Measuring the Impact of Microfinance Grameen Foundation Publication Series

Taking Another Look by Kathleen Odell Measuring the Impact of Microfinance 2 choices andinterpretations presented here becompletely my own. to take onthisproject andespeciallyfor thefoundation’s insistence thattheeditorial number ofpointsinthetext. Thanks alsoto Grameen Foundation for theopportunity substantive comments whichwere essential infocusing thisreport andclarifyinga Nathanael Goldberg, BethHoule,ElisabethRhyne, andDavid Roodman allprovided readers. NimishAdhia, Peter Cowhey, AsifDowla, Christopher Dunford, GeetaGoel, Counts, andCamillaNestor atGrameen Foundation, aswell asanumberof external researchers andpractitioners inthemicrofinance field,includingNigel Biggar, Alex The authorisgrateful for comments onanearlierdraft ofthispaperfrom several Acknowledgements Global Peace through Commerce. work onthisproject was generously by supported theBrennan School’s Center for global policymakingatRoskilde University inDenmark2003-2004. Kathleen’s at Chicago. As aFulbright Scholar, Kathleenstudiedsustainabledevelopment and and amaster’s degree inurbanplanning andpolicyfrom theUniversity ofIllinois areas ofeconomic growth anddevelopment. KathleenholdsaPhDineconomics Brennan SchoolofBusiness inRiver Forest, Illinois.Sheconducts research inthe Kathleen Odellisanassistant professor ofeconomics atDominicanUniversity’s About theAuthor ©Grameen® Foundation, USA. Allrightsreserved. www.grameenfoundation.org Table of Contents 3 Foreword 4 Executive Summary 4 Randomized (Experimental) Studies 5 Non-Randomized (Quasi-Experimental) Studies 7 Section 1 Introduction 7 What the Popular Press is Saying 10 Section 2 Where to Start: Summary of the 2005 Paper 11 Section 3 What Are the Questions? 13 Section 4 Evaluation Methods (Pros and Cons) 16 Three Technical Points 17 Section 5 Experimental (Randomized) Studies 17 Traditional Microcredit in India 18 Individual Lending in the Philippines 19 Consumer Credit in South Africa 20 The Role of Savings Constraints in Kenya 21 Evidence on Returns to Capital in Microenterprises 22 Section 6 Quasi-Experimental Studies 22 The Impact of Microcredit in Bangladesh 23 The Coleman Method (as applied to the Philippines) 24 The Effect of New Bank Branches in Mexico 25 Microfinance in Thailand (Revisited) 27 Section 7 Non-Experimental Studies 27 The Goldin Institute 28 Microcredit for the Very Poor in Eastern Uttar Pradesh, India 29 Section 8 The Macroeconomic Effects of Microfinance 30 Section 9 Conclusions and Directions for Future Research 32 References 34 Appendix Measuring the Impact of Microfinance: Taking Stock of What We Know Executive Summary 35 The AIMS Studies 35 Wider Impacts 35 Empowerment 35 Contraceptive Use 35 Nutrition 36 Determinants of Impact 36 Control of Loan 36 Incoming Poverty Level 36 Family Crises Measuring the Impact of Microfinance 2 www.grameenfoundation.org FOREWORD

During the International Year of Microcredit (IYMC) get feedback on her early drafts, and my colleagues and in 2005, I became frustrated when many speakers at I participated in this review process. I am pleased that so international fora routinely mischaracterized the findings many of the leading thinkers of our field took the time to of the growing body of research that looks into whether, read and comment on this paper in draft form. and how, microcredit was effective in addressing global The debate about microfinance’s effectiveness in poverty. As part of our contribution to the success of the reducing poverty and addressing other societal problems, IYMC, we commissioned Nathanael Goldberg to survey and related discussions about how to make microfinance the literature and report, in layman’s terms, what we even more potent, has often degraded into polemics and knew at that time. unsubstantiated claims, and sometimes become very As it turned out, the report seemed to fill a critical gap technical in nature. The media and other stakeholders, in our movement’s learning agenda and was used by an such as regulators and social investors, have been impressive group of policy makers, donors, investors, increasingly confused by conflicting claims about what academics, and practitioners. Goldberg himself has gone we know and don’t know. This paper should help to on to do great things as a researcher at Innovations for inform these important discussions, which go to the Poverty Action. heart of how we think about making microfinance the Not surprisingly, the field moved on. New research was most effective tool that it can be and how can we set published, some of which (at least according to media expectations appropriately about its potential and reports) appeared to contradict some of the main findings current limitations. of the Goldberg report. In addition, criticisms of earlier The executive summary of the original Goldberg paper research—both specific studies and entire categories of is appended to this paper. Both this paper and the entire scholarly inquiry into the effectiveness of microfinance— Goldberg paper are available for download from Grameen emerged and sparked fascinating and impassioned Foundation’s website, www.grameenfoundation.org. debate that was often difficult for non-specialists to track My colleagues Camilla Nestor, Nigel Biggar, Liselle and decipher. Yorke, Shannon Maynard, and Angie Sanders were I saw a need to commission an updated literature essential partners in bringing this paper to fruition. I am review, and I was pleased to meet Professor Kathleen grateful to Dean Arvid Johnson of Dominican University’s Odell last year at an impressive conference that Brennan School of Business and Kathleen Houlihan, Dominican University’s Brennan School of Business the founding director of the Global Center for Peace (where Odell is an assistant professor of economics) through Commerce, who organized the conference that convened in Chicago. In a hurried conversation between got the ball rolling on this paper. Dean Johnson was also sessions, I explained the need as I saw it and encouraged instrumental in helping to free up Professor Odell to focus her to read the Goldberg report to see if she was up to on this paper for several months. Most of all, I would like taking it forward. She agreed and rapidly convinced the to thank the author for treating the subject rigorously, Brennan School of Business to lighten her teaching load writing elegantly, explaining clearly, and judging fairly. 3 this spring so that she could produce the paper on a She exceeded my high expectations and in doing so has Microfinance of Impact the Measuring compressed schedule. She was willing to do this through made a major contribution to our rapidly changing field. our Bankers without Borders™ volunteer program, which, in the meantime, got a major boost in the form of a large scaling-up grant from J.P. Morgan’s Social Finance Group. We told Professor Odell, as we had done with Goldberg, that she had complete editorial control of the Alex Counts, President final product to ensure independence and credibility. Of Grameen Foundation course, we encouraged her to reach out to as many of May 3, 2010 the industry’s leading researchers and practitioners to

