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: 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 Household composition, education, employment, assets, decision-making, expenditure, borrowing/saving, business 2,800 households (non-random) Created matched pairs for random assignment Endline survey- 2007/2008

Typical Household.. Family of 5 Monthly expenditure: Rs % 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: 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 Issues Generally.. Microfinance clients are self-selected Microfinance organizations choose some villages and not others Cause-effect hard to isolate Specifically 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