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How Much do Existing Borrowers Value Microfinance? Evidence from an Experiment on Bundling Microcredit and Insurance

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  • Abhijit Banerjee
  • Esther Duflo
  • Richard Hornbeck

Abstract

Randomized controlled trials have found only modest effects of microfinance, but these studies focus on new clients. Existing estimates may thus understate ongoing gains for more experienced borrowers and the longer‐run potential of microfinance. We estimate impacts of microfinance on experienced borrowers, using an episode when a microfinance institution modestly increased existing clients’ fees in randomly selected villages (in exchange for a mandatory health insurance policy that turned out to be useless). This increase in fees led to a 22 percentage point decline in loan renewal in treatment villages (95% confidence interval: 16 to 27), compared to control villages where the policy was not introduced. Using this randomly generated variation in microfinance participation among experienced borrowers, we find impacts of microfinance that are strikingly similar to previous estimates for new clients: neither business outcomes nor household consumption were affected, on average. Also, consistent with prior studies, we find significant impacts on business outcomes among clients who had started their businesses before microfinance entered the village (0.06 standard deviation decline in an index of business outcomes from the loss of microfinance, 95% confidence interval: −0.002 to −0.12). However, despite these measured losses, these clients were just as willing to give up microfinance.

Suggested Citation

  • Abhijit Banerjee & Esther Duflo & Richard Hornbeck, 2018. "How Much do Existing Borrowers Value Microfinance? Evidence from an Experiment on Bundling Microcredit and Insurance," Economica, London School of Economics and Political Science, vol. 85(340), pages 671-700, October.
    • Handle: RePEc:bla:econom:v:85:y:2018:i:340:p:671-700
    DOI: 10.1111/ecca.12271
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    2. Riekhof, Marie-Catherine, 2019. "The insurance premium in the interest rates of interlinked loans in a small-scale fishery," Environment and Development Economics, Cambridge University Press, vol. 24(1), pages 87-112, February.
    3. Chowdhury, Shyamal & Hasan, Syed & Sharma, Uttam, 2024. "The Role of Trainee Selection in the Effectiveness of Vocational Training: Evidence from a Randomized Controlled Trial in Nepal," IZA Discussion Papers 16705, Institute of Labor Economics (IZA).
    4. Craig McIntosh & Felix Povel & Elisabeth Sadoulet, 2019. "Utility, Risk and Demand for Incomplete Insurance: Lab Experiments with Guatemalan Co-Operatives," The Economic Journal, Royal Economic Society, vol. 129(622), pages 2581-2607.
    5. Manthos D. Delis & Fulvia Fringuellotti & Steven Ongena, 2020. "Credit and Income Inequality," Staff Reports 929, Federal Reserve Bank of New York.
    6. Feldhoff, Charlotte H. & Liu, Yi & Feldhoff, Patricia R., 2019. "Does microfinance have an impact on borrower's consumption patterns and women's empowerment?," Weidener Diskussionspapiere 67, University of Applied Sciences Amberg-Weiden (OTH).

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    More about this item

    JEL classification:

    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations

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