www.grameenfoundation.org Measuring the Impact of Microfinance 4 1 negative interpretations appearing in the press. public statements disputing the oversimplifications and of the research papers cited in the articles have made with a healthy dose of skepticism, as even the authors of its proponents. These media stories should be read powerful an anti-poverty tool as suggested by many slant, collectively suggesting that microfinance isn’t as Times Economist good deal of media coverage. Stories published in the impact assessment evaluations in 2009 precipitated a survey a much-needed update. microfinance impact assessment, making this current have been a number of important developments in the years since Goldberg’s paper was released, there Foundation and authored by Nathanael Goldberg. In released in 2005, which was sponsored by Grameen comprehensive impact assessment literature survey between 2005 and 2010. It is an update of a impact assessment evaluations released or published This paper is a survey of several significant microfinance programs already on the ground. Also, because the RCT Thus the RCT methodology is not useful for evaluating put into place in advance of program implementation. be identified, and the evaluation structure must be limitations. Programs to be evaluated with an RCT must methodology provides a solution to this challenge. plagues much of social science research), and the RCT impact assessment (in fact, the selection bias problem standing and well-known challenge in microfinance difference between clients and non-clients is a long- different from non-clients. The possibility of inherent microfinance institutions (MFIs) may be systematically eliminates the problem of selection bias, where clients of RCT is that in cases where it can be effectively used, it (RCT) first studies employing the assessment since 2005 is methodological; in 2009, the actual findings reported. studies, disentangling the media interpretation from the of this paper is to summarize the results of these new http://kristof.blogs.nytimes.com/2009/12/28/the-role-of-microfinance/ The release of a handful of prominent microfinance On the other hand, the RCT methodology has One of the key developments in microfinance impact presented the new research with a negative methodology were released. The benefit of the magazine, the Boston Globe randomized controlled trial , and the EXECUTIV SUMMAR www.grameenfoundation.org Financial 1 One aim and social well-being. (positive or negative) on broader measures of poverty investment and outcomes but did not have impacts periods, microfinance had positive impacts on business three studies suggest that over relatively short time overall health and well-being). Collectively, these in children’s school enrollment, or improvements in microcredit (such as women’s empowerment, increases test for, but do not find, evidence of social impacts of poverty. Banerjee et al. and Karlan and Zinman both borrowers only but has no overall effects on income or leads to an increase in business profits for male microlending to a new population in Manila, Philippines, Karlan and Jonathan Zinman) finds that the expansion of to Estimate the Impacts in Manila” [2010b] by Dean Credit Access: Using Randomized Supply Decisions for women. The third study (“Expanding Microenterprise accounts increase business investment and expenditure investment in Kenya, and find that formal savings of the introduction of savings accounts on business small businesses. Dupas and Robinson study the effect investment and supports the creation and expansion of in Hyderabad, India, supports household borrowing and Banerjee et al., find that the introduction of microcredit impacts of microfinance on the lives of poor clients. examined closely, report evidence of a number of positive by Pascaline Dupas and Jonathan Robinson), when Evidence from a Field Experiment in Kenya,” [2009] “Savings Constraints and Microenterprise Development: evaluation,” [2009] by Abhijit Banerjee et al. and miracle of microfinance? Evidence from a randomized three randomized studies. Two of these studies (“The The popular press coverage primarily addressed R references and a more complete discussion. economics is ongoing. See Section 4 of this report for the use of the RCT as an evaluation tool in development everyone has access to microfinance. The debate over to implement the RCT methodology because nearly has been in place for years, it is virtually impossible (such as Bangladesh, for instance) where microfinance are necessarily short. Finally, in many environments services) from a specified group, time horizons for study works by withholding andomized ( E xperimental) Y treatment S (in this case microfinance tudies Clients of Al Sol (Mexico)

In addition to the impact assessment studies above, impact assessment since 2005, there have been other two studies by Suresh de Mel, David McKenzie, and important (non-randomized) studies as well. As of 2005, Christopher Woodruff (2008 and 2009) provide a particularly well-respected study of the impact of some evidence about returns to capital in small microfinance was a study of microcredit in Bangladesh businesses (microenterprises) such as the businesses written by Shahidur Khandker of the World Bank. This most frequently owned by microcredit borrowers. In study, which expanded upon earlier impact assessment in the 2008 study, the authors find that small grants to Bangladesh, showed a strong positive impact on income microenterprise owners were almost completely invested as a result of borrowing from microlending institutions. A 5 in business expansion, and that the grants increased 2009 study by David Roodman and Jonathan Morduch Microfinance of Impact the Measuring average profits of microenterprises by about 60 percent revisits Khandker’s study, as well as two earlier related per year. In the 2009 study, the authors investigate the studies (Morduch, [1998]; Pitt and Khandker, [1998]), difference in returns to capital for male versus female and raises questions about the validity of the results borrowers. They find increases in business profits only for of all three papers. Roodman and Morduch argue that male business owners. methodological concerns about the earlier work should lead readers to be skeptical of the positive results of Non-Randomized microfinance these studies report. (Quasi-Experimental) Studies Work by Brett Coleman (2006) of the Asian Though the release of these randomized studies Development Bank found that for two microlending was one of the major developments in microfinance programs in northeast Thailand, the services were more

www.grameenfoundation.org Measuring the Impact of Microfinance 6 these services. improves the lives of borrowers and savers who use (though sometimes qualified) evidence that microfinance of additional studies provide context and additional and income (Kaboski & Townsend, 2009). A handful participating villages and led to increases in consumption microlending program, relieved credit constraints in that Thailand’s “Million Baht Village Fund,” a government reduced reliance on moneylenders. A second study found consumption smoothing, and occupational mobility, and those targeted at women, promoted asset growth, and Robert Townsend (2005) finds that MFIs, especially was opened. Research in Thailand by Joseph Kaboski and income for residents of municipalities where a branch increase in informal business ownership, employment, Banco Azteca in neighborhoods across Mexico led to an Love (2009) found that the opening of branches of products are reaching their intended recipients. raise important questions about whether microfinance borrowers actually see negative effects. These studies accrue only to relatively wealthy borrowers; the poorest formal saving. However, these positive effects appear to per capita incomes, expenditures, food expenditures, and participation in the lending program leads to increases in program are actually relatively wealthy. Kondo finds that Similar to Coleman, Kondo finds that borrowers in the 30 percent of the rural population in the Philippines. study a microfinance operation aimed at the poorest Development Bank uses Coleman’s methodology to In a related paper, Toshio Kondo (2007) of the Asian target group of the “poorest of the poor.” likely to reach relatively wealthy borrowers than the World Bank researchers Miriam Bruhn and Inessa www.grameenfoundation.org

insights into these critical questions. Hopefully, the next wave of research will provide further such as education, health, and women’s empowerment. effects of microfinance on measures of social well-being, rates of microfinance clients is less clear, as are the this survey, the overall effect on the incomes and poverty and microsavings instruments. Based on the studies in different microfinance services, including microcredit for microbusinesses. This result is observed across different settings) suggesting that microfinance is good of studies (using a variety of methodologies across encouraging results. There is evidence from a number has emerged over the last five years offers some the poor. functions in the world and how it affects the lives of of knowledge about how microfinance, in all its forms, must be interpreted as a small piece of a growing body and the specific questions in mind, each impact study very specific context. Rather, keeping both the general to us, since each study necessarily applies only to a to over-interpret the empirical results that are available greatest errors researchers and practitioners can make is and so on. Given this extreme heterogeneity, one of the Asia, some are in Africa, some are in Eastern Europe, globe: some are urban, some are rural, some are in South MFIs also operate in diverse environments around the products, and various combinations of these services. services including loans, savings accounts, insurance different types of clients. These institutions offer various tool but a collection of tools. MFIs around the world serve impossible to answer, because The research into the impact of microfinance that Ultimately, the question, does microfinance work? microfinance is not a single is section 1 Introduction

In 2005, Grameen Foundation released a study, dollars would have more powerful effects if they were authored by Nathanael Goldberg, entitled “Measuring spent on some other program, such as conditional the Impact of Microfinance: Taking Stock of What cash transfers, teacher training, vaccinations, or any We Know.” Goldberg (now at Innovations for Poverty of the many, many other areas where development Action) surveyed dozens of impact assessments aid is spent. (Though in the absence of rigorous and of microfinance and prepared a literature review comparable impact assessments across a variety of many of the most significant. See Appendix for of development interventions, the answer to this the executive summary of Goldberg’s paper. Of question remains out of reach.) On the other hand, course, since the 2005 paper, microfinance impact in areas where microlending is profitable, concerns assessment has moved forward. Today, in early 2010, arise about whether the lending agencies remain it seems important to again survey the literature, committed to the goal of fighting poverty or whether looking this time at the new studies released since profit is the primary motive. Finally, while there 2005 and addressing the continuing debate about are many inspiring stories of entrepreneurs whose some of the earlier studies. lives have been changed for the better21 (Counts, The past five years have been an exciting time in 2008) by access to credit, there are also stories of microfinance and microfinance impact assessment. borrowers who have been adversely affected by credit, Professor Muhammad Yunus and Grameen Bank experiencing credit dependency and cyclical debt were awarded the Nobel Peace Prize in 2006. As of (Goldin Institute, 2007). December 2007, the Microcredit Summit Campaign The main goal of the impact assessment literature counted 3,552 microfinance institutions (MFIs) is to estimate the average effects of microfinance worldwide, serving nearly 155 million borrowers programs overall, notwithstanding the sometimes (Daley-Harris, 2009). In the area of impact conflicting anecdotal evidence and intuition which is assessment, new research methodologies have been so widely available. Further, a well-designed impact used, and the questions that are being asked have been assessment study can provide insight into the causal refined. The year 2009 was a particularly lively year factors behind the success and failure of various in impact assessment, with new studies emerging that microfinance interventions. The aim of this literature initiated a vigorous debate in the popular press about survey is to step away from the popular debate, to look the merits and potential of microfinance. critically at the new research, and to seek (to whatever 7

