The Miracle of Microfinance? Evidence from a Randomized Evaluation

From Esther Duflo, Abhijit Banerjee, Rachel Glennerster, Cynthia G. Kinnan: 

ABSTRACT: This paper reports on the first randomized evaluation of the impact of introducing the standard microcredit group-based lending product in a new market.  In 2005, half of 104 slums in Hyderabad, India were randomly selected for opening of a branch of a particular microfinance institution (Spandana) while the remainder were not, although other MFIs were free to enter those slums.  Fifteen to 18 months after Spandana began lending in treated areas, households were 8.8 percentage points more likely to have a microcredit loan.  They were no more likely to start any new business, although they were more likely to start several at once, and they invested more in their existing businesses.  There was no effect on average monthly expenditure per capita.   Expenditure on durable goods increased in treated areas, while expenditures on “temptation goods” declined.  Three to four years after the initial expansion (after many of the control slums had started getting credit from Spandana and other MFIs), the probability of borrowing from an MFI in treatment and comparison slums was the same, but on average households in treatment slums had been borrowing for longer and in larger amounts.  Consumption was still no different in treatment areas, and the average business was still no more profitable, although we find an increase in profits at the top end.  We found no changes in any of the development outcomes that are often believed to be affected by microfinance, including health, education, and women’s empowerment. The results of this study are largely consistent with those of four other evaluations of similar programs in different contexts.

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About ozidar

I'm an Assistant Professor of Economics at the University of Chicago Booth School of Business and a Faculty Research Fellow at National Bureau of Economic Research. You can follow me on twitter @omzidar. http://faculty.chicagobooth.edu/owen.zidar/index.html
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One Response to The Miracle of Microfinance? Evidence from a Randomized Evaluation

  1. Brett says:

    Not shocking. There have been a couple of studies showing that micro-finance isn’t a particularly great way of boosting people out of poverty.

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