A critical analysis of evidence on the effects of microcredits on household material well-being

The following post aims at conducting a synthesis and critical assessment of evidence on the impact of microfinance programs on poverty reduction.

Specifically, it will assess the effects of access to microfinance products on the material wellbeing of poor rural and urban households, based on three pieces of evidence. The first is a quasi-experiment that assesses the impact of group microcredits on households of rural villages in Northeast Thailand (Coleman, 1999). The second study assesses the impact of microcredits on rural households in the Philippines (Kondo et al, 2008). Finally, the third study assesses the impact of microcredits on poor rural and urban households in Pakistan (Montgomery, 2006).

Dowload the complete essay here.

1.     Treatment and outcome measures of interest

We are interested in assessing the effects of access to microfinance products, on the material wellbeing of poor households. Nevertheless, the way researchers define this access differs. Kondo et al. (2008) defines treatment as a dummy variable that equals one for those villages where the microfinance program, particularly lending, has been available for some time. Montgomery (2006) uses three alternative continuous variables as treatment: the number of months since the household participates in the microfinance lending program, the total amount ever borrowed by the household, and the number of loans the household has taken. Likewise, Coleman (1999) uses as treatment another continuous variable: the length of time (in months), for participating households, that a microfinance bank has been operating in their village. Those approaches using continuous variables provide a more precise measure of the microfinance program’s impact on outcome measures of interest.

On the other hand, the outcome measures of interest are those indicating household material wellbeing. We want to test if treatment, as defined in the previous paragraph, makes a significant difference in them. The Thailand study (Coleman, 1999) as well as the Philippines study (Kondo et al, 2008) use outcome measures such as households’ physical assets, saving, debt, lending, income, expenditures, labor hours, and category expenditures on food, healthcare and school. In addition, the Pakistan study (Montgomery, 2006) measures variables such as sales and profits from income generating activities, as well as probabilities of children being enrolled in school, of seeking medical treatment when children get ill, and of children being vaccinated.

2.     Methodology assestment


3. Analysis of results

Coleman (1999) finds that the coefficient on the number of months that a microfinance bank has been available in a village, is not significant. Specifically, impact is insignificant on physical assets, savings, production, sales, productive expenses, labor time, and most measures of expenditure on health care and education. More importantly, ‘impact is significant and positive on women’s high-interest debt because a number of members had fallen into a vicious circle of debt from moneylenders in order to repay their village bank loans. And impact is significant and positive on women’s lending out with interest because some members engaged in arbitrage, borrowing from the village bank at its relatively low interest rate and then lending money out at a mark-up. There is no evidence in these results that village bank loans are being directly invested in productive activities with a positive return.’

On the other hand, Montgomery (2006) found that the microfinance program does not impact consumption and health care expenditure, but it has positive impact on educational expenditures for the very poor (statistically significant at 5%). Likewise, the program is found to have special impacts on children’s education for the poorest borrowers (significant at 5%), on children’s health, and likelihood of vaccination. Nevertheless, a point of relative concern is that the R-square of this study is less than 10%.

4. Conclusions.

The three pieces of evidence present contradictory conclusions. While some point at the positive impact of the microfinance programs, others point at its insignificant effect or event negative effects on households material wellbeing. Thus, I think the debate over the effectiveness of microfinance programs remains open.

It would be interesting to have all these researchers and evaluators talking to each other and agreeing in a common and rigorous methodology, as well as cooperating in a fundraising effort to conduct a study done simultaneously in various continents, countries and sub-regions of the world, so that their results and conclusions can be more reliable and externally valid.

Nevertheless, there is a challenge of collective action in this proposal and only multilateral organizations such as the World Bank or the UNDP might be able to play a role in coordinating efforts of this type. Such an effort can allow for increased external validity and inference of results of these evaluations to different countries and regions of the world for the welfare of our peoples.

Dowload the complete essay here.


  • Jonathan Morduch (1999). “The microfinance promise”. Journal of Economic Literature. Vol. XXXVII (1999), pp. 1569-1614.
  • Brett E. Coleman (1999). “The impact of group lending in Northeast Thailand”. Journal of Development Economics. Vol 60 (1999) 105-141.
  • Kondo et al (2008). “Impact of Microfinance on Rural Households in the Philippines”. Philippine Institute for Development Studies, Discussion Paper Series No. 2008-005.
  • Heather Montgomery (2006). “Serving the Poorest of the Poor: The Poverty Impact of the Kushhhali Bank’s Microfinance Lending in Pakistan”. The Asian Development Bank.

(1) The source of this post’s image is http://growthinvestment.files.wordpress.com/2008/07/microfinance.jpg.

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Categorías:English, Microfinanzas, Social Development


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