Dollars and Jens
Saturday, December 06, 2008
An article in the FT on microfinance.
In South Africa in late 2004, Karlan and Zinman persuaded an anonymous consumer finance company that we'll call "ZaFinCo" to participate in an experiment. Ordinarily, almost half of its borrowers would have been turned away as a bad credit risk. But for two months, ZaFinCo loan officers were instructed to identify applicants who had narrowly failed to pass credit checks. From this pool of near-customers, a computer selected almost half and requested that branch managers reconsider and offer a loan anyway.Someone I respect was making fun several months ago of a "microfinance CDO" — I should probably dig up details on that — but the idea makes sense to me, insofar as you could expand money going into microfinance by giving the bulk of the participants a market return while the regular microfinance enthusiasts buy up the junior 10% or so, giving that money a 9 to 1 ratio over what it might otherwise have. I think it's great that we have people giving charity to microfinance organizations, and that we have investors seeking profits from microfinance organizations; I think there's room for more money to do good in microfinance than is being drawn, at this point, by both combined. And it's important to note another point from the article:
This procedure emulated the randomised trials of new medicines - after all, a more typical, non-random comparison of borrowers versus non-borrowers would not be able to tell whether borrowers were doing well because they had access to loans, or because they were confident, entrepreneurial people.
Karlan and Zinman wanted to know what value there might be in expanding access to credit. ZaFinCo was no dewy-eyed social business, but a hard-nosed, profit-minded company, charging 11.75 per cent per month on a four-month loan, or 200 per cent APR, much more than Compartamos was generally judged to have been charging.
Despite the high rates, the results were astonishing. "We expected to see some good effects and some bad," explained Karlan, who checked in with the experiment's participants six to 12 months after they had filed their initial loan applications. "But we basically only saw good effects."
Most strikingly, those "treated" by the experiment - that is, those for whom the computer requested a second chance at a loan - were much more likely to have kept their jobs than the control group. They were also much less likely to have dropped below the poverty line or to have gone hungry. All these outcomes were recorded well after the loan had been taken out and (usually) repaid, so this was not measuring a temporary debt-funded binge.
"If you're trying to make the world a better place but you're not, that's bad. If you're trying to make profits and don't care about people, but make them better off anyway, that's good[.]"