It is important to study the impact of microfinance extent possible) consensus on the question of what Microfinance of Impact the Measuring for several reasons. First, many MFIs receive is rigorously and empirically known about the effect subsidies from governments, development agencies, of microfinance on the lives of the poor people it is and foundations. To the extent that microfinance intended to reach. receives scarce subsidies or preferential regulatory treatment based on its anticipated impact on poverty What the Popular Press is Saying reduction, it is necessary to evaluate whether the In 2009, impact assessment of microfinance became development dollars spent in this area are having a mainstream media topic, with a collection of articles the desired effects (reducing poverty, improving the that could broadly be interpreted as bad press. These lives of the poor) and whether regulatory preferences articles were based on a small wave of research make sense. A related question is whether these same 2 www.kiva.org

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4 David Roodman outlines on his blog some of the follow-up on the Financial Times article. Particularly notable is a tweet from Tim Harford (author of the Financial Times piece): “Note to all microfinance enthusiasts: I DO NOT WRITE MY OWN HEADLINES.” http://blogs.cgdev.org/open_ book/2009/12/making-headlines.php

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The goal of microfinance as an economic Insurance and money transfer services are also development tool71is to improve the lives of the important but newer, so that not much assessment poor. An interpretation of this goal is that if has been completed as yet on their effectiveness. microfinance gets poor people out of poverty, then Second, there is new research available that it must be working as it was intended. This would suggests that microcredit plays an important role be mainly an income measure—if incomes rise as a in helping poor people mitigate the unreliability of result of access to microfinance, then microfinance their income. Portfolios of the Poor: How the World’s is effective as an anti-poverty tool. But over the Poor Live on $2 a Day, a 2009 book by Daryl Collins, years, some microfinance enthusiasts have made Jonathan Morduch, Stuart Rutherford, and Orlanda claims beyond the effect on the income of the Ruthven provides us with new insight into the poor. Microfinance has been heralded not only as complicated financial lives of the very poor. Portfolios a strategy for increasing income and consumption presents the results of year-long financial diaries kept among the poor, but also as a tool for improving by poor households in India, Bangladesh, and South measures of health, children’s education, and Africa. The diaries show the many ways in which women’s empowerment. See also, as one example, poor households rely on financial instruments not the CGAP website answer to the question “How Do only for investment and entrepreneurship purposes, Financial Services Help the Poor?”8 Various studies but also for consumption smoothing and easing the presented in Goldberg’s 2005 paper showed evidence unpredictability of daily life. Portfolios is not impact of positive effects of microfinance on several of assessment research, but rather a rigorous qualitative these “noneconomic” measures, including women’s study that contributes heavily to the understanding empowerment, contraceptive use, and children’s of microfinance’s role in borrowers’ lives. As one of a nutrition. Microfinance scholars, critics, lenders, variety of financial instruments regularly used by the donors, and practitioners alike seek to know to what poor households surveyed, microfinance emerges as a extent microfinance actually achieves these goals. tool providing reliable and predictable access to loans But it turns out that answering this question is not so and savings. The evidence presented in Portfolios simple. demonstrates the importance of microfinance not First, the term microfinance refers to a range of only as a means of reducing poverty, but also as a financial services for low-income people, including means of improving the quality of daily life within the 11 credit, savings, insurance, and money transfers. condition of poverty. Microfinance of Impact the Measuring Most of the studies included here study the effect of Third, while many impact assessments have microcredit—small loans to poor borrowers, but there been conducted about the effects of microlending are also a few studies on the impact of microsavings. on individuals, there is relatively little literature Though microcredit is the best known and most addressing the macroeconomic effects of widely practiced of the microfinance services, interest microfinance. Yet, there are theoretical arguments in microsavings and other services is growing. that if microfinance is successful at any one of its aims (raising incomes, promoting entrepreneurship, increasing children’s education, encouraging savings), 7 It is important to note, however, that as microfinance has matured, it is in some cases implemented not as an economic development tool, but as a then, over time, positive effects on macroeconomic profit-making enterprise. measures (such as the rate of economic growth, 8 http://www.cgap.org/p/site/c/template.rc/1.26.1305/

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Evaluation of microfinance programs attempts group. The fact that borrowers and non-borrowers to determine how some outcome measurement may be systematically different from each other is (income, consumption, children’s participation in called selection bias, and it presents a formidable education, etc.) is affected by access to microfinance. challenge to program evaluators. If, for whatever Answering a question of this nature is surprisingly reason, selection bias persists and the treatment and difficult, however, due to an ultimately unsolvable comparison groups are not comparable, then any problem which evaluators refer to as the absence estimates of the effect of microfinance will be biased of the counterfactual. It is a relatively simple (that is, incorrect). matter to look at incomes, for example, before and Researchers have worked for years on methods of after participation in a lending program and to eliminating selection bias with varying success. The determine whether those incomes increased. But most robust way to generate reliably comparable the counterfactual would indicate what would have treatment and comparison groups is to assign happened to those incomes in the absence of the households randomly to one or the other group, lending program. Might those families have gotten similar to the way patients are assigned to groups in richer anyway? Is the observed increase in incomes clinical medical research. Since the first version of a result of the lending program, or perhaps a result this literature review in 2005, several studies have of some other, possibly unobserved, factor, such emerged that use random assignment, and some as entrepreneurial spirit, work ethic, or inherent innovative non-random approaches also have talent for business? For an impact assessment to been taken. be considered statistically rigorous, some approach The impact assessment literature can be broken must be taken to approximate the counterfactual. into studies with experimental design, quasi- Generally, this requires designating a treatment group experimental design and non-experimental design. which has access to a lending program, for example, Experimental design assigns households randomly to and a comparison group which is identical to the treatment and control groups in advance of applying treatment group in every way, save for access to the the treatment (in this case, making microfinance lending program and some unavoidable random instruments available) to the treatment group. Quasi- variation. experimental studies attempt to eliminate selection But how should this comparison group be bias through statistical strategies, which can be very 13 identified? Simply including households that did complicated. Non-experimental assessments include Microfinance of Impact the Measuring not participate in the lending program will not qualitative studies and studies which do not attempt work, because these households are likely to be to identify treatment and comparison groups or to systematically different from the households that address the selection bias problem. These studies, chose to borrow. Comparing households in a village while problematic, are also relatively quick and with an MFI with similar households in a village inexpensive, and can provide useful snapshots of the without an MFI seems a reasonable strategy, except effectiveness of microfinance on the ground. Also, that there is likely to be a reason that the MFI chose while methodologically rigorous qualitative studies, to locate in one village over the other. If the reason is such as the financial diaries reported in Portfolios anything other than random choice, the comparison of the Poor, do not provide impact assessment in group will not be truly comparable to the treatment the conventional sense, they do provide invaluable

www.grameenfoundation.org 14 Measuring the Impact of Microfinance systematic has that research. insights see results treatment studies known over hand, be program researcher received that because research average these problem statistics effective where significant to intervene microfinance that initiation. groups design. potential neighborhoods a not individuals randomize

