Mongolian microfinance: Some first insights from a randomised field experiment

By: Ralph De Haas Deputy Director of Research

Posted on | February 25, 2010 | 11 Comments

In Mongolia, as in numerous other countries, microfinance has attracted attention as a potentially powerful tool to generate pro-poor growth. Many Mongolians live in poverty and income disparities between urban and rural areas are significant. The rural economy remains vulnerable to variations in weather conditions; droughts and harsh winters often lead to large-scale livestock deaths, also this year. As a result, there is wide-spread migration from the countryside to urban centres, such as the capital Ulaanbataar.

Ger – a portable, felt-covered dwelling – in rural Mongolia

Although microfinance has grown rapidly over recent years, hard evidence on its socio-economic impact is only emerging slowly. To what extent does microfinance lift people out of poverty by allowing them to generate income from small-scale enterprises? And is group lending (‘joint-liability’) or individual lending the best way to reach out to borrowers? These are questions that XacBank, a leading microfinance institution in Mongolia, has been grappling with as well. The bank wanted to expand its outreach to indigent rural borrowers, in particular female ones, who hitherto had only limited access to financial services. But what is the best way to expand lending to such ‘difficult’ customers?

On the one hand, individual loans may be more suitable in a country in which the nomadic lifestyle may have limited the build up of social capital outside of the family structure. On the other hand, group lending may work well if the looser ties within groups reduce the risk of collusive behaviour. Moreover, since monitoring costs are particularly high – loan officers have to travel extremely large distances to reach remote clients – the reduction of such costs through a group lending structure may be particularly valuable.

To help XacBank with its strategic decision making and to assess empirically the impact of access to microfinance on small business development and poverty reduction, a project team at the EBRD (Ralph De Haas and Heike Harmgart) and the Institute for Fiscal Studies (Orazio Attanasio, Britta Augsburg and Emla Fitzsimons) designed a so-called randomised field experiment. The design entails an experimental set up involving 40 soums (villages) across 5 aimags (provinces). Together with the Mongolian Women’s Federation (MWF) a list was drawn up in each village with the names of relatively poor women who were interested in a XacBank loan to expand or set up a small business. These women were also asked to form preliminary borrowing groups. All 1,148 of them were then interviewed by a survey company in March 2008 (the baseline survey).

Session of MWF representatives involved in the field experiment

The 40 soums were then randomly divided into 10 ‘control soums’, 15 ‘group lending soums’ and 15 ‘individual lending soums’. Information from the baseline survey confirmed that the randomisation worked well: the participating women in all three types of villages were on average very similar across a wide range of observable characteristics.

In a next step, all women in group-lending soums were visited by a XacBank loan officer and groups that were deemed credit-worthy were offered a group loan. In the individual lending soums, women were offered an individual loan, while in the control soums XacBank delayed the roll-out of lending for the duration of the experiment. Importantly, when the women signed up to the project it was carefully explained to them that they would only have a 75 per cent change of actually obtaining a loan during the first year (since XacBank would delay the introduction of lending in 10 out of 40 villages).

A follow-up survey was conducted in October/November 2009, about 20 months after the baseline survey. Four interview teams re-interviewed 982 of the initial respondents; a re-interview rate of 86 per cent. This means that for 982 respondents we have detailed information from both the baseline and follow-up surveys on income, consumption and saving patterns, asset ownership, (in)formal enterprises, and exposure to shocks. Respondents were also asked about their income expectations and attitudes towards risk. Finally, novel questions were asked to gauge how well group members knew their co-borrowers, with the aim of allowing us to make inferences about the ‘information asymmetries’ within joint-liability groups. Detailed information was also gathered on the characteristics of villages and loan officers that participated in the experiment, while XacBank provided the project team with comprehensive repayment data on all loans.

Respondent being interviewed. The stones are used to answer questions about the respondent’s own expectations about her future income.

The project team is currently combining and analysing all of these data. This should allow us to compare how the respondents in the control soums (no loans offered) and the treatment soums have developed over time. Since the women in the treatment and the control villages were on average very similar before the experiment, differences in their subsequent development and outcomes will only be related to whether or not they received a loan.

This comparative analysis is of particular interest given the global financial crisis, the impact of which was felt in rural Mongolia in the period between the two survey rounds. Cashmere prices dropped by more than one third over a short period of time, adversely affecting many herder families. We hope that our results shed light on the question of whether the availability of microfinance has alleviated – or maybe even increased – rural households’ financial vulnerability during the crisis. Complete results are expected to be available in June of this year and will be summarised on this blog. For now, the data collected during the baseline survey already provide some insights into the state of rural microfinance in Mongolia. Three observations stand out:
First, we find that only 44 per cent of respondents had no outstanding debt at the time of the first interview while 46 per cent already had a loan. Almost ten per cent of respondents even had two or thee loans. Contrary to popular perception, penetration of microcredit was already quite advanced across rural Mongolia, even among our sample of relatively poor women who were selected because of their supposedly limited access to finance.

