Financial services—savings, credit, insurance, money transfers—are vital yet intangible economic infrastructure. CGD’s work on financial services analyzes how to strengthen, deepen, and broaden financial systems in poor countries to maximize the benefits for poor households and improve development prospects.
Financial services help people manage some of life’s great challenges: investing in education, softening the financial trauma of illness and death, attaining ownership of a safe home. On a macroeconomic scale, they channel investment and diversify risk. Building a strong and inclusive financial sector is an essential part of the development process.
Financial services—savings, credit, insurance, money transfers—are vital yet intangible economic infrastructure. CGD’s work on financial services analyzes how to strengthen, deepen, and broaden financial systems in poor countries to maximize the benefits for poor households and improve development prospects.
Financial services help people manage some of life’s great challenges: investing in education, softening the financial trauma of illness and death, attaining ownership of a safe home. On a macroeconomic scale, they channel investment and diversify risk. Building a strong and inclusive financial sector is an essential part of the development process.
Examples of CGD’s work in this area:
- CGD senior fellow Liliana Rojas-Suarez led a Task Force on Access to Financial Services that identified ten principles for financial-sector policymakers (national authorities, donors, private-sector participants, international financial institutions, and others) involved in the facilitation, regulation, and direct provision of financial services.
- The Provision of Banking Services in Latin America: Obstacles and Recommendations by Rojas-Suarez.
- David Roodman and Uzma Qureshi’s Microfinance as Business report asks how some microfinance institutions succeed in controlling costs, raising capital, and scaling up.
- David Roodman and Jonathan Morduch’s working paper, The Impact of Microcredit on the Poor in Bangladesh: Revisiting the Evidence, replicates and challenges the leading nonexperimental studies of the impacts of microcredit.
David Roodman's Open Book Blog
The Open Book Blog is an experiment in sharing the process of writing of a book about the history and impacts of microfinance. Roodman, a CGD research fellow, asks bottom-line questions about the benefits of microfinance and encourages readers to comment on draft chapters for a forthcoming book. He also shares useful sources that he and his readers uncover.
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My guest on this week’s show is David Roodman, a research fellow here at CGD who has spent the past year writing a book on microfinance. He has shared this experience online through his open book blog, posting chapter drafts, analyzing ongoing research in the field, and soliciting comments and suggestions. I ask David why he decided to write his book in such a public way, and what he’s learned over the last year.
David replies that when it comes to policy research, people write books for four reasons. “One is to help you think through a complicated process… Another is to provide a basis for shorter spin-off pieces… Another is to signal that you’re an expert about something. And then the last is, oh yeah, to write something for people to read.” David says blogging about the book-writing process has helped him to partially accomplish the first three goals even before the book is complete. It has also, somewhat unexpectedly he says, changed his writing style, something he discussed recently on the blog.
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This paper explores the impact of international financial integration on credit markets in Latin America. The overall effect is positive, but the foreign banks do tend to amplify the impact of foreign shocks on credit and interest rates. Important policy recommendations include ring-fencing mechanisms, early-warning systems, and the incorporation for agreements between domestic and foreign supervisors.
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This course explores the role of microfinance in economic development. It will discuss how poor people in poor countries use financial services such as credit and savings; the history and practice of delivering such services; what is known about their contribution to development; and how stories and statistical studies shape public perceptions of microfinance.
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The CGD Task Force on Access to Financial Services proposes 10 principles for financial-sector policymakers—including national authorities, donors, private-sector participants, international financial institutions, and others—on the facilitation, regulation, and direct provision of financial services.
-
CGD fellow David Roodman and Jonathan Morduch reexamine three landmark, but contradictory, evaluations of the impact of microcredit on poor households in Bangladesh. They replicate the studies’ statistical analysis and put an end to the controversy surrounding them by showing that all fail to rule out reverse causation. A positive association between microcredit and household spending, for example, may merely indicate that richer families borrow more. With these studies in doubt, solid academic evidence that microcredit reduces poverty is even scarcer than previously understood.