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www.grameenfoundation.org 16 Measuring the Impact of Microfinance Several T single what methodologies) reading microfinance us actually a of offered offered The holds that groups ence not tween decline. despite actually being offered (ToT) loan. question sumptions. the policy effect of affects the investigates difference in difference have after methodology hree

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of section 5 Experimental (Randomized) Studies

This section presents the results of the existing returns to capital will be higher for female, relative to experimental (or randomized) studies of the male, microbusiness owners. impact of microfinance. Banerjee, et al. (2009) has received well-deserved attention from the Traditional Microcredit in India microfinance community and policy makers as the In “The miracle of microfinance? Evidence from a first experimental study of traditional microlending. randomized evaluation,” Abhijit Banerjee, Esther This study is set in Hyderabad, India. Spandana, Duflo, Rachel Glennerster, and Cynthia Kinnan the lender under study, made relatively small loans (all researchers or students at MIT affiliated with to relatively poor borrowers. The findings of the The Abdul Latif Jameel Poverty Action Lab) report Hyderabad study (though widely interpreted in the on the first randomized evaluation of the group- press as suggesting that microfinance is “not so great”) lending microcredit model. The study is performed are actually quite positive overall. The next two studies in Hyderabad, India, where fifty-two of 104 by Karlan and Zinman (2010a and 2010b) are set in neighborhoods were selected for opening of a branch the Philippines and South Africa, respectively. These of Spandana (one of the fastest growing MFIs in the studies also provide some useful insights, although area), while the remaining fifty-two neighborhoods in both cases there are important qualifications. were not selected. Data was then collected by Borrowers in the Philippines study were relatively sample survey fifteen to eighteen months after the wealthy and well-educated compared to traditional branch opening in each area. Despite the fact that microcredit borrowers. Rates of late payment and loan microcredit was spreading through all neighborhoods default were high relative to microfinance industry of Hyderabad during the study period, the authors standards. The South Africa study looks at cash loans find that the probability of receiving an MFI loan was for consumption (rather than investment) purposes. 27 percent for borrowers in areas with a Spandana Finally, the fourth study by Dupas and Robinson branch, compared to 18.7 percent in areas without (2009) is an assessment of the effects of microsavings, a branch. These findings suggest that the treatment rather than microlending, in Kenya. Dupas and of establishing a Spandana branch had an impact on Robinson find that access to savings accounts for borrowing in the treated neighborhoods (Banerjee microentrepreneurs had several positive effects on et al., 2009). the business endeavors of the savers. The authors evaluate the effect of treatment on a 17

Also included in this section are two studies by variety of measures, some directly related to poverty Microfinance of Impact the Measuring de Mel, McKenzie, and Woodruff (2008, 2009) that (consumption, business income, etc.) and some investigate returns to capital in microenterprises. broader human development measures (education, While these studies are not impact assessments of health, women’s empowerment). Spandana offers microfinance projects (as study participants received loans to members of self-selected groups where cash or in-kind grants, rather than financial services), members meet the following criteria: (a) female, (b) they do address two important questions which are aged eighteen to fifty-nine, (c) residing in the same relevant to microfinance. First, these authors test the area for at least one year, (d) has valid identification, assumption that microenterprises hold the potential and (e) at least 80 percent of women in a group for income growth which will be spurred by capital must own their home. Spandana does not insist that investment. Second, they address the assumption that the loans be used for business investment, nor is

www.grameenfoundation.org 18 Measuring the Impact of Microfinance investment business households, surveys 10 9 productivity loan treatment durables percent increases spending (1 increase find investment. to because the suggesting tobacco, in significant likely businesses There supported and on spending versus that Despite compared profits not and spending percent RecallZiliakandMcCloskey (2008) here;thedifferencesisestimated

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to lender resembles in many ways a more traditional of financial constraints on household members’ lender; First Macro Bank is a for-profit lender that likelihood of visiting a doctor. They also find almost no makes individual loans to microentrepreneurs. First significant effect on a panel of subjective measures of Macro Bank receives implicit subsidies from a U.S. well-being, such as optimism, calmness, and stress (in Agency for International Development (USAID)- fact, the authors find a slight increase in stress for male funded program. The loan size in this study ranged borrowers). from 5,000 to 25,000 pesos, ($111 to $440 USD Several of these results can be seen as contrary using the exchange rate used in the paper), which to the conventional wisdom of microfinance. Some the authors note is substantial relative to borrower effects are strongest on male borrowers, though income. The loans in the sample also had substantial traditional microcredit arrangements target delinquency and default rates, with one-third paying women on the assumption that they will make late at some point, and 7.4 percent written off (p. 8). better use of the credit. Access to credit does not Karlan and Zinman’s methodology is to randomly appear to increase incomes or decrease poverty. select borrowers from a pool of marginally Karlan and Zinman point out, though, that this may creditworthy applicants, whose applications for loans be the result of the combined decrease in outside were neither clearly approved nor clearly denied based employment and increase in school enrollments on the lender’s credit scoring system. The treatment that they do observe (i.e., income formerly brought group in this study is the group of marginal applicants in by children is replaced by added business income, who were offered credit, and the control group is the and those children now attend school). But in light group of marginal applicants who were not offered of the complexity of these results, it is the authors’ credit.11 Karlan and Zinman study the effects of conclusions that perhaps bear the strongest mention: being offered credit on measures of borrowing, “Our results highlight the importance of replicating business outcomes and inputs, human capital, assets, tests of theories and interventions across different investments, and risk sharing. The authors describe settings” (p. 17). In particular, it will be interesting to their results as “varied, diffuse, and surprising in many see going forward whether studies employing a similar respects” (p. 3). research design in different settings find comparable, The authors find a statistically significant increase or different, results. in borrowing from formal sector lenders such as First Macro Bank or a similar lender. With respect Consumer Credit in South Africa to business outcomes, the authors find a statistically In an earlier study “Expanding credit access: Using significant increase in profits for household businesses randomized supply decisions to estimate the impacts,” when borrowers were male but not when borrowers Karlan and Zinman (2010a) study the effects of were female. They also find that profits increase access to individual credit for the salaried poor in more dramatically in households with above median South Africa. The lender dispensed relatively small income. There is evidence that businesses reduce (median size $127 USD) cash loans to borrowers who the number of employees, especially paid employees. were salaried workers (not microentrepreneurs). Two significant effects on human capital measures Though this study was performed in a microlending are found: (1) male borrowers are less likely to be environment that most certainly is not traditional, the 19 employed outside the family business, and (2) male study has interesting results worth including here. Microfinance of Impact the Measuring borrowers are more likely to send their children to The authors worked with the lender to randomly school. Little effect is found on business investment, reconsider the applications of potential borrowers or other types of household investment. Importantly, who were initially rejected but who could be the authors find no significant effect on household considered marginally creditworthy. The treatment incomes, poverty, or remittances received and no group then consisted of borrowers whose applications significant impact on food quality or the effect were reconsidered. The control group contained individuals who were marginally creditworthy but

11 By specifying the treatment group as the borrowers who were offered whose initial rejections were not reconsidered. credit, this study estimates intention to treat effects. In this case, of the Surveys were conducted six to twelve months after the 1,272 applicants who were offered loans, 351 did not actually take the loans. initial loan application This is a take-up rate of 72 percent (Karlan & Zinman, 2010b, p. 8).

