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Microfinance: Issue 3

VoxDevLit

Published 22.02.25
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Jing Cai, Muhammad Meki, Simon Quinn, Erica Field, Cynthia Kinnan, Jonathan Morduch, Jonathan de Quidt, and Farah Said, “Microfinance”, VoxDevLit, 3(3), January, 2025
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Chapter 8
Conclusions & future research on microfinance

It is tempting in writing the conclusion of a review piece on microfinance to reach for a ‘grand unified theory’ of lending, or even to suggest some ideal kind of microcredit contract. However, if there is any single lesson to come from the exciting recent proliferation of microfinance research, it is that microfinance is an extremely heterogeneous field: the design of microcredit contracts involves many degrees of freedom, and different kinds of borrowers are likely to value microfinance for very different reasons. In this regard, it is striking that the first generation of microfinance RCTs were able to test a relatively homogeneous ‘standard’ form of microfinance contract, used in many different settings around the world; if anything, this fact – coupled with the recent design innovations tested in the literature – suggests that microfinance institutions may be ‘under-experimenting’ in the way that they design and implement their products. For this reason, recent innovations in adaptive experimental design might prove particularly fruitful when applied to the design of microfinance products (see, for example, Kasy and Sautmann 2021 and Caria et al. 2023). 

Nonetheless, it is certainly possible to summarise some general lessons – even if these must fall far short of any grand unified theory or design. On our reading of the recent literature, the key lessons are these: 

i. The ‘traditional’ model of microcredit does not have transformative effects on its borrower pool, though that class of contract may nonetheless be valued by microfinance clients for its provision of liquidity and its implicit insurance. Further, it may be possible to find substantial sub-groups for whom that kind of contract is valuable; in particular, for example, it may be valuable for clients with prior business experience. 

ii. For many clients, a key attraction of microcredit is the opportunity to accumulate a lump sum. For this reason, microcredit contracts with an initial ‘grace period’ are likely to be valuable in a wide variety of contexts. For graduated borrowers, at least, it may be that existing microfinance contracts are simply too small; ‘strongly backing’ such borrowers with contracts that provide for much larger lump sums may be a very useful innovation. Asset-based microfinance is one promising method by which a microfinance institution might viably do this. 

iii. Given the evidence that microcredit effects are heterogenous across borrowers and that different contractual forms can work in different contexts, an open research question is how microcredit can become more flexible/tailored while retaining the advantages of its more basic forms – such as transparency, simplicity, the ability to keep costs low through group disbursement and collection, and the harnessing of social capital to promote repayment. 

iv. Microcredit contracts must often be understood in the context of intra-household pressures. For this reason, contracts that allow clients greater autonomy over the use of the lump sum – in particular, contracts designed for women – may prove particularly beneficial. 

v. Different microcredit contracts clearly have different uses for different borrowers – in particular, some microcredit provides for business expansion, while much goes to consumption. There may be valuable contractual innovations in designing microfinance products that more effectively provide for business investment – and conversely, other products that more directly serve a consumption need (for example, products that are intuitive to the borrower and that incorporate appropriate consumer protection). Indeed, this seems like one particularly promising avenue of ongoing and future research: testing ways in which novel contractual arrangements can more effectively serve specific groups of microfinance clients, many of whom use microfinance for very different purposes. In this regard, digitisation and novel financial technologies hold significant promise for enhancing access to financial services (both in the sense of expanding microfinance access, and in the sense of allowing for more flexible performance-contingent microfinance contracts).[1]

For all of these reasons, the optimal design of microfinance contracts is likely to remain an important challenge for many years to come, for policymakers, for microfinance institutions, and for academic researchers.

References

Caria, S, G Gordon, M Kasy, S Osman, S Quinn and A Teyetleboym (2023), “Job search assistance for refugees in Jordan: An adaptive field experiment”, Journal of the European Economic Association, 22(2): 781-836.

Kasy, M and A Sautmann (2021), “Adaptive Treatment Assignment in Experiments for Policy Change”, Econometrica 89(1): 113–132. 

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