Answering this question requires a certain savoir faire. The one word answer just doesn't cut it. If I simply reply microfinance, people get confused. In order to avoid that confusion, I've got a one liner: I am working for a company studying the effects of small loans on poor people in rural Egypt. At least it avoids that awkward confusing look people would give me if I just said microfinance.
What is microfinance?
The provision of financial services including loans, savings accounts, and insurance to low-income people who don't have access to finance through traditional banks. It's regular finance tailored to low income people.
Why study its effects?
In order to deliver aid and spur economic development in the most efficient manner, we have to understand the degree to which programs like microfinance improve lives.
How do you study the effects?
You compare what happened with what would have happened if there hadn't been microfinance. In other words, you compare reality with its counterfactual.
How can you know what could have happened?
You can't! But you can mimic the counterfactual with an intelligent experimental design. You take a sample of your target population and randomly divide it into two groups -- treatment and control. Theoretically, the two groups have identical characteristics because they were chosen at random. The treatment group is offered microfinance products and the control group is not. After two year, you compare the characteristics of the two groups. That comparison is the best simulation of what happened with what would have happened.
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