-
CGD senior fellow Liliana Rojas-Suarez argues that the recent sharp spike in food and oil prices, above the long term upward trend, threatens Latin America’s stability and is the result of excess global liquidity and the U.S. credit mess. She says the region must fight inflation now and, going forward, insist on a greater say in setting global financial rules.
Learn More
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Group liability--wherein individuals are both borrowers and guarantors of other client's loans--is often described as the key innovation that led to the explosion of microcredit. It is thought to create incentives for peers to screen, monitor and enforce each other's loans. But some argue that group liability actually discourages good clients from borrowing, jeopardizing growth and sustainability. In this working paper, CGD non-resident fellow Dean Karlan and his co-author discuss the results of a field experiment at a bank in the Philippines, where they randomly reassigned half of the existing group liability centers as individual liability centers. They find that converting group liability to individual liability, while keeping aspects of group lending like weekly repayments and common meeting place, does not affect the repayment rate, and actually attracts new clients. This paper is one in a series of six CGD working papers by Dean Karlan on various aspects of microfinance (Working Paper Nos. 106 –111).
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Policymakers often urge microfinance institutions to increase interest rates to eliminate reliance on subsidies. This makes sense if the poor will borrow regardless of interest rates: then micro lenders increase profitability without reducing the poor's access to credit. But there is little evidence as to whether this is actually true. In this working paper, CGD non-resident fellow and his co-author test the elasticity of demand for microcredit using field data from South Africa. They find that price sensitivity increased sharply when individuals were offered a rate above their prior loan's rate. They also found that loan size is far more responsive to changes in loan maturity than to changes in interest rates. This paper is one in a series of six CGD working papers by Dean Karlan on various aspects of microfinance (Working Paper Nos. 106 –111).
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Information asymmetries--which occur when one party to a transaction has more or better information than the other party--can cause inefficiency, over-investment, or poverty traps. Unfortunately, they are difficult to identify in practice. In this working paper, CGD non-resident fellow Dean Karlan and his co-author identify two kinds of information asymmetries: adverse selection (where sellers lack information) and moral hazard (where buyers or borrowers lack information). The authors randomize loan pricing using 58,000 direct mail offers along three dimensions: an initial "offer interest rate", the actual interest rate on the loan contract, and the interest rate on future loans. They find that 7% to 16% of default on loans is due to asymmetric information problems. This paper is one in a series of six CGD working papers by Dean Karlan on various aspects of microfinance (Working Paper Nos. 106 –111).
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Microfinance is generally credited with helping to alleviate poverty and improve the lives of the poor. But as microfinance institutions move beyond entrepreneurial credit to offering consumer loans, many practitioners and policymakers are skeptical about "unproductive" lending. In this working paper, CGD non-resident fellow Dean Karlan and his co-author examine the effects of expanding consumer credit using a field experiment in which some loan applicants who had been denied credit were randomly selected to be "unrejected" for a loan. They find that compared to those who did not receive credit, borrowers showed increased employment, reduced hunger and poverty, while also being profitable for the lender. This paper is one in a series of six CGD working papers by Dean Karlan on various aspects of microfinance (Working Paper Nos. 106-111).
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CGD fellow David Roodman and Jonathan Morduch reexamine three landmark, but contradictory, evaluations of the impact of microcredit on poor households in Bangladesh. They replicate the studies’ statistical analysis and put an end to the controversy surrounding them by showing that all fail to rule out reverse causation. A positive association between microcredit and household spending, for example, may merely indicate that richer families borrow more. With these studies in doubt, solid academic evidence that microcredit reduces poverty is even scarcer than previously understood.
-
This course explores the role of microfinance in economic development. It will discuss how poor people in poor countries use financial services such as credit and savings; the history and practice of delivering such services; what is known about their contribution to development; and how stories and statistical studies shape public perceptions of microfinance.
