May 24, 2009

J-PAL Publishes Long Awaited Microfinance Impact Study

by Tim Ogden

Jameel Poverty Action Lab has published their paper detailing the findings of the first randomized controlled trial of “normal” microfinance—small, short-term loans made in a group liability structure. The final findings are quite similar to the early results we reported last October. To quote the paper:

“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 nondurable spending increase. We find no impact on measures of health, education, or women’s decision-making.“

Really understanding what was found in the study requires reading the full paper. But here are some additional interesting excerpts:

* “There was almost no MFI borrowing in the sample areas at baseline. However, 69% of the households had at least one outstanding loan. Loans were taken from moneylenders (49%), family members (13%), friends or neighbors (28%).“

* “31% of households ran at least one small business [before the availability of microfinance].“

* “[T]he reported purpose[for the loan] was starting a new business; 22% were supposed to be used to buy stock for existing business, 30% to repay an existing loan,15% to buy a durable for household use, and 15% to smooth household consumption.“

* “[A]pproximately 1 in 5 of the additional MFI loans in treatment areas is associated with the opening of a new business.“

* “[T]here is no significant difference in total household expenditure per adult equivalent between treatment and comparison households.“

Some readers may think the report is fairly damning to the marketing claims of the impact of microfinance—more studies like this in other areas and over longer periods are necessary before we can reject the traditional views though. Ultimately, though, this study is very good news for microfinance because it begins to illuminate what is really happening among borrowers. That information, in turn, can be used to improve the product to make sure that the best products are offered to clients—and the impact of microfinance can improve.