www.grameenfoundation.org 20 Measuring the Impact of Microfinance 12 Microenterprise In T fees, paid authors study Experiment any negative decision-making food Robinson was The respectively) given increased selected business as participants health reported women, profitable. savings study debt earners a over in findings small credit problem completed. asked income, bankwas locatedinBumalamarket, village aruralmarket center This he

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a Client of Amhara Credit and Savings Institution [ACSI] (Ethiopia) way can be flawed; the logbook data should be more several successive waves of the survey. accurate due to the collection strategy. The authors find that the grants increase the The findings of the study are that despite the average profits of microenterprises by more than 5 negative interest rates offered by the savings percent per month, or at least 60 percent per year. accounts, 89 percent of the 122 respondents offered The treatment effects appear to be flat or decreasing an account opened one. Fifty-five percent of the (not increasing over the survey period) and returns 122 actively used the account (59 percent of women are higher for recipients with more entrepreneurial and 51 percent of men). An important finding is that ability. (The authors outline their measure of business investment increased significantly among entrepreneurial ability in an online appendix to the women with access to savings accounts; a minimum paper.) A surprising finding is that these positive estimate of the increase in average daily investment returns are almost exclusively limited to male-owned is 40 percent. A second important finding is an overall businesses; no positive return to capital is found for increase for women, but not men, in expenditures, female business owners. The authors note that the especially on food (14-29 percent increase) and average results may be misleading as there is high personal expenditures (37-44 percent increase). The variability in the returns across different firms. savings accounts do not appear to crowd out other In the 2009 study, “Are Women More Credit forms of saving, such as participation in Rotating Constrained? Experimental Evidence on Gender Savings and Credit Accounts (ROSCAs). and Microenterprise Returns,” the authors further Overall, Dupas and Robinson’s findings offer strong investigate the difference between returns to capital evidence that microentrepreneurs in Kenya face for male and female microenterprise owners. Data saving constraints, and that the provision of formal from the same experiment reported in the 2008 savings accounts increases both business investment study are used, with the study population being small, and expenditures for women. informal business owners in Sri Lanka. The findings of the 2009 study are that while men invest a substantial Evidence on Returns to Capital in Microenterprises portion of both small and large grants, their profits Two randomized studies by de Mel, McKenzie, and increase by 6.5-14 percent of the grant amount. In Woodruff provide some evidence about returns to contrast, women invest only large grants and earn no capital in microenterprises such as the businesses return on these investments. most frequently owned by microcredit borrowers. Taken together, these studies have important These studies provide insights into two fundamental implications for microfinance, although they do not assumptions that underpin the microcredit industry: directly measure microfinance impacts (since the (1) that small, informal businesses hold the potential programs studied are not microfinance programs). for income growth for their owners; and (2) that First, the finding that there are large positive returns returns to capital will be higher for microenterprises to capital on average is encouraging. Microcredit is owned by women, since women are more credit- often aimed at microenterprises, and these results constrained than men in low-income countries. suggest that investing in these microbusinesses is A 2008 paper, “Returns to Capital in profit generating. Similarly, microsavings programs Microenterprises: Evidence from a Field will create opportunities for microentrepreneurs 21

Experiment,” reports the findings of a study in to save for capital investment; this suggests that Microfinance of Impact the Measuring Sri Lanka. Microenterprise owners were asked to microsavings programs will be very helpful when participate in several waves of survey data collection. business owners face savings constraints. On the Survey participants were selected at random to other hand, the finding that these returns appear for receive US$100 or US$200 (10,000 or 20,000 Sri men (but not for women) is important, since many Lankan rupees) in either cash or equipment for their microfinance products are targeted toward women. businesses. Although no stipulations were made Clearly further research is needed to determine about the use of the cash grants, these as well as the whether returns to capital vary by gender in multiple equipment grants were almost completely invested contexts or whether this result is particular to the in business expansion. The authors then measured experiment conducted by de Mel, McKenzie, and the returns to these randomized capital shocks over Woodruff in Sri Lanka.

www.grameenfoundation.org 22 Measuring the Impact of Microfinance In T This Quasi- section 6 included In Khandker section experimental Matter?” in Group-Based this for Goldberg bias attempted economic men, borrowing They and including in serious a consumption Morduch Using exacerbated, Khandker model. to Morduch’s with some consumption he

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www.grameenfoundation.org 24 Measuring the Impact of Microfinance many assets household other income, represented. 14 in poverty human several intended the percent the health). increases. food program. while this increased increased loaned, to These among also maintain However, however, of per children’s Coleman relatively income food of the targeting his important potential loans but not yet receivingloans). loans) andthecomparisongroup(signed uptoparticipateintheprogram are averagesforthetreatmentgroup(alreadyreceiving These percentages Looking When

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Microfinance inT hailand (Revisited) Two papers by Joseph Kaboski and Robert Townsend provide an alternative perspective on the role of microfinance in Thailand (Coleman’s studies were also set in Thailand). “Policies and Impact: An Analysis of Village-Level Microfinance Institutions” (2005) uses survey data from 1997. Institutions represented in the survey were either production credit groups which provided saving and lending services (though not always both), rice banks (which make small emergency consumption loans in the form of rice), women’s groups (with various services targeted only at women), and buffalo banks (institutions that formally lend out buffalo or cattle). Of the four types of institutions, the production credit groups could be considered MFIs. The survey data also included a household survey. The key findings are that production credit groups, and especially women’s groups, can promote asset growth, consumption smoothing, and occupational mobility and reduce reliance on moneylenders. The provision of saving services was particularly important for the success of an MFI because the services provided positive outcomes for members. An important qualification is that several of the key results are not statistically significant when instrumental variables are used to control for selection bias; however, the same basic results (sign and magnitude of the estimated effects) appear regardless of estimation method. Client of Al Sol (Mexico) Kaboski and Townsend’s 2009 study, “The Impacts of Credit on Village Economies,” provides an impact Taken together, these numbers suggest that the evaluation of Thailand’s Million Baht Village Fund 25 percentage of community residents owning informal program, a government microfinance initiative Microfinance of Impact the Measuring businesses increased from 8.21 to 8.83 percent in the launched in 2001. The objective of the Million Baht Banco Azteca neighborhoods – not exactly a dramatic program was to “improve the economic and social increase. Further, in a sample split by gender, this status of villagers, and to enable villages to be less finding appears only for men. The income increase dependent on government aid in the future” (Kaboski in Banco Azteca neighborhoods is statistically & Townsend, 2009, p. 13). The program involved the significant and slightly stronger for women than transfer of one million baht ($24,000USD using the for men. However, despite the finding of rising exchange rate used in the paper) to participating incomes, there is little evidence of an improvement villages; these funds were used to form an in the proportion of people receiving income independent village bank for lending within above minimum wage, suggesting that the income the village.

www.grameenfoundation.org 26 Measuring the Impact of Microfinance Clients of Mitra Dhuafa in post-tsunami Banda Aceh years was before to (2002-2003), Each received Baht further the implemented research per each of availability, growth. credit some increased. This The

