The Miracle of Microfinance? Evidence from a Randomized Evaluation

Microcredit has spread extremely rapidly since its beginnings in the late 1970s, but whether and how much it helps the poor is the subject of intense debate. This paper reports on the first randomized evaluation of the impact of introducing microcredit in a new market. Half of 104 slums in Hyderabad, India were randomly selected for opening of an MFI branch while the remainder were not. We show that the intervention increased total MFI borrowing, and study the effects on the creation and the profitability of small businesses, investment, and consumption. Fifteen to 18 months after lending began in treated areas, there was no effect of access to microcredit on average monthly expenditure per capita, but expenditure on durable goods increased in treated areas and the number of new businesses increased by one third. The effects of microcredit access are heterogeneous: households with an existing business at the time of the program invest more in durable goods, while their nondurable consumption does not change. Households with high propensity to become new business owners increase their durable goods spending and see a decrease in nondurable consumption, consistent with the need to pay a fixed cost to enter entrepreneurship. Households with low propensity to become business owners increase their nondurable spending. We find no impact on measures of health, education, or women's decision-making.

Banerjee et al (2013)

Region:

Urban (Hyderabad).RCT.Group liability credit in the amount of $200 (at market exchange rates, or $1,00 in PPP-adjusted rates) offered to groups of 6 to 10 women. Loan amounts may increase up to double on successful repayment. Also offered mortgage and insurance products, and savings accounts.32% higher new business creation. Positive impact on business formation among female-headed HH and on business investment among HHs with existing businesses. Female-headed HH in intervention areas more likely to start new business. No significant impact on average total per capita expenditure; or women's business revenues, profits or number of employees. No impact on number of employees in women's businesses. No significant impact on women's business revenues or profits. No impact on women's decision-making on HH spending.http://economics.mit.edu/files/59932,800 adult, very poor women from slums.