Careful New Review of Randomized Trials of Microfinance

CGAP has published a nice summary of what we can learn from the growing collection of randomized studies of microfinance. I've been a bit slow to blog it because it did not generate sparks in my head. I neither found much to disagree with nor learned much from it with regard to themes I care most about---which I don't mean as a criticism, since I am not the intended audience. The sponsors are CGAP, the Financial Access Initiative, IPA, and J-PAL.The authors are Jonathan Bauchet, Cristobal Marshall, Laura Starita, Jeanette Thomas, and Anna Yalouris. (Let history note that it was Laura who broke the story that randomized evaluation would challenge the claim that microcredit reduces poverty.)Like other recent literature reviews, this one finds no rigorous evidence that microcredit, as that category of financial services is usually defined, reduces poverty. But that is less of a conclusion than a starting point for an inquiry into the subtler lessons from recent research. Thus, the review differs in narrowing the focus to just randomized studies; and by widening it to embrace both the hot-button impact question and how the design of financial products affects behavior. I'm guessing that one motivation for the work was to prevent the obsession with the impact question (of which I am as guilty as anyone) from completely overshadowing questions about how to design financial services to better meet the needs of the poor.If you're looking for a thorough, careful, and clear summary of the latest research, and one that gets to those important design questions, you can do no better than read this review. My own chapter 6 is not nearly as complete and precise.You can feel the cautious tone in the conclusion:

The overall message from this body of work is that poor people face various limits, and their ability to capitalize on opportunities varies greatly. One of the next steps is to find simple ways to identify those differences and cater to them with the right products delivered with the right design.Details matter. Purpose does as well—not all borrowers want to grow a business. The variable results seen can be as much a function of borrower intent as borrower ability. A one-size-fits-all product will not bring benefit to the borrowers or profit to the providers. Instead, the microfinance industry needs to continue to mature in ways that allow it to view poor customers as individuals. Some of those individuals will leverage financial services to smooth consumption; some to manage risk; some to make investments they have the skill and resources to profit from; some will do all of the above. With a view of serving all of these needs, microfinance providers may evolve a new generation of improved services and products that reliably and flexibly help poor people.

One difficulty in writing this literature review, I imagine, was positioning it within a polarized debate. After the first randomized studies of microcredit appeared in 2009, newspaper headlines cast the studies as proving that microcredit doesn't work. Many in the industry fired back that the studies' implications were overblown. The authors of this new report, I am sure, sought to distance themselves from both poles, which led them to accentuate the positive in some places and the negative in others. Alas, in a charged atmosphere, such signalling is easily interpreted as bias or inconsistency. Jonathan Morduch and I wrote in 2009 that lack of credible evidence from certain studies that we critiqued did not undermine the idea that microcredit reduces poverty, in the sense that absence of proof is not proof of absence. Our intention was to prevent a dichotomous interpretation of our paper as proving that microcredit does not work, a claim we simply could not support (or rebut) with the data in our computers. A literature review this summer interpreted this nuance as a wishful defense of microcredit.To my taste, this review new does tilt just slightly to the positive, as in this overly qualified but hopeful sentence: "Despite the lack of evidence for positive effects on welfare from credit, the studies so far offer tantalizing evidence that there could be important potential benefits for some poor households to be gained by helping the poor reprioritize their expenditures." But I see this tilt, if that is what it is, as a minor problem. It is slight. And the report carefully segregates evidence from interpretation. One can trust it on the evidence and form one's own conclusions, which in my case are nearly indistinguishable from those in the report.