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

assignmentEndline 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 IssuesGenerally..• Microfinance clients are self-selected• Microfinance organizations choose some villages and not

others • Cause-effect hard to isolateSpecifically 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