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The miracle of microfinance? Evidence from a randomized evaluation

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  • Banerjee, Abhijit
  • Duflo, Esther
  • Glennerster, Rachel
  • Kinnan, Cynthia

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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9437.

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Date of creation: Apr 2013
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Handle: RePEc:cpr:ceprdp:9437

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Keywords: Microfinance;

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  1. de Mel, Suresh & McKenzie, David & Woodruff, Christopher, 2008. "Are Women More Credit Constrained? Experimental Evidence on Gender and Microenterprise Returns," IZA Discussion Papers 3743, Institute for the Study of Labor (IZA).
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  6. Scott Fulford, 2010. "The effects of financial development in the short and long run," Boston College Working Papers in Economics 741, Boston College Department of Economics, revised 31 May 2011.
  7. Joseph P. Kaboski & Robert M. Townsend, 2011. "A Structural Evaluation of a Large‐Scale Quasi‐Experimental Microfinance Initiative," Econometrica, Econometric Society, vol. 79(5), pages 1357-1406, 09.
  8. Jeffrey R. Kling & Jeffrey B. Liebman & Lawrence F. Katz, 2005. "Experimental Analysis of Neighborhood Effects," NBER Working Papers 11577, National Bureau of Economic Research, Inc.
  9. Joseph P. Kaboski & Robert M. Townsend, 2005. "Policies and Impact: An Analysis of Village-Level Microfinance Institutions," Journal of the European Economic Association, MIT Press, vol. 3(1), pages 1-50, 03.
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Cited by:
  1. Beck, T.H.L. & Lu, L. & Yang, R., 2013. "Finance and Growth for Microenterprises: Evidence from Rural China," Discussion Paper 2013-053, Tilburg University, Center for Economic Research.
  2. Bruno CREPON & Florencia DEVOTO & Esther DUFLO & William PARIENTE, 2014. "Estimating the impact of microcredit on those who take it up: Evidence from a randomized experiment in Morocco," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2014012, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  3. Ahmed Mushfiq Mobarak & Mark Rosenzweig, 2014. "Risk, Insurance and Wages in General Equilibrium," NBER Working Papers 19811, National Bureau of Economic Research, Inc.
  4. Alessandro Tarozzi & Jaikishan Desai & Kristin Johnson, 2013. "On the impact of microcredit: Evidence from a randomized intervention in rural Ethiopia," Economics Working Papers 1407, Department of Economics and Business, Universitat Pompeu Fabra.
  5. Kraay, Aart & McKenzie, David, 2014. "Do poverty traps exist ?," Policy Research Working Paper Series 6835, The World Bank.
  6. Basu, Karna, 2014. "Commitment savings in informal banking markets," Journal of Development Economics, Elsevier, vol. 107(C), pages 97-111.
  7. Andalón, Mabel & Williams, Jenny & Grossman, Michael, 2014. "Empowering Women: The Effect of Schooling on Young Women's Knowledge and Use of Contraception," IZA Discussion Papers 7900, Institute for the Study of Labor (IZA).

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