Does Microfinance Work?

In the past, the microcredit movement was driven by inspiring stories, but today donors and investors increasingly see the importance of measuring impacts. In order to credibly establish program impacts, having control groups is central, and the development of randomized controlled trials (RCT) is moving methodological possibilities forward. 

Some of the most well-known researchers in the RCT field include, Abhijit Banerjee and Esther Duflo, who just released their new book Poor Economics this week, and Dean Karlan, who co-wrote the recently published More than Good Intentions with Jacob Appel. The findings from their RCTs are central to the stories told in both these books.

Nonetheless, after 30 years of microcredit and the rise of randomized trials, we still don't have an impact evaluation that is ideal, but we're getting closer. So we at FAI decided it was time to do a little round-up of what the RCT research from our archive suggested on the subject of whether microfinance works. We’ve thrown in a couple of additional and newer papers on the subject for good measure.  You’ll see that while the results don’t tell us that microfinance works all the time to solve every problem we hoped it would, the RCTs do tell us a lot about what is working and what is not working in individual programs. So perhaps we need to get more specific with our questions. Instead of asking whether microfinance works, maybe we should be asking when, how, and why it works, and also what we can learn from situations where it doesn’t have the intended effect.