Second, virtually all respondents with a loan took out that loan in 2007 or 2008. Almost half of the respondents had not had another loan (whether repaid or not) in the last five years. Competition for rural customers – in particular between Khan Bank, XacBank and Mongol Postbank – had intensified in recent years. In our sample, Khan Bank has by far the largest market share: we find that just over one half of those with an outstanding debt owe it to Khan Bank.

Third, we find that between 70 and 80 per cent of the debt outstanding at the start of the experiment was used for consumption purposes and not for financing micro-entrepreneurial activities. This is an important finding since it shows that even though microfinance in rural Mongolia has advanced rapidly in recent years, the vast majority of loans has been used for consumption rather than income-generation. That is not to say that these loans have not been ‘useful’: the ability to smooth consumption is particularly important at low income levels. But it will be interesting to see whether the crisis has impacted households with varying debt levels differently. Moreover, it will be of interest to find out to what extent the individual and group loans disbursed during our experiment, which were intended to finance businesses, have indeed been used for such income generating purposes.

Stay tuned for more…

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Category: Capital markets, Microfinance, Poverty

Comments

11 Responses to "Mongolian microfinance: Some first insights from a randomised field experiment"

FP
February 25th, 2010 @ 3:11 pm

Hi Ralph,

Very interesting project. However, I have the idea that microfinance is not as a brilliant idea as it used to be. I can’t give concrete examples right now but I’ve read that in several countries and for well established MFIs, repayment rates have been falling, undermining the whole concept as it is build.

Then I wonder… perhaps it is equally important to validate the concept in itself, as it is to find out whether microfinance has an impact on small business development and poverty reduction. Why should it matter if the concept is from the start doomed to death?
Ralph De Haas, Senior Economist
February 25th, 2010 @ 5:51 pm

Hi Fabio,
Thanks for your comment. I agree with you that expectations about microfinance may gradually have become somewhat overblown. Some of the recent studies that I linked to in the blog indicate that microfinance – at least in some countries – may not have lived up to all the expectations about its positive impact on the poor (investments in profitable small businesses, consumption smoothing, better health and education, empowerment of women, etc.). But they also show that some basic results can be attributed to microfinance: the creation of new businesses and/or improving the effiency of existing ones and/or a better ability to manage income shocks and/or increases in durable or nondurable consumption. These are all positive results. So, while microfinance may not be a panacea that will ‘cure’ all aspects of poverty at once, it may alleviate some important problems in the lives of poor people (and may even lift some of them out of poverty alltogether). We hope that we can soon say more about how the results of our impact assessment in Mongolia (and a similar one in Bosnia) compare to these findings. However, your point on increasing non-performing microloans in some countries is well taken. While I still think the concept of microfinance is useful, there have been instances (think of certain parts of India and Bosnia) where in recent years too much microfinance may have been pushed into the market (but the same holds for mortgages and other forms of bank lending in large parts of the developed world…). It wil be interesting to see to what extent we can trace that back in our data: both Bosnia and Mongolia were hit by the crisis in the period between our baseline and follow-up survey. We should thus be able to see whether treatment and control groups differed in their ability to deal with this economic shock. As I said in the blog, stay tuned
Kerry Brennan
March 1st, 2010 @ 9:36 pm

It is great to see more rigorous work adding to the body of knowledge on the impact of access to finance. I look forward to reading the full results of the evaluation in June.

Researchers at Innovations for Poverty Action are undertaking similar studies on the impact of microfinance in Morocco, Mexico, and the Philippines. It will certainly be interesting to see how the results compare…
Milford Bateman
March 4th, 2010 @ 3:01 pm

Hi,

Could you provide me with details of how you intend to control for displacement effects in your study? Studies of similar MF programs in other countries, including the UK in the 1980s, show that new jobs/incomes in client microenterprises are very often totally offset by counterpart losses in local non-client microenterprises displaced. This is especially the case because we are talking here about very simple non-tradeable goods and services. Our research in Colombia (Medellin) showed us that displacement effects were very high – most simple microenterprises find their competition exists in the same street or same neighbourhood, so displacement effects were very high, ultimately rendering microfinance-induced new entry and expansion activity a problem for the poor. Another crucial displacement impact is the declining incomes of non-cients as more (unnecessary) competition arrives taking business and turnover away, thus lowering their margins. How is this factored into your model as to whether or not microfinance benefits the community overall (and not just clients)?

Many thanks

Milford
Ralph de Haas
March 12th, 2010 @ 9:55 am

Thanks for your comment. In this experiment we do not explicitly take displacement effects into account; we measure the impact on the borrower level. This contrasts with some other microfinance studies, such as a recent one in India, where the impact is measured through interviewing a random sample of people (i.e. both borrowers and non-borrowers) in each treatment and control village.

We chose to focus on interviewing the borrowers only because at the onset of the experiment almost all women in each village were allowed to sign up to the project. So, in treatment villages all women who were interested in a loan were able to apply and get a loan (provided they passed the lending criteria of XacBank). This reduces the chance of negative within-village spillovers from women with access to finance to women without access to finance, to the extent that the women who did not sign up were not in dire need of borrowing and did not face “unfair competition” from women who suddenly did get access to the experimental loans.

