The Miracle of Microfinance? Evidence from a Randomized Evaluation

Households create and expand businesses as a result of a microfinance program targeting women.


Microfinance has expanded rapidly in the last few decades, but there is mixed evidence on its impact. Proponents believe that microfinance can eradicate poverty and hunger, improve children’s access to primary education, and promote gender equality. Critics fear that microfinance is displacing more effective anti-poverty measures and possibly even contributing to over-borrowing, thus locking households into greater long-term poverty. This paper evaluates the short-term impact of a program that introduces microcredit into slums in Hyderabad, India through Spandana, a microfinance institution that uses a group-lending model and channels the majority of its loans to women.


Microlending to groups of women leads to an increase in investments that may generate additional income for families, but does not result in changes in the gender dynamics of households.

  • Neighborhoods with a new Spandana branch had more new businesses and more profitable existing businesses than neighborhoods without Spandana.
  • The program did not have an impact on total household spending, but it did lead to shifts in spending that presumably reflect business development. That is, households that already ran a business did not change their consumption, but households that started a business did shift to spend more on durable goods. Households in slums with a Spandana branch spent more on durable goods and less on “temptation goods” such as alcohol, tobacco, and gambling.
  • There is no evidence that, in the short term, the program led to women’s empowerment within households. Women in program areas were no more likely to make decisions about household spending, investment, savings, health or education than in non-program households.

In short, although microfinance is associated with some positive outcomes, it does not appear to immediately impact other development goals such as gender equality or educational access.


In 2005, 52 of 104 slums in Hyderabad, India were randomly selected to receive a branch of Spandana, a microcredit institution. The remaining neighborhoods served as the control group. These areas were selected for the program based on having no pre-existing microfinance presence and having residents who were desirable potential borrowers. A baseline survey of 2,800 households was conducted prior to the start of the program in 2005. An endline survey was conducted 12 to 18 months after Spandana began operating in a neighborhood, capturing information for 6,850 households.

With few exceptions, the treatment households that accessed microcredit received a group loan. Only women were eligible for the group loans, and they had to meet several additional eligibility criteria, including age and residency requirements. The program only offered microcredit and did not incorporate any financial literacy promotion or business training. Spandana clients were allowed to use the loan however they saw fit.

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