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Written by David McKenzie for the World Bank, released May 2009 as a policy research working paper, 31 pages, available at: http://collab2.cgap.org//gm/document-1.9.35106/Impact%20assessments%20in%20finance%20and%20private%20sector%20development_what%20have%20we%20learned%20and%20what%20should%20we%20learn.pdf

In this paper, the author explores the proposition that the area of finance and private sector development can benefit from impact evaluations [1]. Impact evaluations can assess the efficacy of a program or policy by comparing it against a counterfactual of what would have happened without the program or policy [1]. He argues that this is one of the most important tools that can be used along with economic theory for understanding “what works” [1].

The author encourages the use of impact evaluations by examining the feasibility of such impact evaluations, and analyzes the lessons of these evaluations for policymakers and practitioners [1]. He uses examples from randomized experiments, and explains that randomized experiments offer many advantages for evaluation [1]. For instance, they ensure that the only reason why some firms, consumers, or other units are subject to a policy or program and others are not is pure chance [1]. Moreover, the results are easy to communicate to policymakers [1]. He highlights policy and implementation lessons from four areas where impact evaluations are emerging: 1) microenterprise, 2) microfinance, 3) rainfall insurance, and 4) regulatory reform [1].

Microenterprise: The paper examines the issue of raising the income of the self-employed via microenterprises. He finds that a central question for policymakers is how to raise the income for poor businesses, and whether the typical microenterprises owned by the poor have any ability to grow [1]. He provides examples of randomized experiments that test the efficacy of grants, yet does not provide any treatments on loans. The experiments show that grants worki to raise income for the average microenterprise owner [1]. However, these impact evaluations can also show what does not work.  For example, even though grants may be effective, they are only effective for male business owners, not women [1]. It also shows that one-time grants may help raise the income of male business owners, but does not necessarily lead to employment creation [1].

Microfinance: Second, the author assesses the microfinance sector, and questions the archetypical model of microfinance as the best way to expand access to finance to the poor and to improve the small business sector [1]. The author mentions that the most famous example of microfinance is that of the Grameen Bank, and the model of microfinance most strongly associated with it is group lending to women at low interest rates [1]. He cites the high ratio of loans to women and the reliance on group liability as possible vulnerabilities in the microfinance model [1]. First, he suggests, as evidenced in his samples, that more credit products tailored to the urban male should be developed with less focus on women [1]. Second, based on randomized tests, group liability does not necessarily mitigate moral hazard, and could end up being more costly to the group [1]. Also, the notion that loans should have lower interest rates is challenged, which is at the heart of the debate on the commercialization of microfinance [1].

For reference purposes, there are MicroCapital stories that cover this topic. A study called “The Miracle of Microfinance? Evidence From a Randomized Evaluation”, by Abhijit Banerjeey, Esther Duoz, Rachel Glennersterx, and Cynthia Kinnan, which was covered in a MicroCapital Paper Wrap-Up, also touched upon the issue of the efficacy of microfinance. The authors conclude that microfinance has only a small effect on the fortunes and almost no effect on the lifestyles of poor people after the opening of a microfinance institution (MFI) in their neighborhood based on randomized evaluations [2]. They find that there is some difference, although not a major difference, in business profit and consumption patterns between households that received microfinance and those without [2]. Also, a recent report by the Economist, which was covered by MicroCapital, further finds that while impact assessment is not a new priority in the microfinance sector, there are few credible estimates of the extent to which microcredit actually reduces poverty [3].

Rainfall insurance: Next, the paper evaluates microinsurance, and the author explains that the reluctance from the poor to take credit is because of the lack of insurance in economies where there are frequent rainfall variations [1]. Studies indicate, however, that potential clients do not take credit even if there is an available insurance program because of the price and the fact that they are unfamiliar with the insurance program and provider [1]. Therefore, these would be issues that should be addressed in moving forward with microinsurance [1].

Further discussion on microinsurance is available in a previous MicroCapital Paper Wrap-Up, which reports on a study called “Insurance, Credit and Technology Adoption: Field Experimental Evidence From Malawi,” by Xavier Gine and Dean Yang [4]. The authors determine whether farmers who are insured against production risk have a greater demand for loans in order to invest in new hybrid seed technology than farmers who are uninsured against the failure of the hybrid seeds [4]. Crop failure, or production risk, is a result of deviations in the level of rainfall [4]. They find the presence of an insurance package did not persuade farmers to take the risk of a loan to employ new seed technology [4].

Regulatory reform: As espoused by the author, impact evaluations can also be used to evaluate regulatory reform. He argues that burdensome regulations are an important barrier to private sector development [1]. He evaluates regulatory reform in business registration in a few countries, including Peru and Mexico, to understand the data that can be garnered from such regulatory impact evaluations [1]. He suggests it is important to know what the consequences of these reforms are for the economic outcomes related to employment generation, consumer welfare, and economic growth [1]. Furthermore for reference purposes, in a MicroCapital Paper-Wrap-Up, the Economist Intelligence Unit released a report in October 2008 that provided a framework of the microfinance business environment in Latin America and the Caribbean [5]. In this report, a robust regulatory framework was one of the criteria that could increase microfinance activity in the region [5].

Finally, the author explores where we should go from here.  First, he proposes that there should be more evaluations in the areas previously discussed that are already at the forefront of current evaluations [1]. Second, he recommends that we can look at the effects of other programs and policies that are widely used to benefit large numbers of consumers and firms [1]. These include financial literacy and consumer protection, business training, and policies to enhance the SME sector [1]. He, therefore, concludes that having demonstrated some of the possible different strategies for evaluation, more impact evaluation is possible than has currently been attempted [1].

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By Uyen Tran, Research Assistant

Bibliography:

[1] “Impact Assessments in Finance and Private Sector Development”, by David McKenzie for the World Bank, http://collab2.cgap.org//gm/document-1.9.35106/Impact%20assessments%20in%20finance%20and%20private%20sector%20development_what%20have%20we%20learned%20and%20what%20should%20we%20learn.pdf

[2] MicroCapital Paper Wrap-Up, 22 June 2009: “The Miracle of Microfinance? Evidence From a Randomized Evaluation”, by Abhijit Banerjeey, Esther Duoz, Rachel Glennersterx, and Cynthia Kinnan http://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/

[3] MicroCapital.org Article, 20 July 2009: The Economist Magazine Reviews Studies Of The Impact Of Microfinance By The Poverty Action Lab http://www.microcapital.org/microcapital-story-the-economist-magazine-reviews-studies-of-the-impact-of-microfinance-by-the-poverty-action-lab/

[4] MicroCapital Paper Wrap-Up, 8 May 2009: “Insurance, Credit, and Technology Adoption: Field Experimental Evidence From Malawi”, by Xavier Gine and Dean Yang http://www.microcapital.org/microcapital-paper-wrap-up-insurance-credit-and-technology-adoption-field-experimental-evidence-from-malawi-by-xavier-gine-and-dean-yang/

[5] MicroCapital Paper Wrap-Up, 24 February 2009: 2008 Microscope on the Microfinance Business Environment in Latin America and the Carribean (LAC), (Part one of a two part series), by The Economist Intelligence Unit http://www.microcapital.org/paper-wrap-up-2008-microscope-on-the-microfinance-business-environment-in-latin-america-and-the-carribean-lac-part-one-of-a-two-part-series/