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February 13, 2010

Prediction is very difficult, especially about the future—Niels Bohr

Posted by David Roodman in Uncategorized Tags: , ,

A common phenomenon that has emerged as a significant impediment to the smooth functioning of Microcredit Operations (MCOs) is that of overlapping. Unhealthy competition among microfinance institutions (MFIs) in luring one another’s beneficiaries has been retarding the pace of development of MCOs.
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Rapid growth of MFIs over the past decade can be said to be the single major reason of overlapping in the country. Mushroom growth of MFIs in the neighboring district towns in and around greater Dhaka has pushed the problem of overlapping in Dhaka region almost to the extent of a crisis situation. Khulna, Rangpur, Dinajpur and Bogra are also following the footsteps of Dhaka and the situation is worsening day by day.
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Needless to say, the problem of overlapping is intense which, if not put to a hold immediately, would put the entire MCOs of the country into serious trouble.

That’s Md. Hasan Khaled writing in the apparently short-lived journal of the PKSF, a World Bank–financed institution that lends wholesale to microcreditors in Bangladesh and performs some oversight of them.

He wrote that in 1998.

(For context, see this and this.)

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February 12, 2010

The Quantum Mechanics of Multiple Borrowing

Posted by David Roodman in Uncategorized Tags: , ,

In the strange world of quantum mechanics, a thing is everywhere until you look at it. I don’t mean that it could be anywhere. It is everywhere. An electron in your fingernail possesses a probability distribution that represents how likely it is to be in any given place once observed. Nearly all the probability, but not quite all, is concentrated in a tiny volume around some atomic nucleus. Observing an electron with laboratory tools localizes it. Its probability distribution collapses to a singularity. In the universe as we understand it, observation does not merely remove uncertainty. It changes that which is observed.

So it is with lending. Lenders carry outstanding loans on their books as assets. They discount the loans according to certain norms and rules to reflect the likelihood that not all will be repaid. But no ones really knows the value of an IOU until it comes time to collect. Things are particularly uncertain when several lenders are making loans to the same people at the same time (multiple borrowing). The borrowers may being using one creditor’s loans to pay off another’s, unable to ever climb out of debt. Yet each lender carries its loans at face value. Things are murkier still when lenders do not (or cannot) share information about borrowers, such as through a credit bureau. Then no lender knows how much each borrower owes.
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February 9, 2010

Grameen Bank, Which Pioneered Loans For the Poor, Has Hit a Repayment Snag

Posted by David Roodman in Uncategorized Tags: , ,

As I blogged before, one of the last articles Daniel Pearl wrote for the Wall Street Journal before he was abducted and murdered—coauthored with Michael Phillips—exposed financial woes at the Grameen Bank. Appearing on page 1 on November 27, 2001, under the headline Grameen Bank, Which Pioneered Loans For the Poor, Has Hit a Repayment Snag, the piece described how some Bangladeshis were juggling loans from several microcreditors at once, how others had banded together to protest and resist the Bank’s policies, and how the Bank’s loose accounting standards and slow disclosure hid a decline in loan repayments.

This post shares new data that suggest that history is repeating itself in important ways. The Grameen Bank, indeed all big microcreditors in Bangladesh, may be finding it harder to collect on their loans. As far as the evidence goes, there has been no epidemic of default. But the combination of years of rapid growth and accelerating declines in key indicators of delinquency are so reminiscent of the lead-up to the global financial crisis that the broad implications hardly need explaining. A partial meltdown in the Mecca of microcredit would not sow the same economic destruction—microfinance is not the heart of Bangladesh’s economy in Schumpeter’s sense—but it could have lasting implications for microcredit worldwide.
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January 17, 2010

Eavesdropping on a Microfinance Conference

Posted by David Roodman in Uncategorized Tags: , ,

Couldn’t make it to the annual research conference hosted by the Centre for Microfinance (CMF) and the College of Agricultural Banking (CAB) in Pune, India, last week? Neither could I. Not invited? Actually neither was I. But as far as I can tell, CMF is the brightest spot on earth for quality research on financial services for the poor. They are worth watching. I suppose this post is the next best thing to being there. Better, in jet lag and carbon terms.

