By Karl Baumgarten, KF9, Costa Rica
In the last 5 years, financial innovation has spread rapidly to the field of microfinance. What previously was better coined micro-credit is starting to live up to its name, with more and more MFIs starting to offer a full gambit of financial services: microinsurance, microsavings, remittances and others. Technology is enabling these products to spread faster and further. But just what are the impacts of these products and how can we be sure that microfinance is really doing all that its rosy image implies? One increasingly popular method is a randomized control trial, where individuals are randomly divided into treatment and control groups to evaluate the impacts of various development interventions. The participants are surveyed at the beginning of the experiment and again at the end. As the treatment and control groups are randomly chosen, the differences between them at the end of the period can be attributed to that treatment/intervention.
Below are a few interesting products and findings I have come across recently:
1. So who are these crafty farmers playing Wall Street? I digress, that was so you’d click on the link. Still, the Centre for Microfinance (CMF) is doing something similar. They are evaluating the impacts of a product that would allow farmers to “play” the commodities futures markets with their planting decisions. Representatives in the treatment villages receive a weekly text message about the futures and spot prices (prices of crops traded on international commodity exchanges) of local crops. This information is posted in local meeting places and farmers can decide whether to use this pricing information to change their planting decisions (In the past planting decisions were based on either last year’s harvest price or the current local prices, both noisy indicators). The farmers in these villages were also trained how to interpret these prices and what they mean. In the first rounds of this study, Shawn Cole (Harvard) and CMF found that providing the futures prices affected planting decisions of nearly 40% of those surveyed. Soon they will be testing the continued impacts of this information provided via mobile phone directly to individual farmers. Read more
One can only imagine the types of information that could and should be provided to rural farmers in the developing world. Imagine microfinance loans for mobile phones that included a daily SMS about current weather predictions, future and spot prices of local crops, prices in local markets and education about new fertilizer methods. In a village with quality primary education, the kids could read the messages to those parents who were illiterate. Then those farmers could receive low cost remittances on the very same phone from their extended family working in the city. Now, a for-profit doctor partners with this MFI, agreeing to diagnose health issues that are reported by text and photo message. What could have been an expensive trip to the doctor is resolved with some simple local treatments and a .30 text message. The possibilities are endless.
2. In 2007 women in the Philippines at the Green Bank of Caraga were offered a commitment savings account which allowed them to set a savings goal and deposit money towards it on a monthly basis. These same clients were not allowed to withdraw the money until they had reached their goal. Researchers at Innovations for Poverty Action found that the women who used this product saw an increase in their decision making power and accumulation of female oriented assets. That is, this savings account helped women have more say in household decisions about which items to buy. This type of innovative financial product is integral if microfinance is really to help empower women. Read More
3. Recent innovations in the microinsurance industry have led to the development of rainfall insurance, a product which pays out depending on levels of rainfall. SEWA (Self-Employed Womens Association) is currently offering rainfall insurance that pays a set amount depending on the severity of rain shortage. In the past, government programs attempted to offer crop insurance though this pursuit failed spectacularly. Like all insurance, farmers had an incentive to put in less effort after buying the insurance and riskier clients were more likely to buy the coverage. Additionally, evaluating claims was inherently difficult.
In the case of India, nearly 500 million people rely on agriculture as their main source of income and nearly all these farmers depend on the variable monsoon. When the monsoon fails, work often dries up (no pun intended) for whole villages and households are forced to sell off their productive assets. Micro crop insurance can help eliminate these asset sell offs, ensuring households don’t fall back into a poverty trap. Read More
Furthermore, this type of insurance could be securitized (bundled into stock) and sold to investors. Imagine your 401k with some micro weather insurance exposure so when the next bubble pops, you’re hoping for rain in the Hindi Belt. Just make sure our favorite insurance company AIG hasn’t touched it.
4. Switching gears, what do you think is the most cost effective way to get children to stay in school in the developing world? Is it a midday meal to ensure kids stick around past lunch? How about a laptop so their education feels fun and relevant? Maybe a school voucher for parents that supplements the income kids would be earning if they weren’t in school? Wrong, Wrong, Wrong. Researchers are finding that the simplest and least costly way to keep kids in school is deworming.
Parasitic worms affect nearly 2 billion people worldwide, with children disproportionately affected. Michael Kremer (Harvard) studied the impacts of mass deworming in Kenya and India (.50 per student) and found increases in attendance of 25% and 20% respectively. The program also had significant spillover effects, with infection rates reduced for miles around the schools that received treatment. While deworming lacks the silicon appeal of the “Laptop for every kid” campaign, this evidence points to the need for a more concerted effort to battle those nasty little parastic buggers.
Apart from deworming, there are some other interesting technology based solutions being tested to improve teacher attendence. Tragically in the developing world, getting teachers to show up to school is one of the more pressing problems. Ester Duflo, a development economist at MIT, tested the impact of a program in India seeking to improve teacher attendance. In this program, teachers were required to take date stamped pictures with students each day to receive pay. Teacher attendance rose 50% and students test scores showed a significant improvement.
It is sometimes these simple, technology based solutions that have real potential to improve the state of primary education in the developing world.
5. With the increasing commercialization of microfinance, MFIs often forgo their social programs to attract international funding sources who demand sustainability and return on equity. Unfortunately, it is often these very programs that have real potential to improve the livelihoods of their clients. One of the more important programs for microfinance clients is business education. Basic business practices such as keeping track of revenues and costs are rarely employed in the developing world. Business education can help ensure these clients understand both their loans and better business methods. Researchers at Innovations for Poverty Action studied the impacts of business education at Kiva’s very own field partner, Finca Peru. They found that not only did business education improve business knowledge and revenues, it also improved repayment rates and client retention. Read More
This is evidence that even those commercially minded MFIs can provide sustainable programs to educate their clients.
Touché to those of you who made it through all that and hopefully it excited the little geek inside. Microfinance is a dynamic sector but unfortunately, those MFIs who are the most innovative and socially conscious are often the very same ones who struggle to obtain commercial funding. Make your Kiva dollars count by researching Kiva’s partner pages and loaning to those clients who are receiving the full gambit of financial services they deserve.
Karl Baumgarten is serving as a Kiva Fellow working with the new field partner FUDECOSUR in San Isidro, Costa Rica
FUDECOSUR seeks to serve the rural poor of Southern Costa Rica by providing credit and capacity building programs. To view their currently fundraising loans, click here.