nep-mfd New Economics Papers
on Microfinance
Issue of 2007‒05‒19
two papers chosen by
Olivier Dagnelie
University of Namur

  1. Should Credit be a Right ? By Marek Hudon
  2. Returns to capital in microenterprises : evidence from a field experiment By Woodruff, Christopher; McKenzie, David; de Mel, Suresh

  1. By: Marek Hudon (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels and Harvard University, Boston.)
    Abstract: Access to credit is today a main constrain for many entrepreneurs. This article studies the question of a right to credit. If access to financial services is so crucial and too many hurdles stop the very poor citizens to benefit from the opportunities the markets can offer, one can consider, as Nobel Prize Laureate M. Yunus, that a specific right should be established. Nevertheless, the use of credit is still controversial and does not always lead to economic development. Hence, rather than a loose right to credit, we argue for a right in a goal-right system. This system could take into account the important elements necessary to the positive impact of credit.
    Keywords: human right, credit, justice, microfinance
    JEL: B0 O16 Q14
    Date: 2007–05
  2. By: Woodruff, Christopher; McKenzie, David; de Mel, Suresh
    Abstract: Small and informal firms account for a large share of employment in developing countries. The rapid expansion of microfinance services is based on the belief that these firms have productive investment opportunities and can enjoy high returns to capital if given the opportunity. However, measuring the return to capital is complicated by unobserved factors such as entrepreneurial ability and demand shocks, which are likely to be correlated with capital stock. The authors use a randomized experiment to overcome this problem and to measure the return to capital for the average microenterprise in their sample, regardless of whether they apply for credit. They accomplish this by providing cash and equipment grants to small firms in Sri Lanka, and measuring the increase in profits arising from this exogenous (positive) shock to capital stock. After controlling for possible spillover effects, the authors find the average real return to capital to be 5.7 percent a month, substantially higher than the market interest rate. They then examine the heterogeneity of treatment effects to explore whether missing credit markets or missing insurance markets are the most likely cause of the high returns. Returns are found to var y with entrepreneurial ability and with measures of other sources of cash within the household, but not to vary with risk aversion or uncertainty.
    Keywords: Economic Theory & Research,Investment and Investment Climate,Microfinance,Small Scale Enterprise,Economic Growth
    Date: 2007–05–01

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