Tuesday, February 1, 2011

Impact Fund Goes to Nationals

We are excited to announce that three of Occidental Impact Funds' research team (Megan Lang, J. Anthony Labarga, and Taylor Corbett) have been invited to attend this year's National Conference on Undergraduate Research. At the conference our research team will be presenting two studies that identify best-practices within the fields of microfinance and community directed economic development. The following are abstracts of both studies:

Study #1: Loan Use as a Function of Bank Distance in India

Central to microfinance is the idea that entrepreneurial poor can rise out of poverty given access to capital, enabling them to start lucrative businesses. However, some have argued that the poor cannot engage in full-time entrepreneurial activities given limited access to markets, causing them to use loans to access other services offered, such as savings and insurance, or for consumption smoothing rather than building microenterprises (Allen 2007, Johnson and Sharma 2007). This has led to assertions that microfinance institutions (MFIs) must maintain a high supervisory presence, suggesting that they are best located close to their customers. This leads to our research question: Does distance from a bank affect the likelihood of microloans being used for income-generating versus non-income generating purposes?

We examine loan use in relation to distance (in minutes) from a bank as recorded in the Centre for Microfinance’s Financial Inclusion Survey to test the theory: as distance to customers increases, microloan use shifts from income-generating to non-income-generating activities. Our preliminary findings show a bimodal distribution. Loan use for growth is high when banks are very close, lower when banks are moderately far, and high when banks are distant.

These findings indicate that arguments for high supervision are partly unfounded, as respondents farthest from banks did not use loans for non-income-generating activities. This suggests that MFIs do not need to allocate many resources for monitoring loans, as the poor avoid incurring debt unless it is necessary or lucrative. However, the data also indicates that MFIs close to customers may be effective at encouraging income-generating loan use, while those far away can take advantage of a unique incentive structure: Individuals are unlikely to take out loans for non-income-generating uses when reaching a bank is difficult. The correlations found between distance from a bank and loan use must be further explored to provide a clearer understanding of the optimal distribution of MFIs in developing countries.

Study #2 - Social Capital and Development: Utilization of Community Elite for Ultra-poor Development in Rural Bangladesh

Development organizations often ignore or isolate the elite of communities in which they operate considering them inhibitory to the development process. Yet, increasingly, certain organizations have come to realize these leaders can assist in achieving program objectives. One such NGO is Building Resources Across Communities (BRAC), and its Confronting the Frontiers of Poverty Reduction – Targeting the Ultra Poor Program (TUP), created to assist Bangladesh’s ultra-poor escape extreme poverty. As part of the TUP program, BRAC has established community support groups comprised of “elite” village members, called Gram Daridro Bimochan Committees (GDBCs), to protect the program’s gifted assets to TUP participants from theft or damage. This research intends to understand what additional non-material transfers GDBCs provide to TUP participants, and the perceived value of such non-material transfers relative to other assets or services offered under the TUP Program. The research is based on group interviews of 670 subjects conducted in June 2010 in 22 villages of Bangladesh’s Rangpur and Naogaon districts.

Conclusions from this sample indicate that 79 percent of GDBC transfers ranked most-important are non-material in nature. Of these “intangibles” education support, sanitation support, and advice/encouragement are the most common. More specifically it was found that the majority (52 percent) of ultra-poor sampled value GDBC non-material transfers of advice/encouragement more than material transfers offered by the program. This is due to GDBCs unique ability to tailor their advice/encouragement to the individual needs of each ultra-poor, with such advice frequently falling into three distinct categories (emergency, preventative, and asset management advice). This finding is significant in that past BRAC studies have failed to identify advice/encouragement as a notable transfer between GDBCs and TUP. More generally this study finds that GDBCs clearly contribute to the attainment of TUP program objectives, acting as a force multiplier, to which there is no close substitute. However, since the majority of these transfers are non-material, and thus difficult to observe and quantify, GDBCs are chronically undervalued in comparison to other aspects of the TUP program.

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