-
Microfinance is a widely celebrated strategy for helping poor people in the developing world. Leading microfinance institutions, including the Nobel Peace Prize-winning Grameen Bank, reach millions of clients. CGD research fellow David Roodman and Uzma Qureshi analyze why some microfinance institutions succeed in covering costs, earning returns, attracting capital, and scaling up. They conclude that financial imperatives can explain much about how microfinance products are designed, for example, the common emphasis on group lending to women. Thus the business acumen of microfinance innovators is underappreciated. But more rigorous study is needed to understand when and where these design choices help clients.
-
This paper explores the impact of international financial integration on credit markets in Latin America. The overall effect is positive, but the foreign banks do tend to amplify the impact of foreign shocks on credit and interest rates. Important policy recommendations include ring-fencing mechanisms, early-warning systems, and the incorporation for agreements between domestic and foreign supervisors.
-
The CGD Task Force on Access to Financial Services proposes 10 principles for financial-sector policymakers—including national authorities, donors, private-sector participants, international financial institutions, and others—on the facilitation, regulation, and direct provision of financial services.
-
My guest on this week’s show is David Roodman, a research fellow here at CGD who has spent the past year writing a book on microfinance. He has shared this experience online through his open book blog, posting chapter drafts, analyzing ongoing research in the field, and soliciting comments and suggestions. I ask David why he decided to write his book in such a public way, and what he’s learned over the last year.
David replies that when it comes to policy research, people write books for four reasons. “One is to help you think through a complicated process… Another is to provide a basis for shorter spin-off pieces… Another is to signal that you’re an expert about something. And then the last is, oh yeah, to write something for people to read.” David says blogging about the book-writing process has helped him to partially accomplish the first three goals even before the book is complete. It has also, somewhat unexpectedly he says, changed his writing style, something he discussed recently on the blog.
-
CGD senior fellow Liliana Rojas-Suarez argues that the recent sharp spike in food and oil prices, above the long term upward trend, threatens Latin America’s stability and is the result of excess global liquidity and the U.S. credit mess. She says the region must fight inflation now and, going forward, insist on a greater say in setting global financial rules.
Learn More
-
Information asymmetries--which occur when one party to a transaction has more or better information than the other party--can cause inefficiency, over-investment, or poverty traps. Unfortunately, they are difficult to identify in practice. In this working paper, CGD non-resident fellow Dean Karlan and his co-author identify two kinds of information asymmetries: adverse selection (where sellers lack information) and moral hazard (where buyers or borrowers lack information). The authors randomize loan pricing using 58,000 direct mail offers along three dimensions: an initial "offer interest rate", the actual interest rate on the loan contract, and the interest rate on future loans. They find that 7% to 16% of default on loans is due to asymmetric information problems. This paper is one in a series of six CGD working papers by Dean Karlan on various aspects of microfinance (Working Paper Nos. 106 –111).
-
Can one teach basic entrepreneurship skills? A growing number of microfinance organizations are trying, in the hopes of improving the livelihood of their clients and to further their mission of poverty alleviation. In this working paper, CGD non-resident fellow Dean Karlan and his co-author measure the impact of adding business training to a Peruvian group lending program for female microentrepreneurs. Their findings--that training leads to increased business knowledge, practices and revenues--are contrary to the presumption (on which the microfinance movement was largely based) that credit constraints alone, not skills, are the obstacle to the entrepreneurial poor. This paper is one in a series of six CGD working papers by Dean Karlan on various aspects of microfinance (Working Paper Nos. 106–111).
-
Group liability--wherein individuals are both borrowers and guarantors of other client's loans--is often described as the key innovation that led to the explosion of microcredit. It is thought to create incentives for peers to screen, monitor and enforce each other's loans. But some argue that group liability actually discourages good clients from borrowing, jeopardizing growth and sustainability. In this working paper, CGD non-resident fellow Dean Karlan and his co-author discuss the results of a field experiment at a bank in the Philippines, where they randomly reassigned half of the existing group liability centers as individual liability centers. They find that converting group liability to individual liability, while keeping aspects of group lending like weekly repayments and common meeting place, does not affect the repayment rate, and actually attracts new clients. This paper is one in a series of six CGD working papers by Dean Karlan on various aspects of microfinance (Working Paper Nos. 106 –111).
