How do we offer credit to unidentifiable people?

How do we offer credit to unidentifiable people?

Innovations for Poverty Action Blog

Carmen Easterwood

How do you offer a loan to a farmer that can provide no evidence of his credit history or even of his true identity? Microfinance institutions (MFIs) in developing countries face this question every day, as they work to extend credit to people living in countries without credit bureaus, national identification systems, or sometimes even formal identification documents like birth certificates. Without a unique identification system, MFIs cannot track a client's credit history, either within a single organization or across multiple lenders. When MFIs do not know who has a good credit history, there is no way to give creditworthy clients access to more and bigger loans, and no way to restrict clients with a history of defaulting.

In a recent study of farmers in rural Malawi, IPA Researchers Dean Yang, Xavier Gine, and Jessica Goldberg looked at how loan repayment rates and access to credit were affected when an MFI collected fingerprint data on its clients so that it could identify them in the future. Farmers were divided into a group whose fingerprints were collected at the time of their loan application, and a comparison group, whose fingerprints were not collected. The results were striking: among the farmers who were fingerprinted, 85% of those considered to be high-risk fully repaid their loans, whereas only 44% of high-risk borrowers in the comparison group fully repaid the loan. The data shows that when high-risk borrowers know that the MFI can easily identify them in the future, they are more likely to take out smaller loans, and they are more likely to use the loan for the intended purpose. Furthermore, because of the increased repayment rates, every dollar that the MFI invested in fingerprinting technology resulted in an extra $2.34 of profit.

The results of this study have implications for credit markets in Malawi and in other developing countries. They reveal the importance of being able to correctly identify borrowers in an efficient credit market, and may provide information on how borrowers' behavior might change upon the introduction of a credit bureau.

A challenge to the international community to do much more on ageing in the development sphere

A challenge to the international community to do much more on ageing in the development sphere

Eldis Ageing Populations

With one in nine persons in the world aged 60 years or over, projected to increase to one in five by 2050, population ageing is a phenomenon that can ...

Is it wrong to cut UK aid to India?

Is it wrong to cut UK aid to India?

Development Horizons from Lawrence Haddad

Today's announcement that the UK is to end financial aid to India by 2015 will re-ignite the debate about aid to middle income developing countries. 

It's a difficult one. 

Is India rich? No--its GDP/capita is a third of China's and a sixth of Brazil.  India is still a very poor country.  You won't see it so much if you go to Delhi or Mumbai but go one hour out of town and you will be shocked. 

Is India using its domestic resources as well as it can for poverty reduction? No, but it is trying to get it right--hence the debate over the massive National Food Security Bill. 

Why should a country with a space programme get aid?  As I have said before the space programme is as much about weather and land quality mapping as about anything else. 

Is UK aid "peanuts" for India as a Indian Minister said in February?  In absolute terms, yes.  But it is an invaluable source of experimentation, piloting, access to knowledge, and risk taking. 

What if the Indian government does not want aid?  Well, obviously it could easily say "no thanks". 

For every poor country, not just India, the future is in domestic resource mobilisation, not aid. 

Just try telling that to the millions of Indian mothers trying to keep their babies alive.

Maybe it's not so difficult.

“The End of Cheap Chinese Labor”

"The End of Cheap Chinese Labor"

Chris Blattman

At the beginning of China's economic reforms in 1978, the annual wage of a Chinese urban worker was only $1,004 in U.S. dollars
…However, wages are now rising in China. In 2010, the annual wage of a Chinese urban worker reached $5,487 in U.S. dollars
…China's wages also increased faster than productivity since the late 1990s, suggesting that Chinese labor is becoming more expensive in this sense as well.
China's labor force may have already reached its peak in 2011; and China's rural-to-urban migration will also slow down because the rural young are highly rural-to-urban migration will also slow down because the rural young are highly mobile; almost all rural youth in the 16–20 age bracket are already working off the farm.
…Therefore, future increases in migrant labor must come from those who are older or those who have established families, who will require the prospect of larger wage gains than migrants of the past if they are to find migration worthwhile.

Each time I hear shouts of sweatshops, I hear louder shouts from bosses about rising wages. These are not wholly inconsistent stroies but nor are they wholly consistent. And one story has hard numbers.
If there is a more important economic change for other developing countries, I don't know it. Prepare thyselves for the migration of much manufacturing to other shores?
An article in the latest JEP.
Also interesting is "How did China Take Off?" by MIT Sloan's Yasheng Huang.