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The Goldin Institute Often loans were taken from one lender in order to Over the period of May 2007-August 2007, the repay another, demonstrating the presence of cyclical Goldin Institute, an NGO in Chicago, conducted a debt. The researchers further found that rather than study of microcredit recipients in Arampur, a village empowering women in household decision making, in Northern Bangladesh. The study relied on “oral women were often used as conduits for credit; male testimony” (i.e. structured and semi-structured relatives would force women to take out loans and interviews with credit recipients) conducted by turn over the money, while the women remained trained village residents. A return visit to Arampur financially responsible for the loans.15 Respondents was conducted in 2009, with results not yet available also reported using microloans to pay for their from the institute. The qualitative nature of this daughters’ dowries. study does not address the problem of selection Borrowers offered several suggestions for bias; on the other hand, the study provides some improving microcredit in the village. One was to insight into borrowers’ lives in Bangladesh, where push back the initiation of repayment, now often the pervasiveness of microcredit makes it difficult to beginning within one week of taking a loan, to allow a identify a control or comparison group unaffected by more realistic time-frame for productive investment access to credit. (especially planting crops) to pay off. Another The Goldin Institute reports that in Arampur, suggestion was for NGOs to provide services such as there are ten different microlending organizations health care and education, in addition to lending. for about 1,000 households. The authors of the study While the published report provides a somewhat write that “while all of these organizations seek to unfavorable overall impression of the effect of provide poverty alleviating loans to the rural poor, microcredit on the lives of these villagers, there our research found that the climate of saturation, are several qualifications. First, it is difficult to competition, and the ready access to loans have assess what life in this village would have been like produced mixed results” (p. 4). The stories in the in the absence of microcredit. Second, the report Goldin Institute report illustrate these mixed results. is a very brief and deeply edited summary of the Some respondents in this study reported being responses. Overall, though, this study certainly offers forced to take loans from traditional moneylenders an interesting counterpoint to the many positive in order to make their microcredit loan payments anecdotes available about the impact of microcredit 27 on time; this is obviously in direct conflict with in Bangladesh. The study provides a window on Microfinance of Impact the Measuring the desire (generally agreed upon as a founding potential problems that can emerge in other countries principle of microfinance) to reduce dependence on as microfinance becomes as prevalent as it is today in moneylenders. Of course, it isn’t clear from the report Bangladesh. whether overall reliance on moneylenders increased or decreased with the introduction of microcredit; it’s possible that while some borrowers still turn to moneylenders in specific circumstances, overall 15 Goldberg’s 2005 paper presents research by Helen Todd (Women at the Center) and Anne Marie Goetz and Rina Sen Gupta (”Who Takes the Cred- borrowing from moneylenders may have decreased. it? Gender, Power, and Control Over Loan Use in Loan Programs in Rural Recipients reported that loans were often used Bangladesh”) which looks in some detail at the practice of women turning for consumption rather than investment purposes. over loans to their husbands. Goetz and Sen Gupta argue that transferring a loan does not, in and of itself, signal a loss of power for women.

www.grameenfoundation.org 28 Measuring the Impact of Microfinance 16 The P Microcredit for the Very PPI Alleviation: an association poverty a CASHPOR’s data was Pradesh at impact conducted with four five poor CASHPOR study study due There the out absence counterfactual no day called PPIisacountry-specific assessmenttoolthatwillhelpinstitutions The

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A question that has been taken up very little in A 2005 study by Robin Burgess (London School of the impact assessment literature is the effect of Economics) and Rohini Pande (Yale) entitled “Do microfinance on macroeconomic measures of Rural Banks Matter? Evidence from the Indian Social economic well-being. Several macroeconomic Banking Experiment” examines the effects on rural studies are briefly surveyed in this section; a more poverty (using the head count ratio) of a state-funded comprehensive survey and additional studies of program of bank branch expansion into unbanked the macroeconomic effects of microcredit and rural locations. The intention of the branch expansion microsavings are badly needed. program was to increase rural household access to A 2010 survey from the Poverty Reduction and formal credit and saving opportunities, which should Equity Group at the World Bank, authored by theoretically lead to poverty reduction. Aphichoke Kotikula, Ambar Narayan, and Hassan An instrumental variables strategy is used to Zaman, studies recent poverty reduction in correct for the selection bias problem; in this case, Bangladesh. This study, titled “To What Extent Are the expected bias arises from the fact that relatively Bangladesh’s Recent Gains in Poverty Reduction richer regions receive greater branch expansion, but Different from the Past?” seeks to decompose the may also be more effective at poverty reduction in micro-determinants of poverty reduction between general. The authors’ main finding is that opening 2000 and 2005 and to compare these to the drivers of branches in rural, previously unbanked locations in poverty reduction in earlier decades. The head count India was associated with decreases in rural poverty. ratio (proportion of the population with per capita The evidence suggests that the branch expansion can income below the poverty line) fell from 49 percent to explain a 14-17 percentage-point decline in the rural 40 percent over the 2000-2005 period. head count ratio over the study period of 1961-2000. Among a number of other economic changes, Interestingly, a similar analysis finds no significant the authors note that microfinance participation effect of branch expansion on urban poverty. increased by 62 percent between 2003 and 2005. In an unpublished 2009 study (“Microfinance An interesting result of this study is that the decline and Inequality”), Hisako and Shigeyuki find that in poverty is greater in areas where microfinance access to microfinance reduces income inequality in access increased more sharply. For example, in a cross-sectional study of sixty-one countries. This areas where the number of microfinance members finding, if it can be replicated and expanded, could 29 increased by less than 20 percent, the poverty rate suggest another important impact of microfinance. Microfinance of Impact the Measuring fell by 3.9 percent (from 46.6 to 42.7 percent). In Certainly, additional studies of the macroeconomic areas where the number of microfinance members effects of microfinance are essential to a complete increased by more than 40 percent, the poverty rate understanding of the overall impact of this set of fell by 13.3 percent (from 54.4 to 41.1 percent). This financial services. Macroeconomic studies of this relationship can be interpreted only as a correlation nature present methodological challenges even and not as evidence of a causal relationship between more serious than those facing studies addressing microfinance and poverty reduction. Nonetheless, microeconomic questions; determination of a credible these results gesture toward an association between approach to studying macroeconomic outcomes is a microfinance access and poverty reduction in major research challenge. Bangladesh.

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as Clients of Ahon sa Hirap, Inc. [ASHI] (Philippines) evaluation of actual projects or programs, whether eagerly anticipated by the microfinance community. through randomized trials or econometric methods As microfinance impact assessment continues, the that are designed to extract defensible causal combined results of well-designed and implemented 31 inferences, unless such analysis tries to discover randomized studies, innovative quasi-experimental Microfinance of Impact the Measuring why projects work rather than whether they work …” studies, and judiciously presented, non-experimental (p. 3) Answers to these important questions about the research will provide useful and reliable estimates mechanisms behind positive development outcomes of the effects of microfinance programs. As our are badly needed. understanding of the strengths and limitations of Additional randomized studies are underway various research methods deepens, the research in Mexico, Mongolia, Morocco, Bosnia, Mali, and community’s ability to answer these critical questions the Philippines.17 The results of these studies are will be enhanced.

