A Few Questions About Microfinace Greg Fischer MIT & CMFR
Introduction • A quick caveat. – This is not a “seminar” but a dialog about a number of interesting and unanswered questions in microfinance.
• What I hope to accomplish today.
Some Stylized Facts The following stylized facts appear applicable to microfinance in India • Uses of proceeds cluster within communities and are drawn from narrow range. • Very few businesses expand beyond selfor family employment. • Most borrows start businesses that would not warrant outside investment. 2
A quick illustration: Starting a Shop Cost of initial shop inventory: Rs 10,000 Interest rate on loan: 18% full balance End of year repayment: Rs 11,800 Effective Interest Rate: 40+% By way of example, assume the shop generates Rs 930 per day in revenues at a margin of 15%. 3
Starting a Shop, Returns • To an outside investor who needs to employ labor at a rate of Rs 100 per day, the NPV of this investment at a discount rate of 40% is approximately zero. • Excluding labor costs, the NPV at 40% is over Rs 24,000. • Of course, in classical economic theory, this makes no sense because it neglects opportunity cost. 4
Starting a Shop, Market Imperfections • What if market imperfections or social norms results in wages exceed MPL or opportunity cost? • For example, a borrower may be able to work as a day laborer for Rs 100 per day but only able to find work for 150 days out of the year. • Yet social norms, behavioral factors, production non-convexities or the like may prevent paying workers less than Rs 100 per day.
What’s Happening? • Given the fixed costs of starting a business (inventory, indivisible capital goods, etc.) it is extremely unlikely that the optimal scale for each business is a single owner-operator, yet that’s what we see. • These observations are consistent with a model of surplus labor where borrowers are effectively “buying a job.”
Towards a Theory & Test Theory • Still working through the surplus labor literature. • Need to expand on the I/O questions. Implications • For a given investment, borrowers with better outside options will be willing to pay lower rates. • Other ideas? • How to test. 7
Other Issues â€˘ What would the policy implications be if we found that in fact people are borrowing to create effective wage security?
Part II: Investment Decisions
Investment Decisions â€˘ Why are there so many small vegetable vendors and identical dosa sellers? â€˘ Why do so many borrowers in the same village, in the same JLG, start similar businesses? â€˘ And a related question, are borrowers taking an efficient amount of risk? 10
A Handful of Explanations • Don’t know about other opportunities. • Don’t know how to execute other opportunities. • Perceived risk of other opportunities (either uncertainty about mean or overestimate of variance) is too great. • Actual risk of other opportunities is too great. • A form of credit constraints, MFI or JLG discourage risk taking. 11