The greatest return on investment
I previously posted on the myth of the entrepreneurial middle class. A post on the India Development Blog on What Does Productive Loan Use Look Like reminded me of this issue. Michael Chasnow reports on new research on the use of credit in the slums of Hyderabad. Here are the reasons people took out loans (often not from any microfinance institution, and at interest rates of 80%):
- Health expenses (17%)
- Marriage (13%)
- Temporary difficulty (10%)
- Home construction (10%)
- Consumption (10%)
- Start a new business (7%)
- Business expansion (1.33%)
The use of credit to invest in business falls pretty low on the list. Chasnow questions the efforts of microfinance institutions to closely monitor loan use or to create specialized products to promote business development. I would tend to agree with this point of view.
As mentioned in my earlier posting, even the middle class in developing countries tends not to invest in businesses but in things like better health and education. Perhaps the greatest return on investment is really in these types of human capital investments. Trying to force microcredit to support business creation would then seem wrongheaded. Rather, efforts to promote entrepreneurialism really require increasing the return on investment in small businesses over that of investment in human capital - and that means improving the operating environment faced by SME entrepreneurs.
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The data provided by the researcher on loan purposes in the Hyderabad slum gives ample signals for microfinanciers on how they could design financial products. Emergency expenditures; health and temporary difficulty comprise 27%, and, expenditures with long term life plans; housing and marriage comprise 23% of the total loans.
Resouce starved middleclass go to bed every night with multiple needs in their mind. Clever financiers would definitely initially include products which would at least partly address borrowers' emergent consumptive needs and sustainably resource consuming problems.
Creativity and risk taking behavior (read enterpreneurship), I believe, would not come when someone is surrounded with numerous vulnerabilities, such as hunger, disease or being homeless. However,once these are addressed reasonably, people would definitely think of improving their opportunities and income.
I assume these families studied belong to very poor section. It could be interesting, if someone could study their behaviour after they have access to some health insurance or better health care.
Posted by: Chandrakant Pradhan | Aug 19, 2008 8:06:09 AM
I am a micro finance employee from last 11 years based at Hyderabad. The survey reflected the actual situation of investments made by the micro finance clients. In our experience most of our clients utilized their loan amounts to their children's education and health purpose. We came to know that from our clients in some situations loan amount was immediately expended to meet the temporary difficulties like clear the other borrowings. Maximum no. of clients were at the age of 30 to 40 so every client having the children all are wants to see their children at a higher level so it is compulsory to invest in the children's education. Circumstances are not co-operating them to invest in the business. When the loan cycle is going to be complete ( 45th to 50th week) the expenditure are ready for coming loans. Group loans are based on the group members approval, normally they don't approve for bigger loans to meet the business expansion investment as well as the family investments like health and child education. So again they are again depending on the formal ways like whole seller’s credit and other ways for the business. They are easily getting credit may goes to long time investments. Any how most of the micro-credit loans are utilizing for greatest returns and for long time benefits.
Posted by: Adinarayan | Aug 19, 2008 10:07:58 AM
I was reading Chandrakant's comment, and wanted to provide some preliminary research results from the Centre for Microfinance (CMF) on the effects of health insurance for microfinance clients. In collaboration with SKS Microfinance, we are evaluating 1) whether MFIs are good channels for providing health insurance; 2) if offering a mandatory health insurance product affects client renewal rates; and 3) the benefits clients gain from use of health of insurance (e.g., health or economic). Below, I briefly summarize what we have found so far regarding these three questions.
1) MFIs seem to be a good channel for health insurance. Clients understand and are using the health insurance product, and the insurance offering has not adversely effected SKS client composition.
2) Client renewal rates have not changed, as about 95% joint liability groups that receive health insurance, and about 95% of those that don't, took out a second group loan.
3) This December we will begin the endline survey to determine how health insurance coverage effected clients (e.g., health,economic). Results should be available on the CMF website (http://ifmr.ac.in/cmf/) mid-2009.
Overall, the primary researchers, Profs. Duflo et al, believe there could be real potential in MFIs providing health insurance. To learn more about this project and read primary researcher analysis, click the short summary linked below:
http://ifmr.ac.in/cmf/research/iehi/Concept%20Note%20-%20RBI%20conference%20-%2018%20Jan%202008.pdf
Posted by: Michael Chasnow | Aug 21, 2008 5:51:32 AM