Abhijit Banerjee presented the CMF-executed Spandana RCT. I embed the slides here less for the content, which is familiar, than the form. Someone at the Poverty Action Lab makes slides like I do, and probably because of similar influences, in my case Edward Tufte and Andy Goodman.

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September 15, 2009

Is Credit Irresistable?

Posted by David Roodman in Uncategorized Tags: ,

A basic point I feel I have not pondered enough is that people who are financially cornered may borrow unwisely—at least sometimes. A Microfinance Insights article by Lilian Simbaqueba and Vitalie Bumacov of the Colombian credit-scoring company LiSim made me think of this now:

With limited access to mainstream credit services, the availability of an opportunity to borrow is overwhelmingly attractive to microcredit borrowers. A “good” opportunity, meaning availability of the right amount of loan at the right time, is a driving factor for microfinance clients to borrow, often without deliberate consideration of the potential risks involved.
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Even in a mature market like Peru, microfinance institutions have to “think for both” themselves and their clients. Easy availability of credit offers a bigger temptation for clients to borrow simultaneously from different sources. Competition among credit institutions may ease the approval or renewal of policies. If the MFI is not aware that the borrower has other current loans, it cannot asses the over-indebtedness of the applicant and, by consequence, can disburse a “low-risk” credit, which in reality is very risky for the client and for the institution. Microborrowers tend to hide this information while MFIs strive to obtain it. In the absence of a credit bureau, this task is nearly impossible.

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August 13, 2009

Wall Street Journal Also Raises Microcredit Bubble Fears

Posted by David Roodman in Uncategorized Tags: , ,

In an article that was published in tomorrow’s(!) Wall Street Journal, reporter Ketaki Gokhale emphatically asserts that “a credit crisis is brewing in ‘microfinance’”:

Here in Ramanagaram, a silk-making city in southern India, Zahreen Taj noticed the change. Suddenly, in the shantytown where she lives, lots of people wanted to loan her money. She borrowed $125 to invest in her husband’s vegetable cart. Then she borrowed more.

“I took from one bank to pay the previous one. And I did it again,” says Ms. Taj, 46 years old. In four years, she took a total of four loans from two microlenders in progressively larger amounts — two for $209, another for $293, and then $356.

At the height of her borrowing binge, she says, she bought a television set. The arrival of microfinance “increased our desires for things we didn’t have,” Ms. Taj says. “We all have dreams.”

Today her house is bare except for a floor mat and a pile of kitchen utensils. By selling her TV, appliances and jewelry, she cut her debt to $94. That’s equal to about a fourth of her annual income.

Interestingly, one inspiration for my own post on this subject was another dispatch from India.
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August 5, 2009

My Brain Made Me Do It (Again)

Posted by David Roodman in Uncategorized Tags: , , , ,

Piggy bank from cover of Mike Dixon, ippr, Rethinking Financial CapabilityA month ago I blogged some reflections on transparency. Transparency is the motherhood and apple pie of microfinance, I wrote, if not in those words. Microfinance institutions (MFIs) should make it easy for clients to understand the full costs of services, not hide fees in fine print or no print at all. And they shouldn’t introduce charges through the back door such as by overcharging for life insurance bundled with loans. But accepting the necessity for transparency, I wondered about the means. Are annualized percentage rates (APRs) the best way to summarize expenses? There, my reflections stopped.

Writing about this for the book just now forced me to push the analysis farther. I realized that transparency is in a way a distorting metaphor for disclosure. After all, pages of fine print are “transparent”: all the information is right there. Accepting that MFIs should give clients a clear window onto costs, there remains the question of how to describe those costs. The window must be framed. One of the most important ongoing developments in economics is the subfield called behavioral economics. The famous duo of Daniel Kahneman and Amos Tversky demonstrated through experiments that how information is presented (framed) often matters at least as much as the information itself for how human beings act. I’ll show you an example below.
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July 27, 2009

If Microcredit Had Bubbles, Would We Know?