17 Thanks to Dean Karlan of Innovations for Policy Action for providing the locations of upcoming studies.

www.grameenfoundation.org 32 Measuring the Impact of Microfinance Deaton, A. Understanding the Mechanisms of Economic Development. de Mel, S., McKenzie, D., & Woodruff, C. (2009). Are Women More Credit Constrained? Experimental Evidence on Gender and de Mel, S., McKenzie, D., & Woodruff, C. (2008). Returns to Capital in Microenterprises:Daley-Harris, Evidence S. from(2009). a Field Experiment. Counts, A. (2008). Collins, D., Morduch, J., Rutherford, S., & Ruthven, O. (2009). Coleman, B. (2006). Microfinance in Northeast Thailand: Who Benefits and How Much. Coleman, B. (1999). The impact of group lending in northeast Thailand. Burgess, R., & Pande, R. (2005). Do Rural Banks Matter? Evidence from the Indian Social Banking Experiment. Bruhn, M., & Love, I. (2009). Bennett, D. (2009, September 20). Billions of dollars and a Nobel Prize later, it Banerjee,looks like S. ‘microlending’(2009, October doesn’t26). How actually Microfinance do Changes the Lives of Millions, One person at a time. Banerjee, A., Duflo, E., Glennerster, R., & Kinnan, C. (2009). Armendáriz, B., & Morduch, J. (2010). Goldberg, N. (2005). Dupas, P., & Robinson, J. (2009). Hisako, K., & Shigeyuki, H. (2009). Harford, T. (2009, December 5). Perhaps microfinance isn’t such a big deal after all. Goldin Institute (2007). Hoboken, NJ: John Wiley & Sons, Inc. Microenterprise Returns. Quarterly Journal of Economics Princeton, NJ: Princeton University Press. Economic Review Bank Policy Research. much to fight poverty. (Working paper). Massachusetts Institute of Technology. www.princeton.edu/~deaton/papers.html (Working Paper #14693). National Bureau of Economic Research. Foundation USA. http://www.goldininstitute.org/microcredit ub.uni-muenchen.de/17572/ Small Loans, Big Dreams: How Nobel Prize Winner Muhammad Yunus and Microfinance Are Changing the World , Measuring the Impact of Microfinance: Taking Stock of What We Know 95 Improving Microcredit Programs: Listening to Recipients: A Summary of the Pilot Phase State of the Microcredit Summit Campaign Report (3), 780-795. The Boston Globe The Economic Impact of Banking the Unbanked: Evidence from Mexico American Economic Journal: Applied Economics Savings constraints and microenterprise development: Evidence from a field experiment in Kenya , Microfinance and Inequality 123 The Economics of Microfinance (4), 1329-1372. . www.grameenfoundation.org References The miracle of microfinance? Evidence from a randomized evaluation Portfolios of the Poor: How the World’s Poor Live on $2 a Day (MPRA Working Paper #17572). Retrieved from http://mpra. (Second Edition ed.). Cambridge, MA: MIT Press. Journal of Development Economics Journal of Economic Perspectives . Washington, D.C.: Microcredit Summit Campaign. , 1 (3), 1-32. The Financial Times World Development . Washington, D.C.: Grameen (Working Paper #4981). World . Retrieved from http:// . , Foreign Policy 45 . Retrieved from , 105-141. , 34 The American (9), 1612-1638. . . . Kaboski, J., & Townsend, R. (2005). Policies and impact: An analysis of village-level microfinance institutions.Journal of the European Economic Association, 3(1), 1-50.

Kaboski, J., & Townsend, R. (2009). The Impact of Credit on Village Economies (Working Paper).

Karlan, D., & Zinman, J. (2010a). Expanding credit access: Using randomized supply decisions to estimate the impacts. Review of Financial Studies, 23(1), 433-464.

Karlan, D., & Zinman, J. (2010b). Expanding Microenterprise Credit Access: Using Randomized Supply Decisions to Estimate the Impacts in Manila (Working Paper).

Khandker, S. (2005). Microfinance and Poverty: Evidence Using Panel Data from Bangladesh.World Bank Economic Review, 19(2), 263-286.

Kondo, T. (2007). Impact of Microfinance on Rural Households in the Philippines: A Case Study from the Special Evaluation Study on the Effects of Microfinance Operations of Poor Rural Households and the Status of Women. Asian Development Bank.

Kotikula, A., Narayan, A., & Zaman, H. (2010). To What Extent Are Bangladesh’s Recent Gains in Poverty Reduction Different from the Past? (Working Paper #5199). World Bank Policy Research.

Microcredit may not work wonders but it does help the entrepreneurial poor. (2009, July 16). The Economist.

Morduch, J. (1998). Does microfinance really help the poor? New evidence on flagship programs in Bangladesh (Working Paper).

Pitt, M. (1999). Reply to Jonathan Morduch’s ‘Does Microfinance Really Help the Poor? New Evidence from Flagship Programs in Bangladesh (Working Paper).

Pitt, M., & Khandker, S. (1998). The impact of group-based credit programs on poor households in Bangladesh: Does the gender of participants matter? Journal of Political Economy, 106(5), 958-996.

RBS Foundation India (2008). Microfinance and Poverty Alleviation: An Impact Assessment Survey. The Royal Bank of Scotland.

Rodrik, D. (2009). What Works in Development: Thinking Big and Thinking Small. In J. Cohen & W. Easterly (Eds.), What Works in Development: Thinking Big and Thinking Small (pp. 24-37). Washington, D.C.: Brookings Institution Press.

Roodman, D., & Morduch, J. (2009). The Impact of Microcredit on the Poor in Bangladesh: Revisiting the Evidence (Working Paper #174). Center for Global Development. Ziliak, S., & McCloskey, D. N. (2008). The Cult of Statistical Significance: How the Standard Error Costs Us Jobs, Justice, and Lives. 33

Ann Arbor, MI: University of Michigan Press. Microfinance of Impact the Measuring

www.grameenfoundation.org 34 Measuring the Impact of Microfinance to use statistical methods to generate a truly accurate influential because they were the first serious attempt and Mark Pitt, a Brown University economist, were the Gender of Participants Matter?” by Khandker Programs on Poor Households in Bangladesh: Does related paper, “The Impact of Group-Based Credit World Bank economist Shahidur Khandker, and the many of them. evaluations and limits the conclusions we can draw from households is prevalent among microfinance impact type of difference between participants and comparison nonmembers who were more likely to be landless. This were found to be younger and better educated than be overstated, however, because Grameen members warned it was likely that his impact findings would landless, followed by marginal landowners. Hossain the increase in income from Grameen highest for the target non-participants in comparison villages, with average household income to be 43 percent higher than Mahabub Hossain. Hossain found Grameen members’ Poverty: The Grameen Bank in Bangladesh,” (1988) by assessments was “Credit for the Alleviation of Rural reliability of each study. and guides readers through interpreting the results and evaluations that have been published as of mid-2005 paper surveys the most significant microfinance impact of microfinance impact evaluations vary greatly. This to improve it as well. However, the quality and rigor not just to prove the effectiveness of microfinance, but increased in recent years, with programs using studies The prevalence of microfinance impact evaluations has The 1998 book, One of the first comprehensive microfinance impact Fighting Poverty with Microcredit Measuring theImpactofMicrofinance: T aking StockofWhatWeKnow Executive Summary www.grameenfoundation.org N athanael Appendix by December 2005 G reduction of moderate poverty in rural Bangladesh. microfinance accounted for 40 percent of the entire per year, respectively. Khandker further calculated that percentage points per year and 1.6 percentage points poverty, which microfinance was found to reduce by 2.2 impact to be greater for extreme poverty than moderate is directly attributable to microfinance, and found the Khandker estimated that more than half of this reduction percentage points—about 3 percentage points per year. since 1991/92 poverty rates declined by more than 20 Among program participants who had been members areas and 13 percentage points in non-program areas. declined by 17 percentage points: 18 points in program 1991/92 and 1998/99 moderate poverty in all villages male borrowing at all. Khandker found that between by more than 20 taka. There were no returns to women increased total annual household expenditures showed that each additional 100 taka of credit to Panel Data from Bangladesh.” The updated findings the study, “Micro-finance and Poverty: Evidence Using to improve their model, published in a 2005 update to model. serious concerns with their data and their statistical from Flagship Programs in Bangladesh” (1998), citing “Does Microfinance Really Help the Poor? New Evidence economist Jonathan Morduch responded with the paper, return to income from borrowing. However, NYU taka to annual household expenditures—an 18 percent additional taka lent to a woman adds an additional 0.18 RD-12. The centerpiece of their findings was that every Bangladeshi programs: Grameen Bank, BRAC, and assessment of the impact of microfinance among three oldberg With the benefit of more data, Khandker was able