We plan to model actual loan take-up more carefully in order to understand which people did and did not take out loans when they were offered. Finally, negative spill-overs from female businesses to male business are also unlikely as most men engage in herder activities only. I hope this at least partially answers your question.
Ireedui
March 28th, 2010 @ 3:41 pm

Hi, Ralph.

Nice to hear that you are doing this research, because I’ve been always wondering whether this micro-loans really help them or kill them. Look forward to seeing the final result.
researcher
September 9th, 2010 @ 5:36 am

Since June has passed by, I am hoping the report will be soon made public. We are researching into Mongolia case to identify if this micro finance development project which was supported and funded by UNDP,USAID and four other NGOs, has really delivered the benefits to the rural poor since gong private in 2002. As we know financial market liberalization often discourage microfinance pvt companies to engage with the poorest, specially when the rural areas are sparely populated, as is the case in Mongolia. So, if an example is taken Xac bank,has it brought transformational change to poverty reduction?
Steve Attree
December 28th, 2010 @ 11:27 pm

Hi Ralph,

It looks a very interesting project and I wondered what the reasons were for the delay in publication and whether you have an expected publication date? Also, one point I am interested in is whether you will you be able to differentiate the benefits of microfinance between relatively better off and worse off recepients and also younger and older members of the sample group?

Many thanks for your help

Steve
Ralph De Haas
January 4th, 2011 @ 9:58 am

Hi Steve,
Thanks for your message. The report has been delayed because we we wanted to collect additional data on borrowers’ repayment behaviour. These are not the “main” (baseline and follow-up) survey data we collected ourselves, but additional information we get out of XacBank’s MIS. Since XacBank changed IT systems halfway through the experiment, this has proven more difficult than originally anticipated. The analysis of the main data has been finalised however, and we are currently writing up the paper. As soon as it is published as an EBRD working paper, I will post a blog here. Btw, we do indeed find some differentiated impacts along the lines you describe. In particular, we find that any positive impact of access to microcredit on enterprise creation and consumption was driven by the less-educated women in our treatment areas.
Best regards
Ralph
Noemie
August 18th, 2011 @ 9:38 am

Dear Ralph,

Your research project looks very interesting and promising! I am looking forward to see the publication…

Furthermore, I was also wondering whether you got any sense of increasing over-indebtedness or saturation of the microfinance market during your research on the field. Many practicionners have highlighted the high penetration rate and saturation of the microfinance market in Mongolia and some banks have been slowly moving from micro lending to SME lending… At the same time I read that poverty remains widespread as the income gap widens. There could be thus increasing need for MF services adapted to the lower end of the market, especially in UB following recent migration in ger areas, no?… I was wondering if you could share your experience and perceived risks of the situation.

Many thanks for sharing your experience,

Warm regards,

Noémie
Lucy Granville Web Editor
November 2nd, 2011 @ 3:02 pm

Dear Noémie,
Many thanks for the interest in our study. We have now finalised the working paper and it should appear on-line by end November. In the end we decided to collect additional data on loan repayments from XacBank and this has taken us a while. Incidentally, I just returned from Mongolia last week where I held some structured interviews with a number of the borrowers in both the individual and the group lending villages. One of the most interesting things to hear was that a number of group borrowers liked that they had to save upfront (the group had to save 20% of the future loan amount and put that down as collateral). One woman even told me that because of that experience she opened a savings account for the first time in her live. So, this anecdotal evidence seems to confirm some recent findings that show that microborrowers may actually just be looking for a structured and safe way to save. As for the move from micro to SME: you are spot on. After the financial crisis in 2008 and the harsh winter, a number of MFIs decided to focus less on rural microlending and more on (urban) SME lending. This development is exacerbated by the current resource boom in Mongolia, which will (hopefully) help to create more business activity across the board. I agree with you, however, that we may see a further widening of income gaps in the years to come, the extent of which will largely depend on two things. First, to what extent will the government be able to prevent “Dutch Disease” by managing its natural resources well. In an ideal world, the boom would be an opportunity for Mongolian medium-sized firms to profit from the increased activity in the mining sector, e.g. by starting to supply such companies. This would allow for a broader section of the Mongolian population to participate in the process of accelarated economic growth. The experience of other resource-rich countries shows, however, that this may be very difficult to achieve and that the “missing middle” – the absence of medium-sized enterprises in developing countries – may actually become more pronounced. Second, the Mongolian government plans to share a part of its resource-related income directly with the population through cash transfers. It will be interesting to see how they will do this exactly and what the impact will be on poverty alleviation. Again, in an ideal world such (conditional or unconditional) cash transfers could help people to improve their living standards, both in the short run and, if they can meaningfully invest some of the money in (human or physical) capital accumulation, also in the long run. The risk is, of course, that transfers may only alleviate poverty in a very shallow way, without leading to more long-term and more transformational impacts.
With best wishes,
Ralph