Using Evidence to Analyze the Success of Microfinance Programs

February 13, 2013
By Jane Finn-Foley, Harvard Kennedy School Communications

Every day in Arusha, Tanzania, Jamila Jiendeleze bakes 1,000 cupcakes in a hot, small tin shack. After her husband passed away a few years ago, Jiendeleze struggled to provide for herself and her four children until she received a microfinance loan of $700 which allowed her to start baking. Now, she owns her own business and is on her way to financial independence.

Two thousand miles away in Southern India, a woman named Durgamma Dappu received a $200 microfinance loan to purchase a home. A widowed laborer from an impoverished village, Dappu had no experience handling finances and struggled to repay the loan. After taking out additional loans, she found herself $2,000 in debt. Dappu fled her village and her family forfeited her small plot of land.

“If you read these kinds of case studies, you don’t know which one to believe,” said Rohini Pande, Mohammed Kamal Professor of Public Policy, explained at this month’s Executive Dean’s Coffee lecture series, “but what you want to know is, in some sense, who represents the average?”

Pande serves as co-director of the Evidence for Policy Design program which was created to find answers to pressing policy questions in the field of international development. “The aim is to start by thinking about what kind of evidence is useful for policy,” Pande said.

In her talk, Pande focused on her research in microfinance, an individual-driven means of fighting poverty in which private companies lend money to the poor without physical collateral. The recipients of the loans, the majority of whom are women, then repay the loan with interest over a set amount of time.

Pande’s research aims to undercover why in some instances the microfinance system works well and in others, like that of Durgamma Dappu, it fails. Policy makers, Pande argues, are faced with a dilemma. “Should [they] go back to the drawing board and say microfinance didn’t work?” she asked. “Or do you actually try to think about hypotheses, about what feature of microfinance may not be working?”

Pande argues that microfinance is a useful tool and that policy makers need to think systematically about the features of the debt contracts to find alternative methods that will improve the system. Through their research, Pande and her team concluded that the lack of credit rating systems for individuals and the lack of regulation to address market failure with subsidies are the biggest hurdles to successful microfinance in developing countries. “The lack of these institutional features can limit the impact of microfinance,” she explained.

John Haigh, executive dean at Harvard Kennedy School and co-director of the Mossavar-Rahmani Center for Business and Government, praised Pande’s work and that being done by the Evidence for Policy Design program.

“What [they do] epitomizes what the Kennedy School should be about and that is actually bringing data to bear on policy implementation, policy choices,” he said.

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Rohini Pande, Mohammed Kamal Professor of Public Policy

Rohini Pande, Mohammed Kamal Professor of Public Policy

“The aim is to start by thinking about what kind of evidence is useful for policy,” Pande said.