Jonathan Morduch

Financial Performance and Outreach: A Global Analysis of Leading Microbanks

Microfinance contracts have proven able to secure high rates of loan repayment in the face of limited liability and information asymmetries, but high repayment rates have not translated easily into profits for most microbanks. Profitability, though, is at the heart of the promise that microfinance can deliver poverty reduction while not relying on ongoing subsidy. The authors examine why this promise remains unmet for most institutions. Using a data set with unusually high quality financial information on 124 institutions in 49 countries, they explore the patterns of profitability, loan repayment, and cost reduction. The authors find that institutional design and orientation matter substantially. Lenders that do not use group-based methods to overcome incentive problems experience weaker portfolio quality and lower profit rates when interest rates are raised substantially. For these individual-based lenders, one key to achieving profitability is investing more heavily in staff costs-a finding consistent with the economics of information but contrary to the conventional wisdom that profitability is largely a function of minimizing cost.

The role of subsidies in microfinance: evidence from the Grameen Bank

The Grameen Bank of Bangladesh has been in the vanguard of the microfinance movement, showing the potential to alleviate poverty by providing credit to poor house- holds. Part of this success has been built on subsidies. In 1996, for example, total subsidies evaluated at the economic opportunity cost of capital amounted to about US

Microfinance Beyond Group Lending

26-30 million. The evidence helps to explain why institutions like Grameen have not just sprung up on their own as private commercial ventures, and it underscores the value of openly addressing the costs and benefits of subsidization. The paper also describes recent difficulties in maintaining high repayment rates. q 1999 Elsevier Science B.V. All rights reserved.

Access to Finance

Microlending is growing in Eastern Europe, Russia and China as a flexible means of widening access to financial services, both to help alleviate poverty and to encourage private-sector activity. We describe mechanisms that allow these programmes to successfully penetrate new segments of credit markets. These features include direct monitoring, regular repayment schedules, and the use of non-refinancing threats. These mechanisms allow the programmes to generate high repayment rates from low-income borrowers without requiring collateral and without using group lending contracts that feature joint liability.

The Impact of Microcredit on the Poor in Bangladesh: Revisiting the Evidence

Expanding access to financial services holds the promise to help reduce poverty and spur economic development. But, as a practical matter, commercial banks have faced challenges expanding access to poor and low-income households in developing economies, and nonprofits have had limited reach. We review recent innovations that are improving the quantity and quality of financial access. They are taking possibilities well beyond early models centered on providing “microcredit” for small business investment. We focus on new credit mechanisms and devices that help households manage cash flows, save, and cope with risk. Our eye is on contract designs, product innovations, regulatory policy, and ultimately economic and social impacts. We relate the innovations and empirical evidence to theoretical ideas, drawing links in particular to new work in behavioral economics and to randomized evaluation methods.

Microfinance: where do we stand?

Abstract We replicate and reanalyse the most influential study of microcredit impacts (M. M. Pitt & S. R. Khandker’s, ‘The impact of group-based credit on poor households in Bangladesh: Does the gender of participants matter?’, published in the Journal of Political Economy, 106, 1998). That study was celebrated for showing that microcredit reduces poverty, a much hoped for possibility (though one not confirmed by recent randomised controlled trials). We show that the original results on poverty reduction disappear after dropping outliers, or when using a robust linear estimator. Using a new program for estimation of mixed process maximum likelihood models, we show how assumptions critical for the original analysis, such as error normality, are contradicted by the data. We conclude that questions about impact cannot be answered in these data.

Politics, Growth, and Inequality in Rural China: Does it Pay to Join the Party?

Economies are built upon people buying and selling, lending and borrowing. The beauty of the market is that, when it works well, sellers are matched to buyers and lenders are matched to worthy borrowers. But when the market does not work well, goods go unsold and promising investment projects go unfunded. We understand why markets fail - the economics of information provides rigorous underpinnings for why credit markets, in particular, are so problematic.1 The challenge has been to move from diagnosis to prescription. The challenge is particularly great in poorer regions, where individuals may have workable ideas and relevant experience but lack collateral. Even a £100 loan can make a difference to a small-scale shopkeeper or craftsperson in countries like Nepal or Uganda, but formal sector banks have steered clear, focusing instead on larger loans to better-established, wealthier clients.

Using mixture models to detect sex bias in health outcomes in Bangladesh

Economic reform is often constrained because rank-and-file bureaucrats responsible for implementation have vested interests that oppose change. Drawing on an unusual longitudinal survey data set for a representative rural county in northern China, we show an alternative, positive scenario consistent with the presence of an implicit, performance-based incentive contract that ties the household incomes of local officials to market liberalization, increases in consumer demand, and the provision of local public goods. The mechanisms appear to be tolerated as the fruits of growth are shared fairly equitably, thus allowing implementation of a politically and economically self-reinforcing reform process.

Decentralization, Externalities, and Efficiency

Abstract Many interesting economic hypotheses entail differences in behaviors of groups within a population, but analyses of pooled samples shed only partial light on underlying segmentations. Finite mixture models are considered as an alternative to methods based on pooling. Robustness checks using t -regressions and a Bayesian analogue to the likelihood ratio test for model evaluation are developed. The methodology is used to investigate pro-son bias in child health outcomes in Bangladesh. While regression analysis on the entire sample appears to wash out evidence of bias, the mixture models reveal systematic girl-boy differences in health outcomes.

Microfinance tradeoffs : regulation, competition, and financing

In the competitive model, externalities lead to inefficiencies, and inefficiencies increase with the size of externalities. However, as argued by Coase, these problems may be mitigated in a decentralized system through voluntary coordination. We show how coordination is limited by the combination of two factors: respect for individual autonomy and the existence of private information. Together they imply that efficient outcomes can only be achieved through coordination when external effects are relatively large. Moreover, there are instances in which coordination cannot yield any improvement at all, despite common knowledge that social gains from agreement exist. This occurs when external effects are relatively small, and this may help to explain why coordination is so seldom observed in practice. When improvements are possible, we describe how simple subsidies can be used to implement second-best solutions and explain why standard solutions, such as Pigovian taxes, cannot be used. Possible extensions to issues arising in the structure of research joint ventures, assumptions in the endogenous growth literature, and the location of environmental hazards are also described.