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William R. Cline, Senior Fellow William R. Cline is a senior fellow jointly at the Peter G. Peterson Institute for International Economics and the Center for Global Development. His research focuses on finance, capital flows, trade and development; currently he is investigating the differential impact of global warming on agriculture in rich and developing countries.
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Ricardo Hausmann, Non-Resident Fellow Ricardo Hausmann is Professor of the Practice of Economic Development at Harvard University's Kennedy School of Government. Previously, he served as the first Chief Economist of the Inter-American Development Bank (1994-2000), where he created the Research Department.
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Dean Karlan, Non-Resident Fellow Dean Karlan is an Assistant Professor of Economics at Yale University. Karlan is President of Innovations for Poverty Action and a research fellow of the M.I.T. Jameel Poverty Action Lab. His research focuses on microeconomic issues of poverty, specifically employing experimental methodologies to examine what works, what does not, and why.
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Guillermo Perry, Non-Resident Fellow Guillermo Perry was Chief Economist of the Latin America and Caribbean region of the World Bank from August 1, 1996 to September 30, 2007. Previous to joining the World Bank, Mr. Perry served his native country, Colombia, in various capacities: he was Minister of Finance and Public Credit (August 1994 - April 1996); Minister of Mining and Energy (1986 - 1988); Director of National Taxes (1974 - 1976); and Deputy Director of the Departamento Nacional de Planeación y Consejo Nacional de Política Económica CONPES, 1970. He was also a Member of the Constitutional Assembly (1991) and of the Senate of the Republic (1990). Perry currently teaches at Universidad de Los Andes and is a research associate at Fedesarrollo.
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Liliana Rojas-Suarez, Senior Fellow An expert on Latin America and on financial services and the development impact of global financial regulation, Liliana Rojas-Suarez combines Wall Street and multilateral development bank experience, having worked as chief economist for Latin America at Deutsche Bank, as principal economist at the Inter-American Development Bank, and in senior research roles at the IMF. Her commentary leads CGD’s extensive package of analysis on the development impact of the U.S. financial crisis.
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David Roodman, Research Fellow David Roodman has been architect and project manager of the Commitment to Development Index since the project's inception in 2002. He is writing a book on microfinance.
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Introduction to Microfinance for Development (Syllabus)
- Dec 7, 2009
This course explores the role of microfinance in economic development. It will discuss how poor people in poor countries use financial services such as credit and savings; the history and practice of delivering such services; what is known about their contribution to development; and how stories and statistical studies shape public perceptions of microfinance.
-
Policy Principles for Expanding Financial Access
- Sep 30, 2009
The CGD Task Force on Access to Financial Services proposes 10 principles for financial-sector policymakers—including national authorities, donors, private-sector participants, international financial institutions, and others—on the facilitation, regulation, and direct provision of financial services.
-
The Impact of Microcredit on the Poor in Bangladesh: Revisiting the Evidence - Working Paper 174
- Jun 18, 2009
CGD fellow David Roodman and Jonathan Morduch reexamine three landmark, but contradictory, evaluations of the impact of microcredit on poor households in Bangladesh. They replicate the studies’ statistical analysis and put an end to the controversy surrounding them by showing that all fail to rule out reverse causation. A positive association between microcredit and household spending, for example, may merely indicate that richer families borrow more. With these studies in doubt, solid academic evidence that microcredit reduces poverty is even scarcer than previously understood.
-
The Right Response in Latin America to Oil and Food Price Pressures: Fight Inflation Now!
- Aug 15, 2008
CGD senior fellow Liliana Rojas-Suarez argues that the recent sharp spike in food and oil prices, above the long term upward trend, threatens Latin America’s stability and is the result of excess global liquidity and the U.S. credit mess. She says the region must fight inflation now and, going forward, insist on a greater say in setting global financial rules.
