MIRG Meeting 5:

Impact of Microfinance
Aruna Ranganathan
 Agenda
• Impact on poverty
• Impact on gender
• Impact on society
• Any harmful effects?
• Methodology Issues
• Overall impact
• Larger question: Is bottom-up development
worth it? Are we doing it for us or for them?
Study-The miracle of microfinance?
Evidence from a randomized
evaluation (Banerjee et al 2009)
• 104 slum neighbourhoods in Hyderabad
• Partner: Spandana
• Random assignment to open a branch (only difference
between treatment and control is access to microcredit)
• Time frame: 15-18 months
• Data source: Household survey in 65 households in
each slum (total:6,850 households)
• Goal:study effects of creation and profitability of small
businesses, investment & consumption
 Household Selection
• No pre-existing microfinance presence
• Poor but not “poorest of the poor”
• Low density of construction workers
• Concrete houses, public amenities
• Not largest slums
• Population per chosen slum:46-555
 Data Collection
Baseline survey - 2005
• Household composition, education,
employment, assets, decision-making,
expenditure, borrowing/saving, business
• 2,800 households (non-random)
Created matched pairs for random
assignment
Endline survey- 2007/2008
 Typical Household..
• Family of 5
• Monthly expenditure: Rs.5000
• 70% lived in own house
• ~85% of children were in school
• 69% had one non-MFI loan (average: Rs.20,000)
• 31% ran one small business (average profits:
Rs.3040)
• 34% had a savings account
• 26% had life insurance
• None had health insurance
 Spandana
• Eligibility: (a) female, (b)18-59, ©residing in same area
for past 1 year, (d) valid id and proof of residence,
(e)80% of women in group should own home
• Group: 6-10 women
• Center: 25-45 groups
• Women jointly responsible for group & center
• No selection based on use of money
• No business training, financial literacy etc.
• Loan: Rs.10,000, 50 weeks, 12%
• Loan can increase up to Rs.20,000 with time
 Methodology Issues
Generally..
• Microfinance clients are self-selected
• Microfinance organizations choose some villages and not
others
• Cause-effect hard to isolate
Specifically in this paper..
• Financial gains for borrower measured by income & spending
• Too short timeframe?
• Other MFIs started operations in both the treatment and
control groups during time frame but Banerjee et al(2009)
claim that probability of receiving loan still 44% higher in
treatment
 Impact on Poverty
• Borrowers who already had a business increased
durable expenditure and realized increase in profits
• Households without businesses (high propensity to
become business owners) saw cut back in
spending (to save for durable asset?)
• Households without businesses (low propensity to
become business owners) increased non-durable
spending
• Overall population: household spending stayed
same “average monthly expenditure per capita”
• Households in treated areas 1.7% points more likely
to report operating a business opened in the past
year
• Business owners in treatment areas report more
monthly business profits- average of Rs.4,800
• Averaged over old business owners, new entrepreneurs
and non-entrepreneurs, there is no significant difference in
total household expenditure between treatment &
comparison (Rs.1453 vs. Rs.1420)
• Composition of spending changed slightly: treatment spent
more on durable and less on temptation
Data on comparison households
who do not own an old business:
• The following
predict the decision
to become an
entrepreneur:
whether wife of
household head is
literature, whether
wife works for wage
(-), # prime aged
women, amount of
land owned
• All 3 groups take out MFI loans at similar rates
• Households who have old business increase rate
of MFI borrowing by 8.5%
• New biz propensity does not increase borrowing
 Interpretation
Those with higher business propensity start more
businesses
• Households with old business increase durable
spending
• Households with no old business and lowest
propensity to start a business increase non-durable
spending
• Households with no old business and lowest
propensity increase spending on temptation
• However, new entrepreneurs decrease spending on
temptation
 What is money spent on?
• Household expenses
• Paying off debts
• Firing unproductive workers
• Luxury goods: TV, fancy weddings
 Impact on Gender
• No impact
• Benefactors of microfinance: male
entrepreneurs with existing businesses
• Women’s decision making power within
household stayed same
 Impact on Society
• Sometimes less money spent on
temptation goods (alcohol, tobacco,
gambling)
• No effect on children’s heath
• No effect on children’s education levels
 Any harmful effects?
Skeptics suggest:
• microfinance displaces other anti-
poverty measures
• Contributes to over-borrowing
• Increases long term poverty
 Overall Impact
• No significant gains for borrowers
(based on chosen indicators)
• Cheaper alternative to moneylender
• Thus encourages saving
Larger Questions:Is bottom up
development worth it? Are we
doing it for us or for them?
• Microfinance initiatives pay for themselves- even
return a profit
• Microfinance will not transform lives
• But India already has many petty jobs- what we
need are stable jobs at large enterprises with
reliable income
• No economies of scale in this: anti-poverty
initiatives need to be broader in scope
• Focus more on medium sized businesses