The results of a randomized impact study done in Nogales, Agua Prieta and Caborca are in and they can help us determine how to best serve our clients.
Win Some Lose Some? Evidence from a Randomized Microcredit Program Placement Experiment by Compartamos Banco
Manuela Angelucci, University of Michigan
Dean Karlan, Yale University, Innovations for Poverty Action, and M.I.T. J-PAL
Jonathan Zinman, Dartmouth College, Innovations for Poverty Action, and M.I.T. J-PAL For release: May 14th, 2013
With more than 200 million borrowers, microcredit has been successful in bringing formal financial services to the poor. While microcredit has received widespread recognition as a tool to help the poor, including a Nobel Peace Prize for the innovators of microcredit at the Grameen Bank in Bangladesh, the expansion of for-profit banks into this market has sparked controversy, especially as interest rates for microlending can reach the equivalent of 100% APR or higher. Many times the impact assessments have been based on generalizations about the microfinance movement or on simple comparisons of borrowers and non-borrowers. Attempts to determine the true impact of microcredit programs are complicated by the fact that the choice to become a microfinance borrower may itself be a sign of increased ambition and ability to improve one’s economic situation. To date, few studies have rigorously quantified the impacts of microcredit loans on the beneficiaries and their communities.
This study used a randomized controlled trial (RCT) design to examine the impact of access to credit. RCTs are the most rigorous evaluation methodology available for assessing social programs such as microfinance.
This study concludes that taken together the studies show that microcredit might not do what everybody hoped it would, but it does have positive effects, and by lowering interest rates, private institutions can expand to new, underserved customers and provide a benifit. Overall, increased access to microcredit allowed some existing businesses to expand, and enabled customers to use formal financial services to manage their cash flows over time, although it did not increase their business profits or prompt people to start new businesses.
Summary of the results:
- Access to credit from Compartamos Banco creates generally positive, but not transformative, impacts.
On average, access to Compartamos Banco credit: Does not crowd out other borrowing, whether formal or informal, although it does lead to a shift away
from informal savings groups.
Enables existing business owners to expand their businesses through higher revenues, but does not spur the development of new businesses or improve profits.
Allows people to avoid selling assets in order to pay down debt, and thus to maintain a more stable level of economic well-being.
Increases happiness and trust in others.
Increases the fraction of women who report having a say in household financial decision making and the number of household decisions women have a say on.
Does not lead to increased income (through business growth or other mechanisms), nor to noticeable changes in household consumption.
- There is some limited, but potentially actionable, evidence that access to Compartamos Banco credit creates “losers”:
Individuals with no previous experience of formal credit, with experience in an informal savings group, or with low incomes experience more negative effects relative to other individuals, particularly for subjective well-being outcomes.
There is no evidence that access to credit increases the likelihood that individuals have worse outcomes after two years.
- Policy implications:
Microcredit does not appear to raise the income of the average borrower, but is still valuable as a tool to allow clients to manage their cash flows over time, and to enable existing business owners to expand their businesses.
From a policy perspective, the negative effects seen on individuals without formal credit experience are particularly relevant given that banks may have a special role to play in helping first-time borrowers. Further research is needed to explore potential screening criteria or effective guidance to first-time borrowers.
Please contact ProMex Group (charitable microfinance for the Mexican border) for information about how we operate.