Project Evaluation

Microcredit for Women in Mexico

Few studies have rigorously quantified the impact of microcredit loans. IPA partnered with Compartamos Banco to evaluate the social and economic impact of their principal village banking loan product by randomizing which new communities the bank entered. After an average of 26 months later, economic impacts were modest, with increases in business activity but not in profits or household income. The data show few negative economic effects, and increased happiness and well-being for the group with access to loans. However, lower income individuals and first-time borrowers reported lower well-being outcomes, including higher stress. Future research and policy would benefit from better understanding the particular effects of access to credit for these individuals.
See the full results in an executive summary here and the full paper here (PDFs).
Policy Issue:
Microcredit is one of the most visible innovations in poverty alleviation programming in the last half-century, and in three decades it has grown dramatically. Now with more than 200 million borrowers,1 microcredit has been successful in bringing formal financial services to the poor. While microcredit has received praise for its potential to lift clients out of poverty, this recognition is often based on generalizations about the microfinance movement or on simple comparisons of borrowers and non-borrowers. Attempts to determine the true impact of microcredit programs are complicated by the fact that the choice to become a microfinance borrower may itself be a sign of increased ambition and ability to improve one’s economic situation. To date, few studies have rigorously quantified the impacts of microcredit loans on the beneficiaries and their communities. 
Context of the Evaluation:
The study took place in the northern Mexican state of Sonora in the cities of Nogales, Caborca, and Agua Prieta, as well as surrounding towns. Although agriculture, mining, and wage labor in factories along the U.S. border provide some employment opportunities, most people are underemployed and strive to make ends meet through various informal employment opportunities. Many residents lack the income or collateral to qualify for loans from traditional bank services.
In 1990, Compartamos Banco began offering credit in an effort to promote economic development by spurring the growth of micro-businesses. It converted to a commercial bank in 2006 and became a publicly traded company in 2007. Today, Compartamos Banco is the largest microfinance institution in Mexico with branches in every state and over two million borrowers. Crédito Mujer, the principal village banking product of Compartamos is offered to groups of 10-50 Mexican women over the age of 18 who either have some kind of business or would like to use the loan money to start one. Compartamos does not verify whether individuals are currently engaged in an income-generating activity or planning to start one once given the loan, instead they depend on other group members to screen out uncreditworthy women.
Description of the Intervention:
This project evaluates the social and economic impact of access to credit, taking advantage of Compartamos’ decision to offer Crédito Mujer in the north of Sonora, where it had not previously offered loans. Researchers divided the study region into 250 geographic clusters and then randomly assigned half to a treatment group and the other half to a comparison group.  In treatment clusters, Compartamos began offering loans in April of 2009: loan officers targeted self-reported female entrepreneurs and used a variety of channels, including door-to-door promotion, radio ads, promotional events, and distributing fliers, to promote the Crédito Mujer product. Crédito Mujer loans in the sample ranged from M$1,500 – M$27,000 (US$125 – US$2,250), with first-time borrowers qualifying for lower amounts. The annualized interest rate for Crédito Mujer was slightly more than 100 percent in 2009 and borrowers repaid the loans over 16 weekly payments. In comparison group areas, Compartamos did not begin offering credit until almost 3 years later. 
Baseline and endline data is from socioeconomic surveys administered to women 18-60 who had or were likely to start a business in both treatment and comparison areas. Researchers conducted follow-up surveys between 2011 and 2012, an average of 26 months after Compartamos entered the treatment areas.
Impact on Loan Take-Up and Financial Access: Women in treatment areas reported taking out more loans and borrowing more from Compartamos than their peers in comparison areas. Nearly twenty percent of women in treatment areas borrowed from Compartamos, while only 5.8 percent of women in comparison areas took a loan from Compartamos. There was no evidence that increases in borrowing from Compartamos was offset by decreases in borrowing from other lenders.
Compartamos’ expansion decreased participation in informal savings groups by about 8 percent, suggesting that women moved from informal to formal financial services. Although formal borrowing increased, women in treatment areas were no more likely to say that they would go to a formal lending institution if they needed a loan tomorrow, nor did it improve how satisfied women were with their access to financial services. 
Impact on Business Outcomes: Expanded credit access increased the size of some existing businesses: in the treatment areas, there was a 0.08 percentage point increase in using loans to grow an existing business, and in the two weeks before the household survey these businesses saw a 27 percent increase in revenue and a 36 percent increase in expenditures, respectively. However, there were no increases in new business ownership or profits.
Impact on Household Finances and Well-Being: While there were no significant changes in household income, households in treatment villages were able to avoid selling assets in order to pay down debt more than their peers in comparison villages, maintaining a more stable level of economic well-being. Expanded credit access had generally positive effects on well-being: depression fell, trust in others rose, and female household decision power increased.
There was no strong evidence that credit expansion created a large number of people who were more likely to experience negative effects when access to credit expands. For instance, none of the 17 outcomes for which data was collected both show significant increases in the likelihood of worsening over time in treatment relative to control areas, and there was no clear pattern of strongly negative impacts on any of the subgroups researchers examined. The data suggested that some subgroups, in particular individuals with no previous experience of formal credit or with low incomes, were more likely to report lower subjective well-being outcomes, like job stress, life satisfaction, and economic satisfaction, than their peers in comparison group areas. However, these groups do not experience a negative effect on total income or happiness. 
Overall, increased access to microcredit allowed some existing businesses to expand, and enabled customers to use formal financial services to manage their cash flows over time, although it did not increase their business profits or prompt people to start new businesses. The potential negative effects seen on individuals without formal credit experience are particularly relevant from a policy perspective, given that banks may have a special role to play in helping first-time borrowers. Further research is needed to explore potential screening criteria or effective guidance to first-time borrowers.
[1] CGAP. “Financial Inclusion” Accessed: 2013. 05.13
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