NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Wednesday, April 30, 2014

A few years ago, a storm was raging in the microcredit world. Nobel laureate Muhammad Yunus, a pioneer of the idea behind giving small working capital loans to groups of mainly poor women based on social collateral, had promised that microcredit would end poverty and “put it in the museums.” But in an influential 2010 study, a group of researchers who spearheaded the concept of randomized-controlled trials (RCTs) in development economics, found no evidence that microcredit was making poverty history. What followed was a heated debate about the impact of microcredit that occasionally flares up even today. Microcredit proponents and practitioners pointed to their experience and cited earlier research showing the benefits of microcredit. The RCT researchers dismissed that earlier work, mainly on methodological grounds.

While the technical arguments might seem arcane, the underlying question of the impact of a development intervention is an important one. This is particularly true when scarce philanthropic or tax-payer money is used to subsidize the initial stage of a market development. After all, the money could be used elsewhere. So, the development community decided to gather more evidence across a broader range of settings of financial access for the poor and compare it with the best understanding of economic thinking.