Evaluating Microfinance Program Innovation with Randomized Control Trials: An Example from Group Versus Individual Lending

Abstract

This paper presents an application of the randomized control trial methodology to evaluate modifications in the design of microcredit programs. As microfinance becomes an even more popular tool for fighting poverty, institutions innovate rapidly in their products and programs. Policymakers and practitioners should know the relative impact of different designs, both to the client (in terms of welfare) and to the institution (in terms of financial sustainability). We discuss the current approach to evaluating product or program changes, and the reasons why more rigorous evaluations are necessary. We then discuss why randomized control trials can prove useful to microfinance institutions in identifying effective program designs in different environments. In this paper, we focus on the choice of lending methodologies—group versus individual liability—to illustrate the benefits of randomized control trials as a business tool for measuring impact and learning how to improve sustainability and growth.