Vijay Mahajan

1
Research in Microfinance A Practitioners
Perspective

• Vijay Mahajan
• Founder and CEO, BASIX Social Enterprise Group
• Chair, Excom, CGAP
• At CERMis 5th Birthday,
• 18th March 2013, Brussels

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Outline

• (Why am I here?) - How research helped the
  design and evolution of BASIX.
• Microfinance is closer to engineering than
  science the consequences of this
• Has research served microfinance well? Comparing
  practitioners priorities with cited research
  papers
• Some glaring acts of omission and commission by
  researchers.
• What can be done to improve things?

3
Some Aphorisms We Believe In

• Nothing is as practical as a good theory Kurt
  Lewin
• If something is wrong in theory, it will
  definitely be wrong in practice Robert McNamara

4
How research helped the design of BASIX,
established 1996...1

• We understood from the writings of the Ohio
  School (Dale Adams, Richard Meyer, Claudio
  Gonsalvez-Vega) the perils of old style rural
  credit, and from Jacob Yaron (1992) that our
  subsidy dependence index should be negative or
  zero.
• Marguerite Robinson (1995) showed the importance
  of savings and how to mobilise them. We
  therefore applied for a banking license at birth!
  Got it five years later and till then worked only
  as non-deposit taking micro-credit lender.
• We understood from Karla Hoff and Joseph E.
  Stiglitz (1993) that screening -selection of
  the right borrower was only one-third of the
  problem incentives to use the loan well, and
  enforcement of the loan contracts was equally
  important.

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How research helped the design of BASIX,
established 1996...2

• Prabhu Ghate and Arindam Dasgupta of the ADB
  (1992) in their book on Informal Finance in Asia,
  educated us about this complex and pervasive
  competition. We decided to be wary of them.
• Clive Bell and TN Srinivasan (1989) and Kailas
  Sarap (1992) showed the importance of
  intermediaries in agricultural credit. We decided
  to use them as a channel!
• Patten, Richard H. and Jay K. Rosengard, (1991)
  Progress With Profits on Bank Rakyat Indonesias
  Unit Desas gave many lessons on designing
  operating and incentive systems for rural credit.
• David Hulme and Paul Mosley, Finance Against
  Poverty (1996) clearly showed the perils of
  credit for the very poor. So we added on a
  livelihood support strategy through a
  non-profit affiliate Indian Grameen Services
  since inception in 1996.

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How BASIX interaction with scholars and
researchers has benefited both sides...1

• Malcolm Harper, one the worlds prolific scholars
  on microfinance and microenterprise development
  was Chair of BASIX Board for 10 years. He has
  written several books on the subject and slowly
  moved from a minimalist credit to savings-first
  to a livelihood approach.
• MS Sriram, one of Indias foremost researchers in
  microfinance, worked with BASIX for two years
  on sabbatical from IIM, Ahmedabad (IIMA). His
  publishes on rural finance and microfinance.
• Sankar Datta, one of Indias foremost researchers
  in livelihood s, worked with us from 1997 to
  2011 and set up The Livelihood School and
  published a number of papers.
• Shamika Ravi of the ISB, Hyderabad has studied
  our KBS Bank for savings behaviour and then
  served on our Banks Board. She published
  Savings Lead to Improved Borrowing Empirical
  Analysis of Rural Indian Households.
  http//ssrn.com/abstract986882
• Somnath Ghosh of IIM Indore/ MDI Gurgaon serves
  on the Boards of the BASIX Bank as well as The
  Livelihood School and Runa Sarkar of IIM Calcutta
  serves on the Board of CTRAN and BASIX
  Consulting.

