Does anyone know about the Microcredit debate, which plagued the world of development for quite some time?
Basically, microcredit, a financial tool providing small loans to underserved entrepreneurs, was both praised and criticized in the development world. It was lauded with the Nobel Peace Prize in 2006 as an effective policy tool for poverty alleviation, but also heavily questioned by the researchers on the dubious evidence for the claim. These evidences were basically based on shaky and unreliable anecdotes, descriptive statistics and impact studies that couldn’t establish strong causality.
To address these debates, six studies were conducted, employing randomized designs that randomly allocated access to microcredit. That means, the research setting provided access to credit to only a limited number of randomly selected people, who were the “treatment group” and provided no access to credit to other random set of people, who were the “control group.”
This was done to ensure that any differences between the two groups are due to chance rather than pre-existing characteristics or preferences. It is to be noted that randomization helps create comparable groups, so on average, the characteristics of participants in the treatment group and the control group are balanced.
The key findings from the six studies were as follows,
💡 The studies revealed modest take-up rates of microcredit among microentrepreneurs, challenging the notion of it as a one-size-fits-all solution.
💡 The studies found it extremely complex to pin-point who would take microcredit, even with extremely advanced econometric methods, and comprehensive baseline data. This highlighted the presence of numerous unobservable characteristics in the decision making of taking up micro credits.
💡 The study also found that contrary to extreme claims, microcredit is neither a panacea nor a useless tool. It falls somewhere in between, with some positive effects and a lack of dramatic transformations.
💡 These studies face a big challenge - statistical power, primarily because of low-take up by microentrepreneurs! It's like trying to find a needle in a haystack. More studies and meta-analyses are needed to crack the code.
The paper for the findings can be found here: Six Randomized Evaluations of Microcredit: Introduction and Further Steps
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