Does information provision foster or hinder the effectiveness of microcredit for human capital investments?

Lead Research Organisation: Institute for Fiscal Studies
Department Name: IFS Research Team

Abstract

Information provision and awareness campaigns are popular tools in international development, aiming to raise knowledge on particular topics, such as health, in order to trigger behaviour change, and to generate demand for related goods and services; with the overall aim of improving human capital outcomes. Despite their popularity, potential unintended consequences of such communication activities have to date been little studied.

The proposed research is designed to contribute to filling this gap by gaining a deeper understanding of the role of information provision in hindering, or fostering the effectiveness of microcredit for human capital investments.

Microcredit - small, usually collateral-free loans given to households in low-income countries - has been much studied and their ability in relaxing poor households' credit constraints to allow them to invest in entrepreneurial activities and cope with adverse events acknowledged. More recently, microcredit has also been shown to be effective in fostering human capital investments particularly preventive health investments such as bednets, water connections and toilets, supporting the emerging trends of private enterprises increasingly taking a role in solving social and environmental problems; and in growing numbers of investors seeking to make financial investments that produce significant social or environmental benefits. Microcredit programs often ensure high loan repayment through joint liability - groups of borrowers are liable for each other's loans, and thus monitor each other. However, this feature could influence the take-up and use of microloans for human capital investments, since financial returns to such investments take time to be realised.

Acknowledging that poor awareness of the existence of social programs could hinder take-up of these programs, awareness creation campaigns have become an essential component of the roll-out of new policy initiatives. However, such campaigns typically deliver multiple messages, which could inadvertently lead to recipients taking away a message that is contrary to that intended by the program designers, implying that information campaigns could backfire and hinder the adoption of human capital investments.

We are in the unique position to research such unintended consequence and their mechanisms by building on an interesting puzzle that emerged from a previously conducted study. In particular, we found that providing information alongside microcredit for human capital investment (sanitation), led to a similar increase in loan uptake on average as the provision of sanitation microloans only, but it resulted in fewer clients using the loan for household toilets, contrary to our original hypothesis.

We intend to explore three channels that could explain this puzzling finding. First, the delivery of the information campaign - through a different organisation from that providing the sanitation loans - might have how peer monitoring of sanitation loan use occurred, resulting in fewer toilets being built. Second, the information campaign might have increased awareness about the existence of the sanitation loans (and their favourable conditions), attracting households who wanted to borrow for a non-sanitation purpose. Third, the information campaign could have unintentionally discouraged households from using sanitation loans for sanitation, by making them believe, for instance that their own sanitation investments would be ineffective unless accompanied by similar investments from their neighbours.

We propose to answer these questions using a mixed-methods approach, combining a theoretical model, with quantitative data collected within the RCT and qualitative research. The key advantage of this combined approach is that it allows us to triangulate the research findings and hence to establish and explain patterns, trends, and mechanisms, in other words dig into the policy relevant questions of 'what' and 'why'.

Planned Impact

First and foremost, we will strive for our proposed research project to have direct implications for the institutions and funders involved in the specific interventions subject to this study, e.g. the microfinance institution Grameen Koota and its NGO arm, Navya Disha, and the umbrella organisation FINISH Society, which works with more than 60 partners in more than 50 districts in 10 states of India, including Micro Finance Institutions (MFIs), NGOs and Cooperatives. The hypotheses we will investigate have been generated from discussions with Grameen Koota and Navya Disha following the puzzling finding from the original trial.

Results of this research will continue to support implementing institutions to gain a better understanding of the underlying mechanisms of outcomes achieved through their interventions. This knowledge will enable evidence-based decision-making on the design and delivery of their interventions, and form the foundation of advocacy initiatives. Other funders (Strategic Impact Evaluation Fund (SIEF) at the World Bank) directly involved in the projects will draw on the research outputs to inform their activities, outputs and policies, with the ultimate aim of enhancing productivity in developing countries. We will also engage partners in our other ongoing research work related to microfinance and sanitation, including Cashpor India, WaterAid UK and Nigeria as well as PLAN International, through projects funded by the Bill and Melinda Gates Foundation and DfID.

To achieve our ultimate goal of supporting sector decision-making through the provision of rigorous academic evidence, we will work with our partners from these impact evaluation studies to help ensure that our analysis responds to sector-relevant questions, placing emphasis on engaging key sector actors and translating the evidence into digestible outputs. Details on planned activities are provided in the Pathways to Impact section, and include presenting findings at important sector convenings (European Research Conference on Microfinance, UNC Health and Water conference); engaging in one-to-one meetings with staff of institutions such as UNICEF who provide technical support to governments on sanitation interventions; active participation in donor meetings (organised by for example the Gates Foundation and DfID); and writing of policy brief and blogs, organisation of e-discussions, making use of tweets and publication of outputs on the IFS website (which currently enjoys >750k sessions and over 500k unique visitors a year from UK and abroad). We will benefit from the support of an experienced and successful communications team at the Institute for Fiscal Studies: including the Head of Public Relations, who has a strong track record of communicating with UK stakeholders in government, third sector, academia and media; and a media and writing consultant, who has wide networks in the international development community.

In all activities, we will be building on long-standing relationships. We expect the project design to continue to strengthen these relationships for future collaborations.

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