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AAAE Conference proceedings (2007) 405-410

Does Participation in Microfinance Programs Improve Household Incomes: Empirical Evidence From Makueni District, Kenya.
Joy M Kiiru, John Mburu, Klaus Flohberg Centre for Development Research, Bonn University Walter flex str. 3, 53113 Bonn- Germany Abstract Although microfinance has elicited different reactions from different stakeholders, thereseems to be a general agreement that it is useful in reducing poverty. This study is an attempt to contribute in to the debate on the impact of microfinance on household incomes. We use a pooled data set collected from the south western part of Makueni district in Kenya to study the households’ access to microfinance credit and how the credit affects their incomes. We control for household selectionbias as well as endogenity problems in the sample. Cross sectional analysis fails to show any significant positive impact of microfinance on poverty reduction. Only after the inclusion of time dynamics in the study are we able to find a weak positive significance of microfinance on household incomes. Keywords: household, incomes, Kenya, Makueni

Introduction The 1997 Microfinance Summit calledfor the mobilization 0f $20 billion over a 10 year period to support microfinance. The United Nations proclaimed 2005 as the “Year of Micro-credit” while 2006 went a score higher to award a Nobel Peace Prize to the founder of modern microfinance Prof. Muhamad Yunus and the Bank he founded in the 1970s; the Grameen bank. The recent publicity accorded microfinance potentially creates an image ofan institution that is all success, thus lacking critique. To justify such significant hype and investment in the name of poverty reduction compared to other alternative investments for the same cause in other programs; it is important that the proposition that “microfinance reaches and helps the poor most” be proven and not just assumed (Coleman 2000). The main objective of this study is tomeasure the impact microfinance has on household income. Methodology To address the empirical objective of this study we collected primary data in 3 cross sections in Makueni district Kenya. The data was collected for the same households after every six months for a period of 18 months; thus giving us a rich pooled primary data for analysis. The data was collected using questionnaires that focused onhousehold access to microfinance, household uses of the credit, as well as household income over the period. To achieve a more accurate

data about household incomes and expenditure and also to be able to capture any changes including marginal changes over the relatively short period, we used relative a measures of income. This measure mainly focused on household access and ownership of assets,and the fluctuations therein within the period. The study is designed as an experimental case study where we used 200 treatment households (participants of Microfinance programs) and 200 control households (non participants of microfinance programs) in every cross section. Econometric Model To take care of the problem of endogeneity with respect to village placement, we propose to use villagelevel fixed-effects method with data from both microfinance participant and non participants. We adopt the model that was used by Coleman 1999 as follows:
Yijt = X ijt α + V j β + M ij γ + Tijt δ + η ijt …..1

Where Yijt is the individual household income, for household I that is residing in village j at time t, X ij

is a vector of individual household characteristics in village j at timet, V j is a vector of village fixed effects; M ij is a membership dummy variable equal 1 if household ij is selected in to the microfinance

Microfinance Programes and household incomes in Kenya program, and 0 otherwise; and Tij is the number of

times a household has borrowed from the microfinance institution at time t. We also use the membership dummy M ij to proxy the unobservable...
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