Principal investigator: Silvio da Rosa Paula
Article title:THE MIRACLE OF MICROFINANCE? EVIDENCE FROM A RANDOMIZED EVALUATION
Article authors: Abhijit Banerjee; Esther Duflo; Rachel Glennerster; Cynthia Kinnan;
Location of the interventionHyderabad, India
Sample size: 104 poor neighborhoods, with 52 treated neighborhoods and 52 under control, totaling 6.863 households.
Main themeFinance
Type of interventionAccess to microcredit for poor families
Main variable of interestAccess to microcredit
Assessment methodExperimental Evaluation (RCT)
Evaluation Context
According to economist Muhammad Yunus, access to microcredit can transform the lives of a large part of the poor population, generating opportunities. Muhammad Yunus, who was born in Bangladesh, became internationally known as the "banker to the poor" for creating the world's largest social microcredit bank, a contribution that earned him the Nobel Peace Prize in 2006. Grameen Bank It is an institution that lends small amounts of money without bureaucracy, mainly to poor women, people who would hardly have access to the conventional banking system and, consequently, would end up in the hands of loan sharks.
Despite all the optimism generated by microcredit, some negative effects have begun to emerge, such as an increase in the number of suicides linked to debt, employees accusing microcredit institutions of making high profits, doubts about the true mission of these institutions, and about the transformative power that access to the service can have in reducing poverty. Given this, the question remains whether microcredit is truly capable of reducing poverty.
Thus, economists Abhijit Banerjee and Esther Duflo, winners of the 2019 Nobel Prize in Economics[1]The authors address this issue in their article, which can be freely translated as "The Microfinance Miracle? Evidence from a Randomized Evaluation." They assess the effects of access to microcredit, producing important results for understanding the impacts that formal loans can have on the poorest population.
Intervention Details
The experiment was conducted in Hyderabad, India's fifth-largest city and the capital of the former state of Andhra Pradesh. The research involved the participation of the Centre for Microfinance (CMF), the Institute for Financial Management Research (IFMR), and the for-profit financial institution Spandana.
Spandana's main product is group lending, first introduced by Grameen Bank. The groups are composed of 6 to 10 women, in a total of 25 to 45 groups that together receive a loan of US$200 PPP.[2]The interest rate charged is 12%, considered low by typical microfinance standards, even when compared to... Grameen BankThe repayment period for principal and interest is 50 weeks, and at the end of the loan, group members who have honored their debts become eligible for a second loan of up to $240, and so on, up to a maximum of $400. Therefore, to be eligible for the loans, clients must: (i) be female, (ii) be between 18-59 years old, (iii) have lived in the same neighborhood for at least one year, (iv) possess valid identification and proof of residence, and (v) at least 80% of the women in a group must own their own home. It is important to note that the home is not used as collateral; it is merely a way for the institution to form a group of people with a lower chance of migrating to other places.
Exclusive
To understand how the assessment of microcredit access among the poor population was conducted, we need to understand the method used. The methodology used by the researchers is called "randomization," an experimental approach commonly used in pharmaceutical research. For example, from a group of patients, some are randomly selected to receive a new medication; this group is called the "Treated Group," while the remaining patients receive a placebo; these are called the "Control Group." At the end of the treatment, data from both groups are collected, and a statistical evaluation of the medication's effectiveness is performed. In this method, the random selection process is indispensable because it ensures that both groups are comparable, meaning that, on average, the "Treated Group" and the "Control Group" have the same characteristics, and the only difference is that one group received the medication and the other the placebo.
In 2005, when the experiment began, some microfinance institutions had already established themselves in certain districts of Andhra Pradesh, but most organizations had not yet started operating in the capital, Hyderabad. The Spandana company, aware of the opportunity, selected 120 neighborhoods in the capital where no other microfinance institutions yet existed. This selection avoided neighborhoods with a high concentration of workers who commute frequently.
In this context, each neighborhood underwent a preliminary survey, gathering information on family composition, education, employment, expenses, loans, savings, and any businesses operated by the family or discontinued in the last year. A total of 2.800 families were interviewed, and after the survey, 16 neighborhoods were discarded due to the large number of migrant workers without families. The remaining 104 neighborhoods were grouped into similar pairs based on their average per capita consumption and debt per family. Subsequently, one neighborhood from each pair was randomly assigned to receive a branch of the institution, giving rise to the "treated group," and the remaining neighborhoods formed the "control group"—those that did not receive the branch.
Between 2006 and 2007, Spandana began operating progressively in 52 treatment areas, with implementation occurring on different dates in various neighborhoods. The first census was conducted in each neighborhood in early 2007, followed by a second census between 2009 and 2010. The collected information allowed for an assessment of whether residents in the treated neighborhoods—those receiving a Spandana branch—showed statistically significant differences compared to the control group.
Result
The results found over the 18-month period indicate that the demand for microcredit was only 26,7% of families, not 80% as expected by the Spandana institution. Despite this, there was a reduction in informal loans, indicating a shift towards microcredit. Furthermore, there was no positive impact on monthly consumption and consumption of non-durable goods; however, there was a positive effect on the consumption of durable goods. After 18 months of access to microcredit, families do not show a greater likelihood of becoming entrepreneurs; however, they invest more in the businesses they own (or those they start) compared to the control group.
In the long term, after 36 months of access to microcredit, the number of households taking out loans increases to 33%, however, this is still well below the demand expected by microcredit institutions. This result is similar to that found in two other randomized interventions with a similar design that took place in Mexico and Morocco.
In the long term, microcredit enabled the expansion of some independent businesses and the creation of others, but overall it was not enough to lift their owners out of poverty. The profits of these businesses only increased for those that were already more profitable. Furthermore, access to microcredit does not appear to have an effect on education, health, or women's empowerment in either the short or long term. The results differ from study to study on these outcomes, but as a whole, they do not show a drastic change in basic development outcomes for poor families.
Therefore, the study concludes that access to microcredit does not change the state of poverty, but it does affect the supply of labor, since families allocate more time to their own businesses, replacing the arduous work that was offered elsewhere, even if their small businesses have less chance of employing a worker and are less profitable. Finally, access to microcredit affects the consumption structure of families who invest in durable goods for the home, restricting their consumption of unnecessary expenses.
Lessons in Public Policy
In general, the evidence suggests that access to microcredit does not reduce poverty, but it is worth noting that researcher Abhijit Banerjee himself, in an interview with IPEA, does not rule out the use of microcredit as a useful tool for the poor to carry out their consumption projects, such as buying a TV or repairing their homes, provided that it is accompanied by good regulation.
Reference
BANERJEE, Abhijit et al. The miracle of microfinance? Evidence from a randomized evaluation. American Economic Journal: Applied Economics, vol. 7, no. 1, p. 22-53, 2015.
[1] Michael Kremer was also awarded the 2019 Nobel Prize in Economics for his experimental approach.
[2] Exchange rates adjusted for purchasing power parity (PPP) for 2007 from the World Bank.
