How Much do Existing Borrowers Value Microfinance? Evidence from an Experiment on Bundling Microcredit and Insurance

Several recent randomized controlled trials have found only modest effects of microfinance on consumption and income. However, these studies by design estimate impacts on new clients, so these modest effects may only have been lower bounds on the gains for more-experienced borrowers and the longer-run potential for microfinance. We examine the causal impacts of microfinance on experienced borrowers, and these clients' valuation of their ongoing microfinance relationship. Our research design uses an episode during which a microfinance institution modestly increased their clients' fees in randomly selected villages in exchange for a mandatory health insurance policy (which turned out to be entirely useless due to administrative failures). Our first result is that this modest increase in fees led to a 22 percentage point (or 30%) decline in loan renewal in treatment villages, compared to control villages where the policy was not introduced. Using this randomly generated variation in microfinance participation among established microfinance borrowers, we find impacts of microfinance that are strikingly similar to the previous literature: neither business outcomes nor household consumption outcomes were affected, on average, for the most part. Consistent with some previous studies, there were some declines in an index of business outcomes and declines in durable goods purchases, but only for those clients who had a business before microfinance entered the village. By contrast, businesses that started after microfinance had entered the villages were unaffected in terms of business outcomes but enjoyed an increase in non-durable goods consumption. This heterogeneity in effects is consistent with a simple model in which durable goods are lumpy purchases. The high drop-out from microfinance further suggests that the net gains from microfinance are small for a substantial share of borrowers. Strikingly, those who had a business before microfinance are as likely to exit as other borrowers, despite suffering large losses in business earnings as a result, which raises the possibility of substantial unmeasured costs from running microfinance-funded businesses.