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The Miracle of Microfinance – An Evaluation

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The miracle that microfinance is thought to be was subjected to a randomized evaluation in a study which was a result of a research partnership between MIT and the Centre for Microfinance at IFMR .

The research findings were presented by Prof. Esther Duflo to a packed audience at the IFMR campus on July 9th, 2009.

Prof. Esther Duflo presenting the study

According to her, the need for such an evaluation was necessitated by the fact that microfinance is often subsidized and there is a problem of self-control, which can if not dealt with, lead to a debt-trap.

Audience in rapt attention

Some of the key findings which she summed up with were:

1.Take-up of MFI loans is lower than is often predicted – this matters for planning sample sizes and it also suggest that microcredit is not for everyone.

2.Microcredit does have impacts and they differ for different households.

Microcredit has spread extremely rapidly since its beginnings in the late 1970s. but whether and how much it helps

the poor is the subject of intense debate. This paper reports on the  randomized evaluation of the impact of introducing micro credit in a new market. Half of 104 slums in Hyderabad, India were randomly selected for opening of an MFI branch while the remainder were not.

We show that the intervention increased total MFI borrowing, and study the effects on the creation and the profitability of small businesses, investment, and consumption. 15 to 18 months after the program, there was no effect of access to microcredit on average monthly expenditure per capita, but durable expenditure did increase. The effect are heterogenous: Households with an existing business at the time of the program invest in durable goods. and their profits increase .

Households with high propensity to become business owners see a decrease in nondurable consumption, consistent with the need to pay a fixed cost to enter entrepreneurship. Households with low propensity to become business owners see non durable spending increase. We find no impact on measures of health, education, or womens decision -making.

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Category: Payday loans

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