Designing Financial Inclusion

Providing financial products to disadvantaged populations can help reduce poverty – but it’s expensive. Can design innovations make financial inclusion economically feasible?

Consider a poor farm worker in rural India: a loan would buy him equipment that might improve his productivity; insurance would give him stability in case of drought; a bank account would be a destination for government assistance payouts. But the nearest brick-and-mortar bank is a long walk down an unpaved road, and a visit would mean losing a day’s wage. He might be illiterate and unable to read the forms when he got there. His only option might be the local moneylender who charges compound interest and uses threats and intimidation to secure repayment.

In 2005 when we analyzed a Indian social banking program that required banks to expand into unbanked rural areas, we found that a branch opening led to a 14 to 17 percentage point decline in poverty rates, yet this policy was abandoned because default rates and logistical difficulties made in too expensive to maintain. Microfinance stepped in, showing promise as a profitable commercial means to give poor people – particularly women – collateral-free loans to start businesses. But the microfinance contract failed to deliver credit in a manner that spurred entrepreneurship or delivered large reductions in poverty.

Today half the world’s adult population – and 77% of those living on less than $2 a day – are still without a formal bank account. In a recent speech, the Executive Director of the Reserve Bank of India said, “The goal of the development process is to include every last member of our society, especially those at the margins.”

Can financial products be redesigned so institutions can feasibly offer them to people at the margins? How can these products be optimized to help poor people break the cycle of instability and poverty?

Redesigning the microcredit contract
Country: India  |  Researchers: Rohini Pande, Erica Field, John Papp, and Natalia Rigol

EPoD, Redesigning the microcredit contractWe are working with a Kolkata microfinance provider on a suite of studies asking whether the classic contract constrains entrepreneurship, and what amendments can be made to relieve those constraints. Adding grace periods before repayment begins significantly increased profits – and default. We are now following these clients to construct one of the longest and most detailed panel datasets in the literature.

Policy Partner: Village Financial Services (VFS), Kolkata
Research Partner
: Centre for Microfinanace, IFMR, Chennai, India
Funding
: ExxonMobil via Women and Public Policy Program (WPPP) at HKS, International Growth Centre (IGC)
Financing low-cost schools in Pakistan
Country: Pakistan  |  Researchers: Asim Khwaja, Tahir Andrabi, and Jishnu Das

EPoD, Financing low cost schools in PakistanWhile low-cost private schools have grown exponentially in much of South Asia, they have limited access to formal financing institutions. This project seems to develop appropriate and commercially viable financial instruments - both debt and equity-based - that cater to the needs to low cost private schools and encourage them to make quality enhancing investments.

Policy Partner: Tameer Micro-Finance bank & Aman Foundation, Pakistan
Research Partner: World Bank, Center for Economic Research in Pakistan (CERP), Lahore, Pakistan
Funding: Templeton Foundation, World Bank Strategic Impact Evaluation Fund, and Aman Foundation

Quantifying microfinance's non-monetary benefits and drawbacks
Country: India  |  Researchers: Rohini Pande, Erica Field, Ben Feigenberg, John Papp, Jeanette Park

EPoD, Quantifying microfinance's non-monetary benefits and drawbacksUsing mobile phone surveys on a sample of Kolkata borrowers, we showed that relaxing the payment schedule halved the likelihood that borrowers felt “worried, tense or anxious” about repaying. A second study showed that repayment groups increased women’s social networks and helped them share risk, independent of the loan for which the group was formed.

Policy Partner: Village Financial Services (VFS), Kolkata
Research Partner
: Centre for Microfinanace, IFMR, Chennai, India
Funding
: ExxonMobil through the Women and Public Policy Program (WPPP) at HKS, International Growth Centre (IGC)
Evaluating banking innovations for the rural poor
Country: India  |  Researchers: Rohini Pande and Erica Field

EPoD, Evaluating banking innovations for the rural poorWe are using a large-scale randomized controlled trial to analyze the rollout of an innovative rural bank that founds its operations on a new set of principles: broad geographical distribution, low banker-to-client ratio, and a wide variety of products offered. We will measure impacts on poverty reduction, entrepreneurship, social networks, health, agricultural investments and female empowerment.

Policy Partner: Kshetriya Gramin Financial Services (KGFS), Tamil Nadu, India
Research Partner
: Centre for Microfinanace, IFMR, Chennai, India
Funding
: National Science Foundation, National Institutes of Health, Templeton Foundation, ExxonMobil Foundation through the Women and Public Policy Program (WPPP) at HKS, the International Initiative for Impact Evaluation (3ie), the Agricultural Technology Adoption Initiative (ATAI), Gates Foundation.

Providing individual accounts to improve women’s wellbeing
Country: India  |  Researchers: Rohini Pande, Erica Field, Simone Schaner, Natalia Rigol

EPoD, Providing individual accounts to improve women’s wellbeingGovernment payments meant for women’s consumption are often paid to the head of household – usually male. We are working with government partners to test whether supplying women with their own accounts in ultra-small banks and requiring payments for a large public works program to go directly into them betters women’s financial lives and bargaining power within the household

Policy Partner: Ministry of Rural Development (MoRD), Madhya Pradesh, India
Research Partner
: J-PAL South Asia at IFMR, Chennai, India
Funding
: Department for International Development India (DFID-I)

Using psychometric testing to fund "untapped" entrepreneurs
Country: Egypt  |  Researchers: Asim Ijaz Khwaja, Dr. Hadia Hamdy

EPoD, Using psychometric testing for untapped entrepreneursA major barrier keeping small banks from lending to micro-entrepreneurs is screening: how do you evaluate the potential of an applicant who has little or no collateral, business experience, or credit history? Evaluations in several developing countries have shown that the same psychometric tools used in corporate hiring can help lenders evaluate borrows and limit risk when traditional credit applications fall short. Current work in Egypt is introducing these tools to the Middle East.

Policy Partner: National Bank of Egypt
Research Partner
: German University of Cairo
Funding
: USAID Development Innovation Ventures