Sara Nadel, Innovations for Poverty Action

This paper presents an application of the randomized controlled trial methodology to evaluating modifications to the design of microcredit programs. As microfinance becomes an even more 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). We discuss the current approach to evaluating product or program changes, and the reasons why more rigorous evaluations are necessary. We then discuss why randomized controlled trials can prove vital to microfinance institutions in identifying effective program designs in different environments. In this paper, we focus on the choice of lending methodologies – credit with education versus credit only, and group versus individual liability-- to illustrate the benefits of randomized controlled trials as a business tool for measuring impact and learning how to improve sustainability and growth. 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. * The authors thank Xavier Gine from the World Bank and Binh Nguyen from the Asian Development Bank for collaboration on an earlier paper written for the Asian Development Bank with similar motivations and thoughts. Karlan thanks Xavier Gine for collaboration and co-authorship on the group versus individual liability project in the Philippines and Martin Valdivia from GRADE in Peru for collaboration and co-authorship on the credit with education project in Peru. The authors also thank the Green Bank of Caraga, FINCA-Peru, the MABS program in th