Effectiveness of Microfinance Based on Rational Mechanisms

Abstract

This study examines the factors that determine whether microfinance borrowers borrow after being allocated individual and group loans through randomization in Mongolia. Efficiently increasing income and consumption through microfinance requires knowledge of the attributes that lead to borrowing and that increase income and consumption, by type of microfinance. The use of MTE reveals the heterogeneity of the borrowers. The results of MTE can help to design effective microfinance policies. The examined outcomes were the impacts on household income, business income, business expenditure, consumption, and food consumption. Furthermore, we investigated the impact on the poorest borrowers and obtained results that took into account the borrowing ratio instead of the borrowed amount. The analysis revealed the following results: first, there are borrowers who actively borrow and those who do not, and their characteristics are shown by microfinance type; second, there are different types of microfinance suitable for different borrowing purposes; third, a comparison between the poorest and less poor borrowers reveals different types of suitable microfinance; fourth, the attributes that increase income and consumption through borrowing differ for different groups. Group lending increases business income and business spending but reduces consumption. It was confirmed that when narrowing the sample to the poorest, the effect of increasing group lending was lost, but consumption increased. There are many cases in which the outcome increases in individual lending, but decreases in group lending, and vice versa.