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Latest Findings from Randomized Evaluations of Microfinance

Latest Findings from Randomized Evaluations of Microfinance

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Published by CGAP Publications
In 2009, the results from two microcredit impact studies in Hyderabad, India, and Manila, the Philippines were released to mixed responses (Banerjee, Duflo, Glennerster, and Kinnan 2010; Karlan and Zinman 2011). Some media declared microfinance a failure (Bennett 2009). Many in the microfinance community dismissed these randomized studies as too limited to be a true reflection of the entire sector.

These first randomized studies caused a sensation because they challenged the dominant impact narrative for microcredit—a narrative that rests on loans to capital-constrained microentrepreneurs who earn a steep return on marginal capital and thus can repay a relatively high interest rate and reinvest to grow out of poverty—and the way in which that narrative had been universalized in the popular imagination. In fact, the results were more nuanced. What the microcredit studies really showed is that this model of microcredit works for some populations—those who successfully grow businesses—but not for others.

Many now agree that the expectations for microcredit in the popular discourse were overblown. For some, the pendulum had swung: far from a panacea against poverty, some argued that microcredit was actually doing harm. The evidence supports neither extreme view. In fact, the results of the studies aligned with and confirmed some of the evidence from nonrandomized methods already in the microfinance research literature that found modest but neither revolutionary nor deleterious impacts from credit. While the concept of capital that will allow poor people to unleash small business opportunities remains valid for some poor clients, not every borrower is a microentrepreneur—take-up rates for credit products are often surprisingly low, and not all economic activities that poor people engage in yield high returns. Microcredit is not transforming informal markets and generating significantly higher incomes on average for enterprises. And yet the industry has focused almost exclusively on the rhetoric of entrepreneurship and has overlooked the many important benefits to households that are using loans to accelerate consumption, absorb shocks, or make household investments, such as investments in durable goods, home improvements, or education for their children.
In 2009, the results from two microcredit impact studies in Hyderabad, India, and Manila, the Philippines were released to mixed responses (Banerjee, Duflo, Glennerster, and Kinnan 2010; Karlan and Zinman 2011). Some media declared microfinance a failure (Bennett 2009). Many in the microfinance community dismissed these randomized studies as too limited to be a true reflection of the entire sector.

These first randomized studies caused a sensation because they challenged the dominant impact narrative for microcredit—a narrative that rests on loans to capital-constrained microentrepreneurs who earn a steep return on marginal capital and thus can repay a relatively high interest rate and reinvest to grow out of poverty—and the way in which that narrative had been universalized in the popular imagination. In fact, the results were more nuanced. What the microcredit studies really showed is that this model of microcredit works for some populations—those who successfully grow businesses—but not for others.

Many now agree that the expectations for microcredit in the popular discourse were overblown. For some, the pendulum had swung: far from a panacea against poverty, some argued that microcredit was actually doing harm. The evidence supports neither extreme view. In fact, the results of the studies aligned with and confirmed some of the evidence from nonrandomized methods already in the microfinance research literature that found modest but neither revolutionary nor deleterious impacts from credit. While the concept of capital that will allow poor people to unleash small business opportunities remains valid for some poor clients, not every borrower is a microentrepreneur—take-up rates for credit products are often surprisingly low, and not all economic activities that poor people engage in yield high returns. Microcredit is not transforming informal markets and generating significantly higher incomes on average for enterprises. And yet the industry has focused almost exclusively on the rhetoric of entrepreneurship and has overlooked the many important benefits to households that are using loans to accelerate consumption, absorb shocks, or make household investments, such as investments in durable goods, home improvements, or education for their children.

