2005 Tinker Summer Research Report Greg Rafert Agricultural and Resource Economics “Microfinance: Do borrowers benefit from small-scale agricultural loans?”

A colorful local Guatemalan market where microenterprise owners and farmers sell their products. Many of these individuals have received a small-scale loan from the many microfinance institutions operating in the area.

Over the last decade the disbursement of small-scale loans to agriculturalists and microenterprise owners has grown dramatically in both scale and popularity as many in the development community have come to see microfinance as one of the best practices for increasing individual capacities and wealth. This growth in microfinance began with the apparent success of the Grameen Bank in Bangladesh and has continued, often with the help of development organizations such as the World Bank, with the expansion of microfinance institutions into most developing countries.

Although microfinance has received much attention from academics, policy makers, and the public press, very little is known regarding the effectiveness of microfinance in increasing the profitability of microenterprises, and in improving individual capacities and opportunities. Advocates of microfinance can point to specific cases in which microfinance resulted in a positive impact, but serious and convincing empirical data do not yet exist. Thus, the enthusiasm for microfinance has run ahead of the available evidence. Given the large levels of donor funds devoted to encouraging the spread of microfinance, serious effort must be expended in obtaining convincing empirical evidence.

This project developed and implemented a rigorous methodology, in coordination with a participating microfinance institution, for analyzing the impacts of microfinance on those who receive microfinance loans. Specifically, the project began in April when FUNDEA, a Guatemalan microfinance institution, was contacted with a proposal detailing the project and its associated methodology. Over the next two months, in coordination with FUNDEA, this project refined and generated a workable and appropriate methodology for understanding the varied impacts associated with microfinance. Upon my arrival in June, I began discussions with the FUNDEA office that would be implementing the proposed methodology. During these initial discussions with FUNDEA and after visiting various villages that would be involved in the project, it immediately became clear that the methodology as proposed would not be successful. Thus, more discussions were held during June and early July. In these discussions we developed a new methodology that would, although different from the original methodology, effectively analyze the impacts of microfinance on those who obtain loans.

The local office of FUNDEA that participated in the project. FUNDEA is a part of ACT, the Belgian development association.

This final methodology relies on a random assignment of villages into treatment and control groups, and a randomly determined order for FUNDEA’s disbursement of loans in the treatment villages. In particular, 14 villages were selected during early July in the northern portion of the department of Quiché. Pairs of communities were then randomly generated and within each community pair: one community was randomly assigned to be a control while the other was designated to be a treatment village. This therefore resulted in seven treatment and seven control villages. In mid-July FUNDEA then began randomly entering into, and giving loans in each treated community in a randomly assigned order. Thus, FUNDEA first entered randomly into one of the seven randomly designated treatment villages. Upon completion of loans in this village FUNDEA then randomly entered into a second treatment village. At the time of writing this report, FUNDEA has successfully disbursed loans in three villages, implying that four treated communities remain.

Throughout the study surveys will be given in both treatment and control communities to analyze the varied impacts of microfinance. Specifically, these surveys will gather data on expenditures, income, assets, and outlays over a nine month period for every household in a treatment community who receives a loan, and for every household in a control community that is statistically similar to surveyed households in treated communities. I will then exploit differences in observed outcomes between treatment and control communities to analyze the impact of microfinance on small-scale agriculturalists.

Data from this project will begin to become available in approximately six months. The analysis of this data will provide valuable insights and answers to the some of the most basic, yet unanswered questions in microfinance. For example, does microfinance have a positive impact on those who obtain microfinance loans? If it does have an impact, in what way? Do microenterprise profits increase? And if so, does household income subsequently increase? And finally, will microfinance impact all clients equally? And if not, which type of client is more likely to benefit? The answers to these questions will prove invaluable as policy makers and microfinance practitioners work to improve the functioning of microfinance in the coming decades.