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Financial Services to the Micro, Small and Medium Enterprises
Dean KarlanYale University
Innovations for Poverty ActionstickK.com
Two Themes
• Apply Behavioral Economics to product design
• Find win-win evaluation strategies:– Measure social impact
AND
– Improve operations
Behavioral Economics
Assumptions of Behavioral Economics
• Humans vs. Econs
• Bounded Rationality – including bounded attention
• Bounded Willpower
• Bounded Self-interest
Escalator Lesson
• People are complicated. No one model predicts a person’s behavior.
• Design matters
Suppose you received one of these letters:What would be most important to you?
Direct Mail Lesson
• The “normal” things economists look at aren’t always the drivers.
• Behavioral economics has expanded the standard set of behavior drivers…
Behavioral Economics
• Theoretical behavioral economics:– Tries to understand, develop models, etc. to
predict behavior better (and heterogeneity)
• Applied behavioral economics:– Tries to figure out how to use behavioral
economics to make the world a better place
Nudges
Anyone who designs the environment in which people make choices is a “choice architect”–Menus– Store layouts–Organ donorship– Retirement savings plans
–One last amusing one, and then banking
Urinal, Amsterdam Airport
Applications in Banking
• Commitment contracts– Savings
• Reminds to save– Increased savings by 6% in three country study!
• But also..– Smoking– Weight loss
Goals and Commitment
• Three “truths” for most if not everyone:– You have set goals for yourself in the past.– You have not achieved every one of those goals.– You regret not having achieved some of them.
Commitment Contracts
• Make your vices more expensive• Make your virtues cheaper• The obvious:– Savings– Weight loss– Smoking– Exercise
Philippines: Savings• “SEED” for the Green Bank of
Caraga in Mindanao• Simplest “commitment:” no
withdrawals until goal amount or date is reached
• No increase in interest rates for illiquidity
• 28% opened an account• 300% increase in savings for those
who opened an account• Similar to “Christmas Clubs” in the
USA, popular in the past
Philippine: Smoking
“Committed Action to Reduce and End Smoking”• Minimum deposit of 50 pesos ($1.25)• CARES lock box to help clients save daily• No access to the money in the account for 6
months• No interest-bearing• Weekly deposit collection service (the service
stops if the client fails to deposit for 3 consecutive weeks)
• Must pass a urine test within 1 week of the 6 month maturity date in order to gain access to the money in the account
Philippine Smoking: Results
• 83 out of 781 (11%) individuals offered CARES signed a contract.• 29 of 83 passed at 6 months• Of the 29 who passed at 6 months:• 14 passed and 15 failed at 12 months
• Of the 54 who failed at 6 months:• 7 passed and 47 failed at 12 months
• 30 percentage points more likely to stop smoking
Mexico: Corporate Employee Wellness Program
• Contracts for employees– Lose weight– Stop smoking– Read more– Play more– Complete tasks on time for work
• No financial incentives• But psychological commitment• And public visibility
Behavioral Economics: Conclusions
Humans are imperfect. We need all need help.
We can improve choices without restricting options.
Nudges can work.
Part II: Win-Win for Social Impact
• Many ways to improve programs
• Evaluation, done well– Looks forward, Not backwards– Is an investment, not a cost– Helps improve profits, not merely prove impact
Outline
• Four specific projects to describe– Reminders to save– Small/medium enterprise mentoring/consulting• Mexico
– Price: expanding access to credit• South Africa and Mexico
– Credit scoring to measure impact of loans• Philippines and South Africa
Reminders to Save:Peru, Bolivia & Philippines
• Attention problem: Savings is “salience-disadvantaged” relative to debt
• Do the poor save everything they can? Or does attention to needs influence savings?
• Three country study• Impact: – Increase savings by 6% with monthly reminder– Increased likelihood of reaching goal by 3
percentage points
Mentoring/Consulting Project
• Run by Mexican state government• Firms apply for grants for consultants/mentors
from consulting firms in Puebla• Limited supply of grants for eligible firms– Thus randomization good for two reasons:
• 1) Helped solve political problem, by choosing randomly no complaints of favoritism when allocating a scarce resource
• 2) Provides powerful impact evaluation by independent researchers to help strengthen future policy discussions
• Fairly small sample, 433 firms
Results
• After one year• Monthly firm sales & profits up 78% and 110%
respectively• Productivity increased– Productivity defined as profits unexplained by
assets
Demand Elasticities
• Large-scale experiment in Mexico, Compartamos Bank
• Randomized over branches spread throughout entire country
• Incorporates general equilibrium effects
Price
• Huge variance in rates around the world• Huge variance in depth of outreach• Significant debate, especially in high rate countries• Two sides to the calculation– Costs– Demand
• Most of the data/analysis/discussion is on costs• For years, World Bank (CGAP) and others pushed to
raise rates, to get to sustainability
Compartamos experiment
• Randomization at branch level• Data collected over 19 months• Two “take-up” sets of data– Specific face-to-face marketing– Natural over time process, i.e., branch level
outcomes with normal marketing, growth, gossip and general equilibrium effects
Experimental Design
• “Crédito Mujer” village banking loan product only for women
• Bank branches grouped into 80 geographic clusters across Mexico– Half assigned “high” rate– Half assigned “low” rate
• Difference of 10% (0.50% per month)
Branch Locations
Final sample included 132 branch offices in 80 geographic clusters across Mexico
“high” rate“low” rate
Results: More Clients
Results: Larger Loan Portfolio
All together for Compartamos
• Compartamos is a for-profit• Impact on society important• Promise to investors of course is that helping
society can be profitable.
