What is the best way to provide financial services to the poor? What is the impact of microfinance on the socio-economic conditions of these households? Despite a great deal of anecdotal evidence, the fact is that we know very little about these issues.

Finding strong evidence explaining the incidence of success or failure in microcredit interventions is important for many reasons. Non-governmental organisations, MFIs and governments can use this evidence to focus their budgets on those programmes that are most effective. Following such an evaluation, an MFI may be convinced to expand the same programme since it has already proved to be very effective in a particular context.

The evaluation of a microcredit programme offered by a MFI partner SPANDANA, conducted by CMF, Chennai and led by MIT's Abdul Latif Jameel Poverty Action Lab (J-PAL) uses a randomised trial to evaluate its impact in the slums of Hyderabad. A baseline survey which started in February 2005, was conducted in 120 slums. Among them 60, randomly selected slums have started receiving credit. A follow-up survey will be conducted after a loan cycle has been completed. The CMF will also continue to track and survey the households for an extended period of time to study the impact over a longer term.

The objective of the study is to examine the impact of microcredit on income, consumption, financial services usage, asset ownership, business scale and profitability, and intra-household decision making. This study will enable an understanding of the effects of the microcredit programme at the household level and the usage of financial services in particular. This understanding could lead to financial products and services that are better designed. It could also contribute to the development of complementary non-financial services interventions at the household level, which can maximise the impact of microcredit.

To gain a fuller understanding of the impact of microcredit programmes on the poor it is essential to carry out similar evaluations in other parts of India as well. Once the results for the present study are in, CMF intends to do just that with MFIs operating elsewhere in the country.