The Miracle of Microfinance? Evidence from a Randomized Evaluation

Abhijit Banerjee
Esther Duflo
Rachel Glennerster
Cynthia Kinnan
Publication Type: 
Working Papers
Publication Year: 
2010

Microcredit has spread extremely rapidly since its beginnings in the late 1970s, but whether and how much is helps the poor is the subject of intense debate. This paper reports on the first randomized evaluation of the impact of introducing microcredit in a new market. Half of 104 slums in Hyderabad, India were randomly selected for opening of an MFI branch while the remainder were not. We show that the intervention increased total MFI borrowing, and study the effects on the creation and the profitability of small businesses, investment, and consumption. 15 to 18 months after the program, there was no effect of access to microcredit on average monthly expenditure per capita, but durable expenditure did increase. The effects are heterogeneous: Households with an existing business at the time of the program invest in durable goods, and their profits increase. Households with high propensity to become business owners see a decrease in nondurable consumption, consistent with the need to pay affixed cost to enter entrepreneurship. Households with low propensity to become business owners see nondurable spending increase. We find no impact on measures of health, education, or women’s decision-making.

JEL Codes: 
O16, G21, D21
Region: 
South and Central Asia
Country: 
India
Topic: 
Financial Institutions
Topic: 
Enterprise
Topic: 
Randomized Evaluation
Topic: 
Microfinance
Topic: 
Consumption