Does Microfinance Lead to Good Health? A Local Average Treatment Effect Analysis for Rural Malawi

Abstract

The significance of the problem of poor health is reflected in the Millennium development goals numbers four, five and six which aim at reducing the child mortality rate, improving maternal health and reducing the prevalence and death rates associated with diseases such as HIV/AIDS, Malaria, Tuberculosis and others by 2015. While the link between microfinance and poverty reduction has become common knowledge, less has been done to unearth the potential of using microfinance as a tool for combating morbidity and mortality.

A number of studies have shown that microfinance leads to poverty reduction through increased incomes. Also, a clear and robust relationship between individual income and individual health has been established by a number of empirical investigations showing that poverty leads to lower health status. However, such studies fail to explicitly isolate the causal effect of an intervention on wellbeing as they use approaches such as the difference in the mean of a target response indicator of beneficiaries and that of non-beneficiaries or by running an ordinary least squares procedure of the indicator variable on the beneficiary status variable and a set of household, demographic and environmental variables. In so doing they fail to establish an adequate counterfactual situation and identify the true causality of change.

This study examines the relationship between microfinance and health by applying a counterfactual outcomes framework on data from the Malawi's second Integrated Household Survey (IHS2) data of 2004. The counterfactual outcomes framework of modern evaluation theory is used to estimate the Local Average Treatment Effect (LATE) of participation in microfinance on household health outcomes such as morbidity and mortality. Results indicate that although improving health status of borrowers is not a primary goal of most microfinance institutions, borrowing has a reducing effect on morbidity as well as mortality. These findings suggest that there is scope for using microfinance as a tool for achieving the millennium development goals on health. This would require the adoption of an integrated approach in which microfinance institution link up with health service providers to provide both credit and health services to their clients.

Keywords: microfinance, health, imapct, conterfactual