• Revenues increased by about 11%• Costs did too• Net impact on profits: up about 3%– Statistically same as before
Measuring Social Impact with Credit Scoring
• Credit scoring– Difficult for SME sector– Even more difficult for nicroentrepeneurs– Much to be learned about optimal system• How to balance hard and soft information• How to build incentives for long term client loyalty• How to maintain safe banking principles
Experiments to measure impact
• Impact studies of microcredit have been done – and done and done and done…– Questions linger regarding identification
• Basic selection problems:– Who chooses to borrow? • Entrepreneurial spirit? Resourceful individuals?
– Who do MFI’s agree to lend to?– Program placement: MFI’s target growing areas
Microcredit Randomized Trials
• Now we are beginning to see a wave of them– South Africa: urban/peri-urban, for-profit, individual lending, formal sector
employed individuals (Karlan and Zinman, 2008)– Philippines: urban Manila, for-profit, individual lending (Karlan and Zinman,
2009)– India: Spandana, urban Hyderabad, for-profit, group lending (Banerjee, Duflo,
Glennerster and Kinnan, 2009)– Peru: Arariwa, rural, village banking, non-profit (Karlan and Zinman, 2010?)– Mexico: Compartamos, peri-urban/urban, village banking, for-profit
(Angelucci, Conley, Karlan and Zinman, 2011?)– Morocco: Al-Amana, rural, village banking, non-profit (Crepon, Duflo and
Pariente, 2010?)– Philippines: FICO and First Valley (getting under way, 2012?)– Bosnia: for-profit, individual liability, urban and rural (Augsburg, de Haas,
Hamgart and Meghir, 2011?)– Mongolia: group liability, rural, Attanasio et al
Simple but critical test
• One theory: markets are actually complete. • High prices for informal credit – Incomplete credit markets?– Or higher price for better service?
• Will increased loans higher debt or change in debt composition?
• If so, prima facie evidence for credit constraints
Basic Methodology
1. Lender randomizes marginal loan applicants:
100-point credit scorecard based on applicant’s:
1 – 30
Auto reject
60 – 100
Auto approve
31 – 45
Randomly
approve 60%
46 – 59
Randomly
approve 85%
• Business capacity
• Personal financial resources
• Outside financial resources
• Personal and business stability
• Demographic characteristics
Basic Methodology
2. Follow-up with household survey that measures:
• Borrowing, broadly defined
• Business income, expenses, and profits
• Investments, broadly defined
• Psychological and political outlook
Surveyors completed 1,114 of 1,601 in sample for70% response rate.
Number of days between treatment and follow-up:
Mean Median Standard Dev.
411 378 76
Why did the bank do this?
Weekly credit committees: slow, costly, subject to inconsistencies of subjective scoring.
Computerized credit scoring fast (loan decision in 1 hour!) and quantitatively-based.
Future scorecard revision requires data points on “below the line” applicants.
Market Settings
Small-business Microloan market in Philippines:
• For-profit rural bank
• Regulated but no viable credit bureau
• Unsecured
• Individual liability
• High-risk
• Short-term (13 weeks), fixed repayments
• Expensive by many international standards (63% APR)
Results
• Loan use increases: 9.6% more likely to have a loan– Evidence of market failure being solved
Impacts
• Key results:– Profits go up for men, but not women (consistent with
de Mel et al capital drop experiment in Sri Lanka)– Cut back in firm investments and cutback in formal
insurance– Increased education for families of male borrowers– Increased access to informal credit– Increased trust in community– Increased stress (consistent finding in South Africa)
South Africa
• Similar study• Consumer lending• Found increase in employment after getting a
loan• Net impact: 8 percentage point reduction in
poverty headcount ratio
Further research
• What are patterns of impact?• When should credit be increased?• Who should lenders (and their funders) target?
• Replication needed to further answer these questions. No one study can satisfy the policy questions being posed.– Need varying competitive settings– Need varying cultural and economic conditions.
Five ideas
• SME– Give a choice to a microentrepreneur
• JobOr
• Microenterprise
– What will she choose?– What are constraints? Managerial capital? Finance? Both together?
• Credit scoring• Electronic/mobile banking linkages to savings accounts• Savings
– Behavioral Economics applications
• Integration of health into banking– CARES
Thank you!
http://karlan.yale.eduhttp://www.poverty-action.org
http://www.stickK.com