Tuesday, May 14, 2013

Microfinance Lending Does Not Help Poor Or Change Small Business Outcomes

Posted by Milton Recht:

From NBER Working Paper Series, "The Miracle Of Microfinance? Evidence From A Randomized Evaluation" by Esther Duflo, Abhijit Banerjee, Rachel Glennerster and Cynthia G. Kinnan, Working Paper 18950, May 2013:
In this paper we report on the first randomized evaluation of the effect of the canonical grouplending microcredit model, which targets women who may not necessarily be entrepreneurs. This study also follows the households over the longest period of any study (it followed households for about three to 3.5 years after the introduction of the program in their slums areas), which is necessary since many impacts may be only expected to surface over the medium run. A number of recent papers have reported on subsequent randomized evaluations of similar programs in Morocco (Crépon et al., 2011), Bosnia-Herzegovina (Augsburg et al., 2012), Mexico (Angelucci et al., 2012) and Mongolia (Attanasio et al. 2011). We will compare their results to ours in the last section of this paper.
The primary engine of growth that it is supposed to fuel is business creation. Fifteen to 18 months after gaining access, households are no more likely to be entrepreneurs (that is, have at least one business), but they are more likely to start more than one business, and they invest more in the businesses they do have (or the ones they start). There is an increase in the average profits of the businesses that were already in existence before microcredit, but this is entirely due to very large increases in the upper tail. At every quantile between the 5th and the 95th percentile, there is no difference in the profits of the businesses. The median marginal new business is both less profitable and less likely to have even one employee in treatment than in control areas.
However, the average business is still small and not very profitable. In other words, contrary to most people’s belief, to the extent microcredit helps businesses, it may help the larger businesses more. There is still no difference in average consumption. We do not find any effect on any of the women’s empowerment or human development outcomes either after 18 or 36 months. Furthermore, almost 70% of eligible households do not have an MFI loan, preferring instead to borrow from other sources, if they borrow (and most do). Our results find a strong echo in the four other studies that look at similar programs in different contexts. This gives us confidence in the robustness and external validity of our findings. In short, microcredit is not for every household, or even most households, and it does not lead to the miraculous social transformation some proponents have claimed. Its principal impact seems, perhaps unsurprisingly, to allow some households to sacrifice some instantaneous utility (temptation goods or leisure) to finance lumpy purchases, either for their home or in order to establish or expand a business. [Footnotes omitted.]

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