pakistan
Methodology: Field Experiment
Researchers: Xavier Gine, Ghazala Mansuri
The availability of highly motivated and well trained field staff has been recognized as one of the key constraints to the rapid expansion of CDD programs. Given the complex and multi-faceted nature of program objectives, the incentive structure facing facilitators may also be quite important since there may be important trade-offs across program objectives. We are working with the Rural Support Program in Pakistan, a nation-wide initiative to implement an incentive scheme for their field staff in line with the twin objectives of the institution. The incentive contracts will reward (i) the quality of the loan portfolio and (ii) the quality of the COs. Strong financial performance is crucial for the sustainability and scaling up of NRSP operations, while cohesive COs are crucial for effective social mobilization. While incentives for credit performance are more conventional in micro-credit programs, an unstated hypothesis is that a more cohesive and active community organization may ultimately improve credit performance in addition to generating broader collective action capacity within the community.
Status: Work in Progress
Impact evaluations of provision of credit and insurance to enterprises
Impact of subsidized exporter credit on firm outcomes
Country: Pakistan
Methodology: Natural Experiment, Difference-in-Difference
Researcher:Bilal Zia
The provision of subsidized credit to exporting firms is widespread in emerging markets. To what extent are such incentives useful in alleviating financial constraints and promoting firm growth? In addition, are more financially constrained firms allocated a greater share of credit? This paper combines an exogenous shock to the supply of subsidized credit with unique loan-level data from the export sector in Pakistan to identify the impact of such financial incentives on real firm outcomes. The removal of subsidized credit causes a significant decline in the exports of privately owned firms, while the exports of publicly listed and corporate group firms are unaffected. Publicly listed firms make no significant adjustments to their balance sheets, and only their profits are reduced, indicating that they are financially unconstrained. Nearly half of all subsidized loans are assigned to such firms, implying a substantial misallocation of credit. The analysis also shows that productivity differences cannot explain the heterogeneous effects across firms.
Status: Paper forthcoming in the Journal of Financial Economics.
Getting credit to high return microenterprises: the results of an information intervention
Country: Sri Lanka
Methodology: Randomized Experiment, and Difference-in-Differences
Researchers: David McKenzie, Chris Woodruff and Suresh de Mel
We conducted an information intervention, in which these microenterprises with high average returns to capital were invited to a meeting with a local development bank, and given information on loan options available and how to apply for credit. We then investigate the determinants of which firms show up for this meeting, finding they are positively selected in terms of returns to capital. The intervention succeeds in getting a large fraction of the firms to apply for loans. However, relatively few of those applying are granted loans. We use our rich panel dataset of information on these firms to look at the screening decision of the firms, and identify the main constraints in operation which prevent more microenterprises from obtaining finance.
Status: Ongoing
Constraints to Female Entrepreneurship: Ideas or Capital?
Countries: Pakistan
Methodology: Field Experiment
Researchers: Xavier Gine, Ghazala Mansuri
This study uses a randomized experimental design to assess the impact of a program to provide business training to poor rural women to assist them in identifying business opportunities in their local environments, understanding markets for inputs and outputs, obtaining basic entrepreneurial skills, such as book keeping, and finally assisting them with their needs for financial capital through micro enterprise loans. The study is being conducted with the Pakistan Poverty Alleviation Fund (PPAF) a World Bank funded apex organization in Pakistan which supports NGOs working with the poor, and the National Rural Support Program (NRSP), the largest community based development program in rural Pakistan. The key outcome of interest is the extent to which such training and credit access improves the economic opportunities of women. To see this we will measure new business start ups and business expansions, changes in business profitability and women’s labor market activity. In addition, however, we will examine the ways in which such an intervention can impact other aspects of a woman’s wellbeing, including her ability to influence household decisions regarding the allocation of resources, investment in children, and her own mobility.
Status: Work in Progress
Marketing, Creditand Technology Adoption
Countries: Kenya
Methodology: Randomized Field Experiment
Researchers: Xavier Gine, Dean Karlan and Nava Ashraf.