Learn More
-
Group Versus Individual Liability: A Field Experiment in the Philippines - Working Paper 111, updated May 2009
- Jan 29, 2007
Group liability--wherein individuals are both borrowers and guarantors of other client's loans--is often described as the key innovation that led to the explosion of microcredit. It is thought to create incentives for peers to screen, monitor and enforce each other's loans. But some argue that group liability actually discourages good clients from borrowing, jeopardizing growth and sustainability. In this working paper, CGD non-resident fellow Dean Karlan and his co-author discuss the results of a field experiment at a bank in the Philippines, where they randomly reassigned half of the existing group liability centers as individual liability centers. They find that converting group liability to individual liability, while keeping aspects of group lending like weekly repayments and common meeting place, does not affect the repayment rate, and actually attracts new clients. This paper is one in a series of six CGD working papers by Dean Karlan on various aspects of microfinance (Working Paper Nos. 106 –111).
-
Credit Elasticities in Less-Developed Economies: Implications for Microcredit - Working Paper 110
- Jan 29, 2007
Policymakers often urge microfinance institutions to increase interest rates to eliminate reliance on subsidies. This makes sense if the poor will borrow regardless of interest rates: then micro lenders increase profitability without reducing the poor's access to credit. But there is little evidence as to whether this is actually true. In this working paper, CGD non-resident fellow and his co-author test the elasticity of demand for microcredit using field data from South Africa. They find that price sensitivity increased sharply when individuals were offered a rate above their prior loan's rate. They also found that loan size is far more responsive to changes in loan maturity than to changes in interest rates. This paper is one in a series of six CGD working papers by Dean Karlan on various aspects of microfinance (Working Paper Nos. 106 –111).
-
Teaching Entrepreneurship: Impact of Business Training on Microfinance Clients and Institutions - Working Paper 107, updated May 2009
- Jan 29, 2007
Can one teach basic entrepreneurship skills? A growing number of microfinance organizations are trying, in the hopes of improving the livelihood of their clients and to further their mission of poverty alleviation. In this working paper, CGD non-resident fellow Dean Karlan and his co-author measure the impact of adding business training to a Peruvian group lending program for female microentrepreneurs. Their findings--that training leads to increased business knowledge, practices and revenues--are contrary to the presumption (on which the microfinance movement was largely based) that credit constraints alone, not skills, are the obstacle to the entrepreneurial poor. This paper is one in a series of six CGD working papers by Dean Karlan on various aspects of microfinance (Working Paper Nos. 106–111).
-
Observing Unobservables: Identifying Information Asymmetries with a Consumer Credit Field Report - Working Paper 109
- Jan 29, 2007
Information asymmetries--which occur when one party to a transaction has more or better information than the other party--can cause inefficiency, over-investment, or poverty traps. Unfortunately, they are difficult to identify in practice. In this working paper, CGD non-resident fellow Dean Karlan and his co-author identify two kinds of information asymmetries: adverse selection (where sellers lack information) and moral hazard (where buyers or borrowers lack information). The authors randomize loan pricing using 58,000 direct mail offers along three dimensions: an initial "offer interest rate", the actual interest rate on the loan contract, and the interest rate on future loans. They find that 7% to 16% of default on loans is due to asymmetric information problems. This paper is one in a series of six CGD working papers by Dean Karlan on various aspects of microfinance (Working Paper Nos. 106 –111).
-
Female Empowerment: Impact of a Commitment Savings Product in the Philippines - Working Paper 106
- Jan 29, 2007
Microfinance is often viewed as a tool for empowering women. However, it is not clear that increasing a woman's share of household income also improves her status within the household. In this working paper, CGD non-resident fellow Dean Karlan and his co-authors examine whether access to individually held savings accounts leads to an increase in female decision-making power within the household. They find positive impacts, particularly for women who start with below-average decision-making power; there is a shift towards the purchase of female-oriented durables in the household. This paper is one in a series of six CGD working papers by Dean Karlan on various aspects of microfinance (Working Paper Nos. 106–111).
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