Microfinance and Diversification

The bulk of the world's extreme poor live in rural areas and work in subsistence agriculture. Diversification out of this activity is often seen as the sine qua non of economic development. We evaluate whether the randomized roll-out of a mainstay development intervention - microfinance - into poor, agricultural and largely unbanked populations in rural Uganda exerts any influence on diversification into non-agricultural labor market activities. The new microfinance product differs from existing sources of formal and informal credit in that it allows households to borrow larger amounts but has inflexible repayment dates and the use of funds is monitored. We find that the arrival of microfinance enables women to diversify out of agricultural production and into non-agricultural labor market activities such as small-scale trading. This low-level structural change, however, is not transformative in that it does not lead - at least after two years - to significant uplifts in earnings, consumption, savings, investment and overall wealth.