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How BASIX interaction with scholars and
researchers has benefited both sides...2

• The founding research for BASIX by Vijay Mahajan
  and Bharti Gupta Ramola resulted in a publication
  in the Journal of International Development
  Vol8, No.2, 211-224 (1996), Financial Services
  for the Poor and Women Access and
  Sustainability.
• Mahajan published Employment and Unemployment in
  Andhra Pradesh with S. Mahendra Dev, Economic
  and Political Weekly , Vol. 38, No. 12/13 (Mar.
  22 - Apr. 4, 2003),
• Mahajan argued in favour of a paradigm shift
  From Microcredit to Livelihood Finance in
  Economic and Political Weekly , Vol. 40, No. 41,
  (Oct 2005).
• Braja Mishra of The Livelihood School published
  in Enterprise Development Microfinance Volume
  19, No 4, Oct 2008, a case on BASIX work with
  PepsiCo potato cultivation by farmers in
  Jharkhand.
• BASIX work in health insurance led Vijay Mahajan
  to be a co-author of Financing health care for
  all challenges and opportunities published in
  The Lancet 2011 377 66879
• Mahajan and Vasumathis article in An Investment
  Sourcebook on Agricultural Innovation Systems The
  World Bank (2012)

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How BASIX interaction with scholars and
researchers has benefited both sides...3

1. Tom Dichter carried out an institutional review
   of BASIX in 2001 and later published a Yale case
   study on BASIX in 2007.
2. Bhagwan Chowdhry of UCLA/ISB, Hyderabad published
   Monsoon Hedging Economic and Political Weekly,
   August 21, 2004, inspired by the rainfall index
   insurance offered by BASIX.
3. Sanjay Sinha of M-CRIL and Frances Sinha of EDA
   Rural Systems have carried out a number of
   studies on BASIX which led to a better
   understanding of sustainability, and social
   performance.
4. An Ivey Case no 9B11M010 on BASIX PepisCo potato
   farming published by Gita Bajaj and Neelu Bhullar
   of MDI, Gurgaon.
5. Pastakia has studied BASIX work in promoting
   livelihoods in the dairy sector in the Journal of
   Entrepreneurship, 2012
6. Malcolm Harper, Iyer and Rosser (2011) published
   a whole book on BASIX Whose Sustainability
   Counts BASIXs Long March to Livelihood
   Promotion. Kumarian Press, USA.

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Microfinance is closer to Engineering than
Science - whats the difference?

• Hard sciences progress by the spiral of
  falsification
• Engineering progresses by the spiral of
  working models

Null Hypothesis
Experiment
Observation
Null Hypothesis falsified
New Null Hypothesis
Theoretical understanding
Pilot Testing
Operating Model
Scale Up after improvements
Practice feeds Theory
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Microfinance is engineering because its focus
is solving a problem poverty

• This was based on a theory from development
  economics that access to capital (from
  1975-2000 only credit later, a wider set of
  financial services) can lead to increased income
  and reduce poverty.
• The rest of the effort was to find the right
  model by which credit could be given to
  households.
• Efficiency parameters were identified early on
  operating cost and loan loss.
• Effectiveness initially was seen in terms of
  outreach

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Microfinance is engineering because its focus
is solving a problem poverty

• This was based on a theory from development
  economics that access to capital (from
  1975-2000 only credit later, a wider set of
  financial services) can lead to increased income
  and reduce poverty.
• The rest of the effort was to find the right
  model by which credit could be given to
  households.
• Efficiency parameters were identified early on
  operating cost and loan loss.
• Effectiveness initially was seen in terms of
  outreach

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The founding theory of microfinance was weak
how?

• Access to capital did not always lead to
  increased income (because of poor training,
  missing input-output linkages, adverse markets,
  risks, and so on).
• Increased income of a household did not always
  reduce poverty cashflows were frittered away.
• The importance of other financial services
  savings, insurance, payments, etc. became
  clearer.
• Efficiency parameters - lower operating costs and
  lower loan loss rates turned out to have
  trade-offs.
• Effectiveness was not just outreach but positive
  impact on poor households and sustainability of
  the provider institutions a dichotomy by
  itself.

13
The theory of microfinance was weak but did
it get any help from research?

• Not much most insights came from reflective
  practitioners and close associates /consultants
  not from scholars. Grameen Bank, Bangladesh
  visits BRI Indonesias Unit Desa BAAC,
  Thailand Boulder Courses and Basix Quarterly
  Reviews offered lessons to hundreds of early
  practitioners.
• Most early writing on microfinance was
  explanatory how joint liability groups works
  for credit (Stiglitz, 1990 Bannerjee and Besley,
  1994 Besley and Coate, 1995 Sharma and Zeller,
  1997). Likewise, other financial services
  savings (M. Robinson, 1990) insurance (e.g.
  Townsend, 1992) also focussed on how JLGs
  worked.

