2/5/2013: Microfinance: not really working all too well?

In recent years, there has been some new evidence emerging on the negative aspects of microfinance - the darling of many development quangos. Here's an interesting study showing that, basically, the entire concept might not be working all too well.

"The Miracle of Microfinance? Evidence from a Randomized Evaluation" by Abhijit V. Banerjee, Esther Duflo, Rachel Glennerster and Cynthia Kinnan (April 10, 2013, MIT Department of Economics Working Paper No. 13-09, available http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2250500) carried out "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."

Core findings from the experiment?

"Fifteen to 18 months after Spandana began lending in treated areas, households were 8.8 percentage points more likely to have a microcredit loan."

However, despite having more credit, households in treated areas "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."

Did consumption improve due to availability of microfinance? "There was no effect on average monthly expenditure per capita. Expenditure on durable goods increased in treated areas, while expenditures on “temptation goods” declined."

What about longer-term effects? "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." In other words, availability of credit did not improve due to presence of microfinance lenders in terms of access to credit, but credit did increase for those who have borrowed.

Again, consumption did not improve and neither did the quality of enterprises started in the microfinance covered areas. "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."

Top of the line conclusion? "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."

Much hype has been expanded on microfinance over the years, including a Nobel Prize award and UN and other multinational organisations cheerleading. Subsidies have been lavished on some lenders, while other lenders have gotten off to stock exchange listings on foot of 'doing good' by microlending. Yet, newer evidence continues to emerge that not all is happy in the microfinance world.