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Literature Review

This literature review discusses several studies on the impact of microfinance. Coleman (1999) addresses self-selection bias by using a "quasi-natural" experiment comparing households that were able to access loans immediately versus those that had to wait one year, finding no significant impact after controlling for endogenous selection. Karlan (2001) and Alexander-Tedeschi and Karlan (2002) note problems with drop-outs overestimating impact. Microfinance emerged in the 1970s and 1980s as an alternative to subsidized rural credit programs, with Grameen Bank and BRI showing small loans and savings services could be profitable at scale. The 1990s saw rapid growth in microfinance institutions and emphasis on outreach.

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Kritesh Rathore
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113 views2 pages

Literature Review

This literature review discusses several studies on the impact of microfinance. Coleman (1999) addresses self-selection bias by using a "quasi-natural" experiment comparing households that were able to access loans immediately versus those that had to wait one year, finding no significant impact after controlling for endogenous selection. Karlan (2001) and Alexander-Tedeschi and Karlan (2002) note problems with drop-outs overestimating impact. Microfinance emerged in the 1970s and 1980s as an alternative to subsidized rural credit programs, with Grameen Bank and BRI showing small loans and savings services could be profitable at scale. The 1990s saw rapid growth in microfinance institutions and emphasis on outreach.

Uploaded by

Kritesh Rathore
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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LITERATURE REVIEW:-

In one study, Thai borrowers, prior to borrowing, were much wealthier than
nonborrowers ( Coleman, 2006). He attributes the difference to either a selection
bias or a programplacement bias. A proper impact analysis should control for the
initial wealth differences between borrowers and nonborrowers.

Coleman (1999) addresses this problem by collecting data on 445 households in


14 villages. Of these, eight had village banks operating at the start of 1995. The
remaining six hadn't started operations, but village banks were set up already,
allowing the households to selfselect according to the village banks' procedures.
Since the selected households were forced to wait one year before getting their
first loans, it was possible to use this group of households as a control group.
This “quasi-natural” experiment controlled for self-selection bias. Coleman finds
that controlling for selection makes an important difference: The average
program impact is not significantly different from zero after controlling for
endogenous member selection and program placement.

Karlan (2001) and Alexander-Tedeschi and Karlan (2002) point out additional
problems due to MFI program drop-outs and graduates that can be especially
severe in cross-section studies, which rely on comparing old borrowers to new
ones. Sometimes borrowers graduate MFI programs because they are doing so
well that they no longer need assistance. More often, it is the borrowers in trouble
that leave. The result of drop-outs is that only successful borrowers remain in the
program, resulting in overestimation of program impact. Hulme (1999) reports
that dropout rates are 25 to 60% per year in East Africa. Gonzalez-Vega et al.
(1997) report that just half of the clients who ever borrowed from BancoSol were
still active at the time of analysis. In rural areas, however, the fraction of active
borrowers numbered two-thirds of all borrowers, possibly reflecting the fact that
there are fewer alternative lending sources in the countryside.

Microcredit and microfinance are relatively new terms in the field of development,
first coming to prominence in the 1970s, according to Robinson (2001) and Otero
(1999). Prior to then, from the 1950s through to the 1970s, the provision of
financial services by donors or governments was mainly in the form of subsidised
rural credit programmes. These often resulted in high loan defaults, high loses
and an inability to reach poor rural households (Robinson, 2001).
Robinson states that the 1980s represented a turning point in the history of
microfinance in that MFIs such as Grameen Bank and BRI2 began to show that
they could provide small loans and savings services profitably on a large scale.
They received no continuing subsidies, were commercially funded and fully
sustainable, and could attain wide outreach to clients (Robinson, 2001). It was
also at this time that the term “microcredit” came to prominence in development
(MIX3, 2005). The difference between microcredit and the subsidised rural credit
programmes of the 1950s and 1960s was that microcredit insisted on repayment,
on charging interest rates that covered the cost of credit delivery and by focusing
on clients who were dependent on the informal sector for credit (ibid.). It was now
clear for the first time that microcredit could provide large-scale outreach
profitably. The 1990s “saw accelerated growth in the number of microfinance
institutions created and an increased emphasis on reaching scale” (Robinson,
2001, p.54). Dichter (1999, p.12) refers to the 1990s as “the microfinance
decade”. Microfinance had now turned into an industry according to Robinson
(2001). Along with the growth in microcredit institutions, attention changed from
just the provision of credit to the poor (microcredit), to the provision of other
financial services such as savings and pensions (microfinance) when it became
clear that the poor had a demand for these other services (MIX, 2005).

Vinod Khosla & Vikram Gandhi, TNN, Jun 15, 2006, IST
The impressive recent growth of certain sectors of the Indian economy is a
necessary but insufficient condition for the elimination of extreme poverty.

In order to ensure that the poorest benefit from this growth, and also contribute to
it, the expansion and improvement of the microfinance sector should be a
national priority.

Researchers tell us that in Bangladesh, where 15 million families now benefit


from small loans and other financial products such as micro-savings and micro-
insurance, 40% of the overall reduction of rural poverty in recent years has been
due to microfinance.

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