Does Microfinance Make $ense?
Experimental Approaches
IFC M&E
Conference
May 9, 2006
Jonathan Zinman
Dartmouth College
Plan for Talk
•
Evaluating Impacts of Microcredit Access Using Randomized Credit
Supply Decisions
– Design
– Implementations
– Some Results
•
Beyond Risk Assessment: Evaluating “Access” Interventions Broadly
Defined
– Other efficiency and strategy interventions
• Enforcement
• Pricing
• Other contract terms: (maturity, loan size)
– Savings takeup
• Product presentation (marketing, mental accounting)
• Product development (reminders)
• Distribution Channels (“impulse savings”)
•
Beyond Impact Evaluation: Experimentation and Innovation
– The importance of measuring why interventions (don’t) work
– The possibility of transforming organizations into learning laboratories
Evaluating Impacts of Microcredit Access
Using Randomized Credit Supply Decisions
Ongoing work with Dean Karlan (Yale)
Our Methodology:
1. Lender randomizes credit supply decisions:
o
o
o
o
2.
Randomized-control design: social science gold standard
Subject pool of marginal applicants (“grey area”)
Some in grey area randomly treated (“derationed”)
Remaining in grey area control group (“rationed”)
We follow-up with household and/or business surveys:
o
o
Measure investments, broadly defined
Measure impacts, broadly defined


On borrowing/credit access
On various measures of well-being
Measuring Impacts
Using Derationing
• Impact= the difference in an outcome of interest in
derationed and rationed groups:
– Examples of outcomes:
•
•
•
•
lender’s profits
applicant borrowing (do rationed get credit elsewhere?)
applicant revenues
applicant consumption smoothness
• NOT needed to measure impacts using this method:
– No baseline survey needed
– No perfect compliance with treatment assignment needed:
workable if some derationed borrowers get loans, or vice versa
• Can use statistical technique called “Intent to Treat” to measure
impacts based on remaining random variation
Measurement Strategy
Formally:
(1) Yi = a + bderationedi + driski + fmonthi + ei
– Y is an outcome from admin or survey data
– derationed is randomly assigned by Lender
– risk conditions the randomization (“reversal”)
probability on the Lender’s assessment of how close
to creditworthy
– month partials out aggregate shocks in the time
series
Derationing Implementations
• Completed in South African consumer loan
market
• Underway in Filipino microenterprise loan
market
• Planning in Peruvian microenterprise loan
market
Market Settings
• Microenterprise credit market in Metro
Manila
– For-profit lender
– Individual liability
– Partly secured
– Primarily small grocery/convenience stores
– No targeting
Market Settings
• Consumer loan market in South Africa
– For-profit lender regulated by Microfinance
Regulatory Council
– Unsecured
– Individual liability
– High-risk
– Short-term (4 months), fixed repayments
– Expensive (11.75% monthly, simple)
– Untargeted, “working poor” clientele
Implementation Details:
Engineering Randomness
• South Africa: derationing by random
reversal (or not) of rejections in grey area
• Metro Manila: derationing via
implementation of new credit scoring
model with random component in grey
area
What’s in it for the Lenders?
• Improve profitability by careful identification of
the profitability frontier
– What does the marginal profitable/break-even
applicant look like
– “Pilot approach”
• Systematic and gradual changes
• Improve efficiency by process innovation
– Introduction of credit scoring
– Experimentation and the learning organization
• Democratization of approach used by sophisticated firms
• ICIC, Green Bank
Preliminary Results from
South African Implementation
• Derationing does increase borrowing over the 612 months following the experiment
• Some positive impacts 6-12 months out:
– Derationed households have less hunger
– Derationed households more likely to maintain formal
employment
• No negative impacts on households
– But power issues: small sample, so imprecise
estimation of null effects
• Derationed loans did have substantially worse
repayment.
– Profitability?
Beyond Risk Assessment:
Access Broadly Defined
Several other aspects of financial product
delivery affect access:
• Loan pricing: targeted groups may have
different takeup elasticities
– Dehijia et al vs. Karlan-Zinman
• Maturity & loan amount elasticities may
dwarf price elasticities for constrained
borrowers
– Karlan-Zinman; Attanasio et al
Access Broadly Defined
• Efficiency-Sustainability-Access nexus:
– Risk assessment (credit scoring)
– Enforcement & monitoring experiment in Peru
(Karlan, Mullainathan,and Zinman)
Access Broadly Defined: Savings
• Do consumers have difficulty saving?
– Self-control; Household control
– Other motivation and follow-through problems
• Then savings takeup decision critical: what
drives it?
– Product presentation:
• Mental accounting (KMZ puzzles experiment)
• Marketing and framing a la BKMSZ on loans
– Product features (reminders, SMART, SEED)
– Distribution channels: “Impulse Savings”
Beyond Evaluation: Why?
• Interventions: how do we know what to try
in the first place?
– Intuition
– Theory
– Anecdata
– Past Evaluations
– Presence or absence underlying market
failures interventions are designed to solve
Beyond Evaluation: Why?
• Scientific evidence on empirical relevance of
specific market failures also rare
• Important to build into evaluations,
experimentation
• Example: measuring adverse selection and
moral hazard
– Most important theoretical motivations for microcredit
– Little clean evidence on importance of either friction
Beyond Evaluation:
Identifying Market Failures
• Karlan-Zinman pricing experiment in South
Africa (2005a, 2005b)
– Derive profit-maximizing interest rate by randomizing
interest rates
• This requires one dimension of interest rate variation
– Also measure why optimal interest rate is where it is
• Demand elasticities
• Repayment elasticities due to separate effects of adverse
selection and moral hazard
• Requires three dimensions of interest rate variation
Why invest in the why of
interventions?
• Policy
– E.g.: adverse selection and moral hazard
have different remedies
• Practice:
– Investments in screening?
– Investments in enforcement?
• Design of future interventions
– Ongoing experimentation as process
innovation
Experimentation &
the Learning Organization:
A Virtuous Cycle
Experiment
Evaluate
Innovate