The AIMS Studies Case Study from Peru” (2001), by Elizabeth Dunn and J. Gordon Arbuckle Jr., found Mibanco clients earned In 1995 the United States Agency for International $266 more per household member per year than non- Development (USAID) launched the Assessing the participants. Impacts of Microenterprise Services (AIMS) Project, which developed five tools (two quantitative and three qualitative) designed to provide practitioners a low- Wider Impacts cost way to measure impact and improve institutional performance. The tools recommended comparing Empowerment existing clients to incoming clients and using the Hashemi, Schuler, and Riley, in “Rural Credit Programs difference between them to estimate program impact. and Women’s Empowerment in Bangladesh” (1996), The idea behind the methodology was that since both used a measure of the length of program participation the clients and the comparison households had chosen among Grameen Bank and BRAC clients to show that to join the program, there should be no difference in each year of membership increased the likelihood of their “entrepreneurial spirit.” Otherwise, higher incomes a female client being empowered by 16 percent. Even among participants might simply be driven by superior women who did not participate were more than twice business acumen. However, some experts, notably as likely to be empowered simply by virtue of living Dean Karlan in “Microfinance Impact Assessments: in Grameen villages. This may suggest that a positive The Perils of Using New Members as a Control Group” spillover from microfinance is affecting the norms in (2001), have called into question the validity of this communities, but it could also imply that Grameen type of comparison. Karlan warns that this design can selects relatively empowered communities for program yield biased estimates of impact because MFIs may placement. have originally started to work with different types of clients than they currently serve (for instance, an MFI Contraceptive Use may have cautiously started out working with better-off “Poverty Alleviation and Empowerment: The Second communities before branching out to poorer areas), and Impact Assessment Study of BRAC’s Rural Development because clients who chose to enroll earlier may differ Programme” (1998), by A. M. Muazzam Husain, reported from those who chose to wait and see before joining. that members who had been with BRAC the longest had The AIMS Core Impact Assessments of SEWA (India), significantly higher rates of contraceptive use. Fighting Zambuko Trust (Zimbabwe), and Mibanco (Peru) avoid Poverty with Microcredit found credit provided to women this problem through the use of longitudinal data and reduced contraceptive use among participants. However, non-client comparison groups. “Managing Resources, as discussed above, the results from Khandker’s earlier Activities, and Risk in Urban India: The Impact of SEWA work may be unreliable. “The Impact of an Integrated Bank” (2001), by Martha Chen and Donald Snodgrass, Micro-credit Program on Women’s Empowerment and compared the impact of clients who borrowed for Fertility Behavior in Rural Bangladesh” (1998), by Steele, self-employment to those who saved with SEWA Bank Amin, and Naved, estimated that, even after statistically without borrowing, and compared both groups to non- controlling for prior contraceptive use, borrowers were clients. Borrowers’ income was over 25 percent greater 1.8 times more likely to use contraceptives than the 35 than that of savers, and 56 percent higher than non- comparison group. Membership in a savings group Microfinance of Impact the Measuring participants’ income. Savers, too, enjoyed household was not found to have an effect. However, analysis of income 24 percent greater than that of non-participants. the actual number of births did not reveal a statistical These findings indicate that microfinance—credit or relationship between either savings or credit and fertility. savings—can be quite effective. “Microfinance Program Clients and Impact: An Assessment of Zambuko Trust, Nutrition Zimbabwe” (2001), by Carolyn Barnes, found that while Barbara MkNelly and Christopher Dunford, both of clients’ income was significantly higher in 1997 than the Freedom from Hunger, completed two comprehensive incomes of other groups, by 1999 the difference was no evaluations of Credit with Education programs: “Impact longer statistically significant, though continuing clients of Credit with Education on Mothers and Their Young still earned the most. “The Impacts of Microcredit: A Children’s Nutrition: Lower Pra Rural Bank Credit with

www.grameenfoundation.org 36 Measuring the Impact of Microfinance and net worth was 50 percent higher. Significantly fewer greater than those of comparison group households, that BRAC members’ non-land assets were 380 percent The Second Impact Assessment Study of BRAC found I comparison villages. empowered, compared to only 9 percent of women in with no control of their loans could be considered finding that 36 percent of Grameen and BRAC borrowers Empowerment in Bangladesh” confirms this conclusion, than without. “Rural Credit Programs and Women’s entire loans—women are better off with microfinance have the least control—i.e., women channeling their however, found that that even in the case where women participation were among this group. Other studies, of the borrowers who were still poor after 10 years of represent only 25 percent of the members, 41 percent as the most marginal in her sample; though they loans to their husbands. Todd described these women of clients in her sample were turning over their entire In C D negative effect. male borrowing, which had an insignificant or even circumference) from women’s borrowing, but not from on children’s health (as measured by height and arm Chowdhury, and Millimet, found substantial impact Children in Rural Bangladesh” (2003) by Pitt, Khandker, “Credit Programs for the Poor and the Health Status of for-age and weight-for-age for children of participants. These impacts paid off in a significant increase in height- had diarrhea by giving them oral rehydration solution. were more likely to properly rehydrate children who into their babies’ diets until the ideal age, and they and more likely to delay the introduction of other foods Participants were more likely to breastfeed their children of $36, compared to $17 for the comparison group. experienced an increase in monthly nonfarm income Program in Bolivia” (1999). In Ghana, participants Children’s Nutrition: CRECER Credit with Education Credit with Education on Mothers and Their Young Education Program in Ghana” (1998), and “Impact of ncoming ontrol of Loan eterminants Women at the Center P overty Level

, Helen Todd found that a quarter of I mpact www.grameenfoundation.org very poor benefited most from program participation. better than non-clients. Compared to non-clients, the an increase in household income, they didn’t do much showing that while non-poor clients most often reported (2004), by EDA Rural Systems, supports this conclusion, participation. “The Maturing of Indian Microfinance” found that the poorest clients benefited most from Poverty: Evidence Using Panel Data from Bangladesh,” impact for the poorer half. half of Promuc clients was 80 percent higher than the by Copestake et al., found that impact for the wealthier a comparison of methods using data from Peru” (2005), diversity of poverty outreach and impact of microfinance: (“the poor”) benefited most. Another study, “Monitoring the program, while those with 1-50 decimals of land landless clients (the poorest clients) benefited least from group). However, subgroup analysis revealed that households versus 68.6 percent of the comparison BRAC households were poor (52.1 percent of BRAC savings and insurance products for the poor. only. These results highlight the need to further develop percent for those who had experienced serious illness nearly 60 percent remained Very Poor, versus only 40 experienced both serious illness and death in the family, with a larger sample size). Among clients who had earlier findings from edited by David Gibbons, however, corroborates Todd’s rates. “Moris Rasik: An Interim Impact Assessment,” ability to cope with crises to their extraordinary savings increase or decrease in poverty. Todd attributed their they were no more-or-less likely to have experienced an family crisis or natural disaster in the previous four years, though 49 percent of SHARE clients had experienced a Poverty: The Impact of SHARE Microfin Limited,” found on the effect of crises. Another Todd study, “Paths out of husband or the wife. Other studies show mixed results to support the family through the loss of income from the forced to sell off assets to pay for medical treatment and to Todd, the families that suffer crises were almost always the family in the three years before her study. According decade, ten of them had experienced a serious illness in 17 Grameen Bank borrowers who were still poor after a In F amily However, other studies, including “Micro-finance and Women at the Center C rises Women at the Center , Helen Todd found that out of the (this time

Design: Lloyd Greenberg Design, LLC Client of Grameen Ghana 38 Measuring the Impact of Microfinance Fax: +1 206-325-0634 Phone: +1 206-325-6690 Seattle, WA 98121 Suite 1030 2101 4th Avenue G Fax: +1 202-628-3880 Toll Free (US): 1-888-764-3872 Phone: +1 202-628-3560 Washington, DC 20001 8th Floor 50 F Street NW G rameen rameen F F oundation oundation T echnology C enter www.grameenfoundation.org www.grameenfoundation.org