MICROFINANCE PAPER WRAP-UP: Latest Findings from Randomized Evaluations of Microfinance; By Jonathan Bauchet, Cristobal Marshall, Laura Starita, Jeanette Thomas and Anna Yalouris; Published by CGAP

By Jonathan Bauchet, Cristobal Marshall, Laura Starita, Jeanette Thomas and Anna Yalouris; Published by CGAP (Consultative Group to Assist the Poor); December 2011; 32 pages; available at http://www.cgap.org/gm/document-1.9.55766/FORUM2.pdf

The authors of this paper assess the impact of microfinance on poverty by reviewing findings from recent randomized evaluations, which compare how one group responds to having access to specific financial services against how a comparable group fares without access to those services. This study aims to contribute to a more refined narrative of the impacts of microfinance in the wake of mixed appraisals of microfinance, including inflated expectations of its positive impact and categorical denials thereof. The studies discussed in the paper were undertaken by the following US-based entities: Innovations for Poverty Action (IPA), a nonprofit organization; Financial Access Initiative (FAI), a consortium of development economists; and the Abdul Latif Jameel Poverty Action Lab (J-PAL), which is housed at the Massachusetts Institute of Technology (MIT).

The first part of the paper reviews the results from randomized evaluations that measure the impact of microcredit and microsavings on business investment, business creation, consumption and household welfare. This evidence suggests that, while increased access to credit does not produce the kind of dramatic transformations promised by some microfinance providers, it does appear to have some positive outcomes including the creation of new businesses and increased purchasing of durable goods. The studies also indicate that loans that were extended to wage earners who were considered marginally creditworthy enabled the workers more easily to withstand shocks such as health emergencies and thus maintain their jobs. Furthermore, evidence indicates that formal savings is an effective tool to help poor people accumulate funds for investment or consumption.

The second part of the paper presents evidence from evaluations of financial products and delivery methods indicating that seemingly small variations in traditional microcredit and savings offerings can yield significantly different results. The studies under consideration assessed the results of modifying common microfinance strategies and attributes inter alia group liability, establishing weekly repayment schedules and targeting women rather than men. Many of the studies found that individuals and groups shared very similar repayment patterns. In serving women, practitioners may have a greater impact if they extend a menu of loans that are tailored to different categories of women, specifically targeting various levels of earning potential and reasons for borrowing. Similarly, impact assessments that were conducted to isolate the effects of the frequency of repayments suggest that various repayment options should be made available including grace periods. Studies that were conducted to observe the effects of “microfinance plus” products, which include add-on services such as financial management training, revealed that simple rules-of-thumb about sound financial practices – rather than comprehensive curricula – are more advantageous for low-income business owners.

Finally, the authors suggest that microinsurance has positive impacts on poor households – including a greater ability to deal with weather shocks and irregular agriculture income – but that low rates of take-up, even for effective products, show that product design matters tremendously. The price of the insurance policy, lack of information about how formal insurance works and lack of trust in the insurance provider often deter poor households from buying policies.

The authors acknowledge that randomized trials have limitations such as the short timeframe during which most are conducted. This is due in part to high costs that are associated with randomized evaluations as well as to the reluctance of practitioners to deprive a control group of financial services for longer than a couple of years.

By Jacqueline Foelster, Research Associate

Sources and Additional Resources:

CGAP (Consultative Group to Assist the Poor) (December 2011), “Latest Findings from Randomized Evaluations of Microfinance”; available at http://www.cgap.org/gm/document-1.9.55766/FORUM2.pdf

MicroCapital’s Microfinance Universe profile, CGAP, https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=CGAP+%28Consultative+Group+to+Assist+the+Poor%29

MicroCapital’s Microfinance Universe profile, Innovations for Poverty Action (IPA), https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Innovations+for+Poverty+Action

MicroCapital’s Microfinance Universe profile, Financial Access Initiative (FAI), https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Financial+Access+Initiative+%28FAI%29

MicroCapital’s Microfinance Universe profile, Abdul Latif Jameel Poverty Action Lab (J-PAL), https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Abdul+Latif+Jameel+Poverty+Action+Lab+%28J-PAL%29

Browse the MicroCapital Universe and add your entry to the wiki at https://www.microcapital.org/microfinanceuniverse/

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