What do we know about the impact of microfinance? : the problems of power and precision

Six randomized control trials were published simultaneously in one issue of the “American Economic Journal: Applied Economics” in 2015. The studies show no or minimal impact from providing microloans to clients and have led many researchers and policy makers to conclude that microfinance has been proven to have little or no positive impacts on people’s lives. We review in detail these six studies and find three main results. First, unsurprisingly, the insignificant results are replicable using the researcher’s original data. Many coefficients are large, but very noisy. Second, every one of the studies is significantly underpowered. This is generally due to low take-up of the financial product offered. Pooling the data from the six studies together improves power for most outcomes, but minimum detectible effect sizes are still very large. Third, when we run analysis on the pooled sample, we find a treatment effect of 29% increase in profits, significant at the 5% level. We also obtain large impacts on business growth and household assets, but not for overall consumption. These results suggest that existing research on the impact of microfinance is generally underpowered to identify impacts, whether modest or zero, reliably. We end by discussing ways to improve future research on this topic.