David Roodman's Microfinance Open Book Blog

 

Posts in: 6. Development as Poverty Reduction

 

Chapter 6 Revised

March 23rd, 2011

Posted by Tags: , ,

A revised chapter 6 (.docx and .pdf) is up.

For me, the most interesting thing to come out of my editing was a greater appreciation of the implications of Dean Karlan and Jonathan Zinman’s study of “cash lending” in South Africa. In that study, they pioneered the methodology they would later use in their 2009 study of the impacts of microcredit in Manila, in which some applicants for credit are randomly “unrejected.”

Unlike the Manila study and the other randomized microcredit impact study of 2009, the South Africa study found that credit reduced poverty. Here are the two things I came to understand, or understand better:

  1. The effective interest rate on the loans in question was an astonishing 586%/year, compounded. The loans were repaid over four months, with monthly interest equal to 11.75% of the opening balance. Since the average balance was about half the opening balance, the monthly rate was more like 2 × 11.75% = 23.5%. Multiply that by 12 to get 282%/year.

    …or, more precisely, the loan balance was 100% of the original amount for the first month, 75% for the second, 50% for the third, and 25% for the fourth. The average of those four numbers is 62.5%, so the average balance over the four months was 62.5% of the opening balance, not 50%, and the effective rate was 11.75%/62.5% = 18.8%/month or 18.8% × 12 = 225.6%/year.

    If you do the math properly (use Excel’s IRR() function on a disbursement of +1000 and four payments of –367.5), the rate with compounding is 586%. (On the interpretation of such monstrous numbers see Does Compartamos Charge 195% Interest? and Reflections on Transparency.

    What is remarkable is that people came out ahead on average despite paying such a high rate.

  2. The key benefit of the loans lay in helping a subgroup of people get or retain jobs, not start microbusinesses. As I write in the text, citing an e-mail from Dean Karlan, “They might use the loans to buy required uniforms, or sample kits for sales work, or fix or buy a vehicle to get to work.”

Something I already appreciated, which is worth keeping in mind as you cast your mind over this study, is that subjects had a daily per-capita income of $6.50, using a purchasing power parity exchange rate of 3.87 rand/dollar. So they were better off than the people usually imagined as targets for microcredit.

Comment »

 

Chapter 6! Development as Proven Poverty Reduction

November 20th, 2009

Posted by Tags: ,

I have just posted a draft of chapter 6 (.doc and .pdf). [Update: comments from Nancy Birdsall and Eben Lazarus incorporated.] More than any other so far, this draft incorporates text from this “open book” blog, forging a richer link between the two media. By the same token, regular readers of this blog will find less new in the chapter.

The subject of the chapter is what we should conclude from the academic literature on the impacts of microfinance.

I posted a draft of chapter 7 back in September. So now I have done 1–7. As always, I welcome your comments.

Here’s the conclusion:

I draw two main lessons from this tour of the evidence. First, poor people are diverse, and so are the impacts of microcredit upon them. Thus, microcredit undoubtedly helps many people. A distinction that appears particularly important in the latest results is between entrepreneurs, who are a minority, and everyone else. More controversially, I conclude that there is no convincing evidence beyond the widespread impression that microcredit raises incomes on average. That Holy Grail, though many have sought it and many have thought if found, still eludes us. It is entirely possible that for a majority of microfinance users do not invest in microenterprises, but instead use the loans to smooth spending on necessities, as we saw in chapter 2. That would show up as lower spending (net of interest payments)—and getting to eat every day. So far, the randomized studies have not checked this possibility.
Read More…

4 Comments »

 
 |