Microfinance Can Raise Incomes: Evidence from a Randomized Control Trial in China

Abstract

This study evaluates the impact of a randomized control trial (RCT) in China that introduced externally funded village credit funds in poor, rural villages. In contrast to recent RCT-based studies that have failed to find evidence of significant increases in income from microfinance interventions, we find that the Chinese program significantly raises household income and reduces poverty. We explore possible explanations as to why the estimated impacts may be greater in China: lump-sum repayments, lower interest rates, less access to formal credit before the program, and greater potential returns from off-farm employment opportunities that are credit-constrained.