1. Introduction

Despite the multitude of studies on microfinance, there still exits surprisingly little hard data on the effects of microcredit. This analysis focuses on the effect of microcredit specifically on household consumption, and reviews relevant literature which addresses the relation between household consumption and availability of microcredit.

Traditionally Microcredit has been studied as a tool of poverty reduction through increase of consumption. A relatively recent shift in thinking has been to consider microcredit as a means to facilitate consumption smoothing and build assets to protect against risks ahead of time and cope with shocks, leading to widespread poverty alleviation but not widespread poverty reduction.

The review is divided into three sections based on the approach used to study the effect of microcredit. The first section examines the works of Pitt & Khandeker and Morduch which use non-experimental methods to make claims of causal identification. This is followed by a look at random evaluation studies performed and discusses their conclusions. The final section introduces “Portfolios of the Poor” by Daryl Collins et al (2009), a descriptive study of the financial activities of the poor.

2. Literature Review

2.1 Non-Randomised Approach

The studies by Pitt & Khandeker and Morduch are all based on the 1991-92 cross-sectional survey of nearly 1800 households in Bangladesh served by microfinance programs of the Grameen Bank, the Bangladesh Rural Advancement Committee (BRAC), and the Bangladesh Rural Development Board (BRDB). The sample also includes a control group of households in areas not served by any microfinance programs.

Pitt and Khandeker (1998 A) apply a quasi-experimental design to this data and use a regression-discontinuity design to estimate the marginal impacts of microcredit while distinguishing borrowing by gender. The study obtains the result that “annual household consumption expenditure increases 18 taka for every 100 additional taka borrowed by women as compared with 11 taka for men” and hence concludes that microcredit increases household consumption.

A key to the identification strategy used in this study is the fact that the factors driving credit choice be exogenous. One of these factors is the eligibility of households for credit (eligible if they own less than 0.5 acre). However this factor as noted by Morduch (1998) suffers from considerable mistargeting: overall 20-30% of borrowers own more than the mandated threshold and are actually ineligible. Consequently a criticism of this paper would be that the lax implementation of program rules undermines the application of the regression-discontinuity design.

Morduch (1998) uses simpler estimators as compared to Pitt and Khandeker (1998 A). The study regresses directly on the primary instruments for credit, dummies for credit choice. Morduch measures the average impact of microcredit by first performing simple difference-in-difference estimates and then adding controls.