The impact of microfinance on household expenditures for health and education: Evidence from a randomized controlled trial implemented in Hyderabad, India

Since the late 1970s, microfinance has been popular in the developing world. This paper studies whether the effect of microfinance on household expenditures for education and health varies by business propensity (i.e., the likelihood that a household either already operates a business or will start a business in the near future). My analysis is based on data from a randomized controlled trial conducted by Spandana, a microfinance institution. Spandana randomly selected 52 out of 104 slums in Hyderabad, India to open microfinance institution (MFI) branches. I hypothesize that the effect of microfinance on education and health expenditures might vary among households based on their business propensities. More specifically, I hypothesize that the establishment of microfinance institutions could cause households with businesses existing before the program to reduce their expenditures on education and health. One might also expect the same to be true for households that did not have a business before the existence of the microfinance institution but that had a high propensity to start a new business later. However, data from the Spandana experiment produces only limited evidence in support of these hypotheses. Evidence is especially limited with regard to the impact of microfinance on education.