Does it Work? The Need for and Potentials of Randomized Evaluations in Microfinance

During the last thirty years, microfinance has spread all over the globe from its roots in Bangladesh. However, as this paper will show, this expansion has not been high quality research demonstrating its effectiveness in improving the lives of the poor. In addition to showing the statistical shortcomings of the research that has been done on the subject, I will show how and why randomized evaluations can fill that gap. Several factors that have historically been considered unrealistic, including financial sustainability for most microfinance institutions and the feasibility of performing randomized evaluations on small scales, have recently become a reality. This has opened the doors for three specific opportunities within microfinance. Firstly, organizations can now improve their understanding of whether microfinance improves the lives of the poor using statistically compelling methods. Second, it gives microfinance institutions the opportunity to provide a better financial product for clients via randomized evaluations. Lastly, as I will argue, it puts microfinance in the position to use loan manipulation and group meetings to improve the lives of the global poor in a more meaningful way.