The missing middle: cash transfers and microcredit
Many advocates for cash transfers and microcredit see their respective inputs addressing a capital constraint that is confining a person to lower productivity and lower quality of life (1). There is significantly better evidence for the former than the latter. At the same time, both cash transfers (capital the recipient doesn’t pay back) and microloans (capital the recipient does pay back with interest) are just points on a long continuum of options for addressing the capital constraint. Between these two poles of charity and business lies a vast expanse largely neglected (to my understanding) by NGOs, MFIs, and academics.
What might other points on this continuum look like?
- Principal only: After four to six months, the recipient pays back the principal.
- Partial repayment: After four to six months, recipient pays back some percentage of the principal.
- Transfer and loan: Recipient receives a one-time start-up grant and subsidized loan.
- Convertible transfer: The recipient has the option to determine if they will repay some portion of the transfer in exchange for low-rate access to capital going forward. For example, if return 50% of the original transfer, next five loans will be 0%.
A risk in creating a more complex capital structure is that it muddies the water for recipients. There may indeed be something magical about receiving a grant with no risk of indebtedness attached. Still, the final two options just begin to scratch the surface of the possibilities that respect that perspective.
Why aren’t people offering these types of products? Microfinance institutions believe that their services already have a significant impact, and typically see scale as the means to greater impact. Ingrained in many of the cultures is a focus on self-sustainability and, in many cases, profitability, along with an aversion to financial risk (e.g., very little tolerance for high default rates.) On the other hand, NGO staff may find that asking for a portion of a transfer to be paid back doesn’t align with their values, and may see it as a distraction as their “scale” will come from procuring large grants. Regardless, many of the NGOs will lack the business acumen, with the necessary MFI infrastructure posing a high entry cost for a business with no clear advantage. There are some organizations that have both NGO and MFI affiliates; while these organizations are best poised to explore this space, the lack of trying (at least that I’m aware of!) could again be due to the same assumptions outlined above. For example, I think the closest we’ve come to this type of collaboration surrounds the ultrapoor graduation pilot program, which saw a number of MFIs design grant-based programs to try to “graduate” recipients to their microfinance institutions. Still, even then, the responsibilities were divided between NGO and MFI with each employing its standard tools (grant for former, loan for latter), again neglecting to explore the many possibilities between.
If anyone knows of NGOs, MFIs, or academics who have done work in this space, please let me know. I’d love to incorporate their experience into this post.
(1) Yes, it’s true that cash transfers are celebrated for more than just their ability to improve the economic trajectory of recipients. This post is focused on cash transfers with that aim in mind.