Evaluating the Impact of Microfinance on Savings and Income in Sri Lanka:Quasi-experimental Approach Using Propensity Score Matching

Abstract

The study applied recent advances in propensity score matching methods to assess the impact of microfinance on household income and savings. Results suggest that overall programme participants’ benefit incidence is indeed pro-poor. With respect to both household per capita income and savings, programme participation definitely has a positive impact for all low-income households. Consequently, this article’s findings have several important policy implications. The large positive impact of participating in microfinance programmes on household income and savings suggest that microfinance programmes may improve household status in terms of wealth. The regressive effect on household per capita income suggests that poorer households do not feel as much the effects of the intervention compared to richer households. The policy implication of this regressive effect might be that for the poorest programme participants, the availability of programme loans and savings schemes may be not sufficient to become highly productive in income-generating activities. The finding of participation in microfinance programmes not being highly effective in terms of savings for richer households highlights the importance of a robust and accurate targeting mechanism for the microfinance programme in Sri Lanka. Against the backdrop of these findings, policy planners and microfinance practitioners could re-examine the targeting approach of microfinance in Sri Lanka. Finally, the principal message that emerges from the study is: there are quantitatively non-negligible, average gains from microfinance on household savings and income, especially for the poor. JEL Classification: O16, C14, C21, G21