MICROCAPITAL BRIEF: 25% of Microfinance Borrowers Use Part of Enterprise Loan Proceeds for Consumption, According to Study by Dean Karlan, Jonathan Zinman

In a recent paper, “List Randomization for Sensitive Behavior: An Application for Measuring Use of Loan Proceeds,” researchers Dean Karlan and Jonathan Zinman put forth data indicating that enterprise microloan borrowers tend to underreport the percentage of the loan, if any,  that they use for non-business purposes such as household expenses [1] [2]. The study uses a survey technique called “list randomization” that allows researchers to calculate the average response to a question in a population without being able to connect individual answers with individual respondents. This is intended to allow respondents to answer more truthfully than if they are asked questions directly, which can result in respondents feeling pressure to “conceal” information to protect their loan eligibility or to provide socially desirable answers.

Using results from two surveys, the study shows that when asked directly less than 10 percent of respondents admitted to spending their loan proceeds on household expenses, health or education, while under list randomization, this number increased to between 20 percent and 30 percent. The researchers emphasize that this study can help microfinance practitioners examine whether microloans have more impact on smoothing out day-to-day spending rather than maintaining a “sharp focus” on enterprise development alone. The study does concede that some of the difference between the two sets of survey results could be due to the order in which the surveys are administered – using the direct survey first might facilitate recall, leading to a different response for the later survey employing list randomization.

By Nisha Koul, Research Associate

Sources and Additional Resources:

 [1] Freakonomics, “What Percentage of Microfinance Loans Actually Go to Business Investment?” http://www.freakonomics.com/2011/09/19/what-percentage-of-microfinance-loans-actually-go-to-business-investment/

[2] “List Randomization for Sensitive Behavior: An Application for Measuring Use of Loan Proceeds,” by Dean Karlan, Jonathan Zinman, http://karlan.yale.edu/p/JDE-ListRandomization.pdf

MicroCapital.org story, August 20, 2011, “MICROFINANCE PAPER WRAP-UP: Selective Knowledge: Reporting Biases in Microfinance Data, by Jonathan Bauchet and Jonathan Morduch, Published by Financial Access Initiative (FAI) at New York University’s Robert F Wagner Graduate School of Public Service and Hunter College,” https://www.microcapital.org/microfinance-paper-wrap-up-selective-knowledge-reporting-biases-in-microfinance-data-by-jonathan-bauchet-and-jonathan-morduch-published-by-financial-access-initiative-fai-at-new-york-university/

MicroCapital.org story, January 12, 2010, “MICROFINANCE PAPER WRAP UP – CGAP Due Diligence Guidelines For The Review Of Microcredit Loan Portfolios, by Robert Peck Christen and Mark Flaming,” https://www.microcapital.org/microfinance-paper-wrap-up-cgap-due-diligence-guidelines-for-the-review-of-microcredit-loan-portfolios-by-robert-peck-christen-and-mark-flaming/

MicroCapital.org story, June 22, 2009, “MICROCAPITAL PAPER WRAP-UP: The Miracle of Microfinance? Evidence From a Randomized Evaluation, by Abhijit Banerjee, Esther Duflo, Rachel Glennerster, and Cynthia Kinnan,” https://www.microcapital.org/microcapital-paper-wrap-up-the-miracle-of-microfinance-evidence-from-a-randomized-evaluation-by-abhijit-banerjeey-esther-duoz-rachel-glennersterx-and-cynthia-kinnan/

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