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The theory of microfinance was weak but did
it get any help from research?

• There were some notable exceptions Hulme and
  Mosley (1996) warned against the credit fix in
  Finance Against Poverty (Routledge, Chapman
  Hall, Inc.)
• Mahajan and Ramola, (Journal of International
  Development,1996) showed the trade-off between
  access and sustainability in a World Bank study.

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How the microfinance field has evolved in practice

• Slide taken from a presentation by Tilman
  Ehrbeck, CEO, CGAP, 2013.

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How the field of microfinance research has
evolved... theory trailed practice
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Sharing Lessons for Policy Matters Example -
Countries with Interest Rate Ceilings (23 vs 7)
had Low Access to Microfinance (5 vs 20)
Number of microfinance borrowers shown as
percentage of population living on less than
US 2 per day
Source CGAP Focus Note 2004 The Impact of
Interest Rate Ceilings on Microfinance
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Some acts of omission by microfinance
research

• One of the early assertions of theory was that
  interest rate caps on micro-credit will only
  squeeze supply (supported by data, e.g. CGAP
  Focus Note 2005).
• But the related assertion that competition will
  bring down interest rates has not been borne
  out.. No work has been done to explain this,
• Over USD 1.5 billion lost in AP alone. Do
  researchers not have a responsibility to study
  the impact of this on the poor of AP and on the
  industry?
• Effect of insurance on reduction in loan defaults
• Effect of support services (training, extension,
  market linkages) on loan default rates.

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Some acts of commission by microfinance
research

• The impact of the study of the impact of
  microfinance on poor households based on research
  techniques like randomised control trials (RCTs)
  has been far out of proportion than the views of
  hundreds of practitioners.
• The results of the early (imperfect?) studies
  were amplified by antagonists of microfinance and
  mixed with the heady dose of allegations of
  malpractice from over-lending to coercive
  recoveries to abetting suicides
• This created a justification for the actions of
  the Government of Andhra Pradesh to ruin a
  whole sector built over 15 years of painstaking
  work. AP today has 10 million defaulters and 120
  pa loans from moneylenders.
• Recent corrections in methodology and tone may be
  too late.
• --------------------------------------
• For example the Impact Study of Spandana by
  Banerjee, Duflo et al (2009) was unable to
  measure effects after 15-24 months due to
  problems with control, yet most effects of
  microfinance begin to have effect after two or
  three years.

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How Practitioners Use Microfinance Research
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How Practitioners Use Microfinance Research

• This is the cover of a recent CGAP publication,
  which has surveyed the literature on randomised
  control studies in microfinance.
• It shows that of the 12 RCTs studies reviewed on
  microfinance, all but one show the MF has a
  positive impact (dark means high correlation,
  and light means some correlation).
• All services have a positive impact, except for
  consumption credit, for which the evidence is
  mixed.

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The way forward

• We need research at all three levels micro
  (households, products, methodologies) meso
  (provider institutions, livelihood eco-systems)
  and the macro (full microfinance industry) level.
  At present focus is mainly on the micro level.
• The use of economic theory and statistical
  techniques to study microfinance rest on the
  pretence of knowledge (Hayek, 1989, Nobel
  lecture). The field requires other disciplines -
  anthropology, sociology, social psychology and
  even philosophy.

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The way forward for microfinance research

• Now that even Esther Duflos has discovered the
  power of hope (watch http//www.youtube.com/wat
  ch?vQxKdc8snnlw Duflo talking about the Lack of
  Hope and the Persistence of Poverty )
• techniques like
• Positive psychology (Seligman, Learned Optimism,
  1991)
• Appreciative enquiry method, (Stowell and West.
  1991) where they talk of discover, dream, design,
  and deliver
• Rational Reconstruction of Society(James
  Coleman, 1992) and the
• Positive Organisation School (Cameron, Dutton and
  Quinn, 2003)
• need to be used for more useful and meaningful
  research.

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Thank You

• vijaymahajan_at_basixindia.com