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Published by: CGAP Publications on Jan 19, 2012
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Latest Findings rm RandmizedEvalatins  Micrfnance
Jonathan Bauchet, Cristobal Marshall, Laura Starita,Jeanette Thomas, and Anna Yalouris
Access to Finance
FoRuM
Reports by CGAP and Its Partners 
No. 2, December 2011
 
Acknowledgments
Our thanks to the following people who reviewed andgave helpful input on this paper: Lasse Brune, Erica Field,Nathanael Goldberg, Dean Karlan, Asim Khwaja, Meng Lu,David McKenzie, Jonathan Morduch, Jonathan Robinson,and Dean Yang, and from CGAP’s publications committeeTilman Ehrbeck, Alexia Latortue, Kate McKee, andRichard Rosenberg.
© 2011 Consultative Group to Assist the Poor/The World BankAll rights reserved.Consultative Group to Assist the Poor1818 H Street, N.W.Washington, DC 20433 USAInternet: www.cgap.orgEmail: cgap@worldbank.orgTelephone: +1 202 473 9594
 
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n 2009, the results rom two microcredit impactstudies in Hyderabad, India, and Manila, thePhilippines were released to mixed responses(Banerjee, Duo, Glennerster, and Kinnan 2010;Karlan and Zinman 2011). Some media declared mi-cronance a ailure (Bennett 2009). Many in themicronance community dismissed these random-ized studies as too limited to be a true reection o the entire sector.
1
These rst randomized studies caused a sensa-tion because they challenged the dominant impactnarrative or microcredit—a narrative that rests onloans to capital-constrained microentrepreneurswho earn a steep return on marginal capital andthus can repay a relatively high interest rate and re-invest to grow out o poverty—and the way in whichthat narrative had been universalized in the popu-lar imagination. In act, the results were more nu-anced. What the microcredit studies really showedis that this model o microcredit works or somepopulations—those who successully grow busi-nesses—but not or others.Many now agree that the expectations or micro-credit in the popular discourse were overblown.For some, the pendulum had swung: ar rom a pan-acea against poverty, some argued that microcreditwas actually doing harm. The evidence supportsneither extreme view. In act, the results o thestudies aligned with and conrmed some o the evi-dence rom nonrandomized methods already in themicronance research literature that ound modestbut neither revolutionary nor deleterious impactsrom credit. While the concept o capital that willallow poor people to unleash small business oppor-tunities remains valid or some poor clients, not ev-ery borrower is a microentrepreneur—take-up ratesor credit products are oten surprisingly low, andnot all economic activities that poor people engagein yield high returns. Microcredit is not transorm-ing inormal markets and generating signicantlyhigher incomes on average or enterprises. And yetthe industry has ocused almost exclusively on therhetoric o entrepreneurship and has overlookedthe many important benets to households that areusing loans to accelerate consumption, absorbshocks, or make household investments, such as in-vestments in durable goods, home improvements,or education or their children.Combined with other evidence, randomizedevaluations are contributing to an emerging body o knowledge that is creating a new narrative aroundhow nancial services or the poor really work. Asthe results rom new studies have been released,the discussion has evolved, and randomized evalua-tions are being used to examine when particularproducts and designs work, or what segments o people, and why.Today researchers are using randomized tech-niques to better understand the underlying nan-cial services needs o poor clients and what impactsare achieved when appropriate nancial servicesare oered. Building on evidence rom earlier non-randomized studies, researchers are increasinglyable to work with micronance providers to applythese techniques to product innovation and totweak product design. In this way, randomizedtechniques can make a signicant contribution tothe eld by clariying our understanding o precise-ly how, and under what conditions, nancial ser-vices benet poor people.
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(See Box 1.)Poor households clearly have other nancialneeds that go beyond working capital loans to mi-croentrepreneurs. They use a variety o inormaland semi-ormal mechanisms to cope with risk,
Latest Fidis rm RadmizedEaluatis  Micrface
1. See, e.g., Helms (2010).2. Naturally, not all settings are appropriate or randomized eval-uations. This paper does not discuss such methodologicalissues in detail, but it does share ndings rom settings whererandomized evaluations were easible and illuminating.

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