The Miracle of Microfinance? Evidence from a Randomized Evaluation Esther Duflo, Abhijit Banerjee, Rachel Glennerster & Cynthia G. Kinnan Presented by Will Morgan February 8, 2018

Microfinance Microfinance is a system in which small loans are given to low-income households Households are generally assumed to have little access to capital aside from moneylenders and family/friends Theory is that low-income individuals will be able to start businesses, become more prosperous, and experience other positive outcome such as women’s empowerment

Hyderabad Study Sought to examine “win-win” narrative – what impact, if any, does microlending have not only on household wealth, but on social factors such as education, health, and women’s empowerment Randomization used so that some areas received access to microcredit, and others did not Initial loans took place in 2007, and households were studied over next three years

Study Demographics The study was conducted with Spandana, a major microlender 104 neighborhoods in Hyderabad selected based on similar characteristics 52 neighborhoods were selected for Spandana’s microlending program These neighborhoods fit a certain profile: No discernible current access to microlending, poor but not poorest, not migrant workers

Characteristics of Loans Loans were given to groups of 6-10 women Initial loan of 10,000 Rs (comparable to $200 at 2007 PPP) Interest rate of 12% (nondeclining balance; 24% APR) Loan eligibility not tied to intended use of funds Use of funds not specified; repayment is only lender requirement

Findings Rate of borrowing 38% - slightly higher in selected areas than the 32.8% in control group Households increased spending on durable goods (home and business assets) and decreased spending on frivolous goods Rapid growth and profitability are not seen in most businesses, but this can be attributed to the nature of the business, not the lending structure “Win-win” narrative not supported by evidence – no significant changes in health, education, or women’s empowerment

Criticisms Lack of true control group High interest rate on loans – 24% APR, compared to low effective interest rate for existing credit, presumably from family/friend lending Loan eligibility not tied to intended use of funds, business investment not required Spandana only conducted loans – no additional social development programs – how would that change outcomes?

Questions?