In much of the developing world, many farmers grow crops for local or personal consumption despite export options which appear to be more profitable. Thus many conjecture that one or several markets are missing. We report here on a randomized control trial conducted by DrumNet in Kenya that attempts to help farmers adopt and market export crops. DrumNet provides smallholder farmers with information about how to switch to export crops, makes in-kind loans for the purchase of the agricultural inputs, and provides marketing services by facilitating the transaction with exporters. The experimental evaluation design randomly assigns pre-existing farmer self-help groups to one of three groups: (1) a treatment group that receives all DrumNet services, (2) a treatment group that receives all DrumNet services except credit, or (3) a control group. After one year, DrumNet services led to an increase in production of export oriented crops and lower marketing costs; this translated into household income gains for new adopters. However, one year after the study ended, the exporter refused to continue buying the cash crops from the farmers because the conditions of the farms did not satisfy European export requirements. DrumNet collapsed as farmers were forced to sell to middlemen thus defaulting on their loans. Eventually they switched back to local crops. The risk of such events may explain, at least partly, why many seemingly more profitable export crops are not adopted.
Status: 1 Working Paper available
Insurance, Credit, and Technology Adoption
Countries: Malawi
Methodology: Randomized Field Experiment
Researchers: Xavier Gine, Dean Yang
The adoption of new agricultural technologies may be discouraged because of their inherent riskiness. This study implemented a randomized field experiment to ask whether the provision of insurance against a major source of production risk induces farmers to take out loans to invest in a new crop variety. The study sample was composed of roughly 800 maize and groundnut farmers in Malawi, where by far the dominant source of production risk is the level of rainfall. We randomly selected half of the farmers to be offered credit to purchase high-yielding hybrid maize and improved groundnut seeds for planting in the November 2006 crop season. The other half of the farmers were offered a similar credit package but were also required to purchase (at actuarially fair rates) a weather insurance policy that partially or fully forgave the loan in the event of poor rainfall.Surprisingly, take up was lower by 13 percentage points among farmers offered insurance with the loan.Take-up was 33.0 percent for farmers who were offered the uninsured loan. There is suggestive evidence that the reduced take-up of the insured loan was due to the high cognitive cost of evaluating the insurance: insured loan take-up was positively correlated with farmer education levels. By contrast, the take-up of the uninsured loan was uncorrelated with farmer education.
Status: 1 Working Paper available
Impact of Liquidity Booms in Emerging Markets
Dollars Dollars Everywhere, Not a Dime to Lend: Credit Limit Constraints on Financial Sector Absorptive Capacity
Country: Pakistan
Methodology: Natural Experiment
Researchers: Asim Khwaja, Atif Mian, and Bilal Zia
The events of 9/11 led to an unexpected surge of capital into Pakistan. This provides a rare opportunity to understand the micro-level causes preventing emerging economies from effectively utilizing liquidity booms. We show that despite the surge of capital, an aggregate demand boom, and sharply falling cost of capital, banks were remarkably sluggish in increasing firm credit. Consequently Pakistan became a net exporter of capital. Using quarterly loan-level data covering the entire banking sector and all borrowing firms in the economy, we show that backward looking pre-9/11 credit limit constraints imposed by banks are largely responsible for the limited absorptive capacity of the banking sector. Banks are unable to extend credit in sync with firm demand, particularly for smaller firms and those facing more stringent collateral requirements. Our evidence provides important clues for why emerging markets often find it difficult to attract and retain capital. We estimate the economy wide cost of this limited absorptive capacity to be 2.3% of GDP.
Status: Working Paper Available
Impact Evaluation ofMicro-insurance Products
Patterns of Rainfall Insurance Participation in Rural India
Countries: India
Methodology: Field Experiment
Researchers: Xavier Gine, Robert Townsend, James Vickery
Insurance markets are growing rapidly in the developing world. As part of this growth, innovative new products allow individual smallholder farmers to hedge against agricultural risks, such as drought, disease and commodity price fluctuations.These financial innovations hold significant promise for rural households. We describe the contract design and institutional features of an innovative rainfall insurance policy offered to smallholder farmers in rural India, and present preliminary evidence on the determinants of insurance participation. Insurance takeup is found to be decreasing in basis risk between insurance payouts and income fluctuations, increasing in household wealth and decreasing in the extent to which credit constraints bind. These results match with predictions of a simple neoclassical model appended with borrowing constraints. Other patterns are less consistent with the “benchmark” model; namely, participation in village networks and measures of familiarity with the insurance vendor are strongly correlated with insurance takeup decisions, and risk-averse households are found to be less, not more, likely to purchase insurance. We suggest that these results reflect household uncertainty about the product itself, given their limited experience with it.
Status: 1 Working Paper available and work in progress
Health Insurance Take-up and Market Efficiency