Evaluating Microfinance Program Innovation with Randomized Controlled Trials: Examples from Business Training and Group versus Individual Liability

This paper illustrates the benefits of randomized controlled trials to measure impact and learn how to improve sustainability and growth. This paper was commissioned by the Microcredit Summit Campaign in 2006.The paper presents an application of the randomized-controlled-trial methodology to evaluate modifications to the design of microcredit programs. It states that:

• As microfinance becomes a popular tool for fighting poverty, institutions innovate in their products and programs at a rapid pace;
• Policymakers and practitioners should know the relative impact of different designs, both to the client (in terms of welfare) and to the institution (in terms of financial sustainability).

The paper discusses current approach to evaluating product or program changes and the reasons for the need for more rigorous evaluations. It argues that randomized-controlled-trials can prove vital to microfinance institutions in identifying effective program designs in different environments. The paper also:

• Focuses on the choice of the following lending methodologies:
  • Credit with education versus credit only;
  • Group versus individual liability.
• Illustrates the benefits of randomized controlled trials as a business tool for measuring impact and learning how to improve sustainability and growth.

The paper concludes by stating that this methodology can be employed for a plethora of program design issues, such as timing of payments, loan size, interest rates, term, and other services such as insurance and savings.