Posted by David Roodman in Uncategorized Tags: ,

Think of microcredit as you read John Kenneth Galbraith, who wrote that financial euphorias share common denominators:

This is of no slight practical importance; recognizing them, the sensible person or institution is or should be warned. And perhaps some will be. But…the chances are not great, for built into the speculative episode is the euphoria, the mass escape from reality, that excludes any serious contemplation of the true nature of what is taking place.
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Uniformly in all such events there is the thought that there is something new in the world. It can, as we shall see, be one of the many things. In the 17th century it was the arrival of tulips in Western Europe…Later it was the seeming wonders of the joint-stock company, now called the corporation…

In all speculative episodes there is always an element of pride in discovering what is seemingly new and greatly rewarding in the way of financial instrument or investment opportunity. The individual or institution that does so is thought to be wonderfully ahead of the mob. This insight is then confirmed as others rush to exploit their own, only slightly later vision…

As to new financial instruments, however, experience establishes a firm rule…that financial operations do not lend themselves to innovation. What is recurrently so described and celebrated is, without exception, a small variation on an established design, one that owes its distinctive character to the aforementioned brevity of the financial memory…All financial innovation involves, in one form or another, the creation of debt secured in great or less adequacy by real assets…All crises have involved debt that, in one fashion or another, has become dangerously out of scale in relation to the underlying means of payment.

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July 16, 2009

Indicators of (Dis)empowerment: Interest Rates Overrated? Repayment Rates Underrated?

Posted by David Roodman in Uncategorized Tags: , ,

In my writing now, I am sorting through lines of thought on how microlender behavior enhances or reduces the freedom of poor borrowers—freedom in Amartya Sen’s definition, as agency in one’s own life. The oldest strand here is that of “usury,” the idea that charging interest above some level (maybe zero) is unjust, akin to the full-bellied selling food to the starving for a profit. As you probably know, the Compartamos IPO revived within the microfinance world the ancient debate over usury. Compartamos borrowers paid 100%/year while the Compartamos founders earned millions of dollars—and the scorn of Muhammad Yunus. Probably most Compartamos critics accept that the poor should have to pay more for credit than the rich—lending in small amounts costs more per dollar—but see 100% as beyond the pale. Fortunately, a recent CGAP report finds that such rates are exceptional. Fears about high interest rates may be overwrought.

It occurred to me that another oft-cited microcredit rate resembles the interest rate more than is usually appreciated, and perhaps ought to be worried about more: the repayment rate. Like the interest rate the on-time repayment rate in microcredit exceeds rich-world norms, enough to startle newcomers. Among 718 microfinance institutions (MFIs) that voluntarily supplied relevant data to the MIX Market for 2007, the median PAR 30 rate was 3.4%. That is: for half the MFIs, repayments overdue at least 30 days constituted 3.4% or less of outstanding loan balances. 85% reported PAR 30 below 10% of outstanding credit. This graph tabulates the MFIs in that 85%:
Counts of MFIs by 2007 PAR 30
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June 18, 2009

The Dangers of Overlending in India

Posted by David Roodman in Uncategorized Tags:

Siddhartha Chowdri, ACCION International’s Country Manager for India, has posted a warning on the blog of the Center for Financial Inclusion about the dangers of overheated competition and growth in microcredit in India. Some people, he says, are borrowing too much, from too many microfinance institutions (MFIs). The resulting situation, as in Andhra Pradesh a few years ago, is politically combustible. If it ignites, attacks on the lenders can force them to withdraw, cutting off access to credit:

So far MFIs are mostly blaming the political elements and the clients. Few understand (or admit) that in fact this is a risk of the business that we are in and that in many ways the MFIs are to blame.

This is a scary moment for the industry with its root cause being insufficient systems for tracking client indebtedness, unfettered competition, irrational growth expectations, and little analysis and understanding of the client’s ability to repay.

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