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The miracle of microfinance? Evidence from a randomized evaluation

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

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
Date of revision:
Handle: RePEc:cpr:ceprdp:9437
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  1. Beatriz Armendáriz & Jonathan Morduch, 2010. "The Economics of Microfinance, Second Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262513986, June.
  2. Robert M. Townsend, . "Risk and Insurance in Village India," University of Chicago - Population Research Center 91-3a, Chicago - Population Research Center.
  3. Abhijit Banerjee & Arun G. Chandrasekhar & Esther Duflo & Matthew O. Jackson, 2012. "The Diffusion of Microfinance," NBER Working Papers 17743, National Bureau of Economic Research, Inc.
  4. Esther Duflo, 2003. "Grandmothers and Granddaughters: Old-Age Pensions and Intrahousehold Allocation in South Africa," World Bank Economic Review, World Bank Group, vol. 17(1), pages 1-25, June.
  5. Gine, Xavier & Townsend, Robert M., 2004. "Evaluation of financial liberalization: a general equilibrium model with constrained occupation choice," Journal of Development Economics, Elsevier, vol. 74(2), pages 269-307, August.
  6. Robert M. Townsend & Joseph P. Kaboski, 2009. "A Structural Evaluation of a Large-Scale Quasi-Experimental Microfinance Initiative," 2009 Meeting Papers 717, Society for Economic Dynamics.
  7. Nidardo, J. & Fortin, N. & Lemieux, T., 1994. "Labor Market Institutions and the Distribution of Wages, 1973-1992: A Semiparametric Approach," Papers 93-94-15, California Irvine - School of Social Sciences.
  8. Thomas, D., 1989. "Intra-Household Resource Allocation: An Inferential Approach," Papers 586, Yale - Economic Growth Center.
  9. Attanasio, Orazio & Augsburg, Britta & de Haas, Ralph & Fitzsimons, Emla & Harmgart, Heike, 2014. "Group lending or individual lending? Evidence from a randomised field experiment in Mongolia," Discussion Papers, Research Unit: Economics of Change SP II 2014-303, Social Science Research Center Berlin (WZB).
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  11. Jeffrey R Kling & Jeffrey B Liebman & Lawrence F Katz, 2007. "Experimental Analysis of Neighborhood Effects," Econometrica, Econometric Society, vol. 75(1), pages 83-119, 01.
  12. Suresh de Mel & David McKenzie & Christopher Woodruff, 2009. "Are Women More Credit Constrained? Experimental Evidence on Gender and Microenterprise Returns," American Economic Journal: Applied Economics, American Economic Association, vol. 1(3), pages 1-32, July.
  13. Mark M. Pitt & Shahidur R. Khandker, 1998. "The Impact of Group-Based Credit Programs on Poor Households in Bangladesh: Does the Gender of Participants Matter?," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 958-996, October.
  14. Jonathan Morduch, 1999. "The Microfinance Promise," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1569-1614, December.
  15. 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.
  16. 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.
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