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on Microfinance |
| By: | Muhammad Meki (Post-doctoral research fellow in development economics at Pembroke College, University of Oxford) |
| Abstract: | Access to finance is often listed as one of the most important constraints on the expansion of small firms in low-income countries. However, several recent studies reveal that most microcredit-funded businesses rarely grow beyond subsistence-level entrepreneurship. Other evidence shows that cash and capital grants have delivered high returns to some microenterprises, and that small changes to contract structure can have a long-term effect on investment and profits. In this paper, I investigate the potential of ‘microequity’ contracts, which can be viewed as lying at some point on a spectrum between credit and grants, and provide a more flexible form of capital with performance-contingent repayments and a greater sharing of risk and reward. I present results from work with two of the largest microfinance institutions in Pakistan to investigate the effects of microequity contracts on microenterprises. In the first part of the paper, I describe an artefactual field experiment, designed using a simple model of investment choice under different financial contracts. This is tested with microenterprise owners who are part of a related field experiment that provides them with shared-ownership financing to expand their business. Results reveal that equity-financed microenterprise owners chose investment options with a greater expected profit than those under debt financing, with heterogeneity analysis suggesting a larger effect for the most riskaverse individuals, who also exhibit a stronger preference for equity contracts when offered a choice. In the final part of the paper, I describe qualitative insights for why most microfinance institutions do not implement microequity products, using a field survey and manager interviews, which reveal the practical implementation challenges due to costly state verification, adverse selection into profit-sharing contracts and moral hazard caused by inappropriately-tailored sharing ratios |
| Date: | 2019–09–20 |
| URL: | http://d.repec.org/n?u=RePEc:erg:wpaper:1348&r=all |
| By: | Kuriakose, Francis; Joseph, Janssen |
| Abstract: | This paper examines how microfinance institutions impact human development indicators using the case of Kerala in southern India. The study uses an institutional approach to understand microfinance institutions with the help of three variables - core activities, total loan portfolio and approach to microfinance. The impact of microfinance institutions on four human development variables namely education, health, income and participation are analyzed. The main conclusion of the study is that microfinance institutions that follow an integrated approach impact human development more than those that follow a minimalist approach. Furthermore, this impact of microfinance institution is due to production functions that generate income and protective function that defends against vulnerability. Therefore, an integrated approach to microfinance has income generating and risk mitigating effects that translate into better human development indicators. |
| Keywords: | Microfinance, Human development, Financial inclusion, Social welfare, Kerala |
| JEL: | G2 G21 I3 I31 I38 |
| Date: | 2020–03–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:98393&r=all |
| By: | Joana Silva Afonso (Portsmouth Business School); Joe Cox (Portsmouth Business School); Andy Thorpe (Portsmouth Business School) |
| Abstract: | This paper explores the features and consequences of heterogeneity among clients of the largest Islamic microfinance institution in Pakistan, identifying differences in business and household outcomes between sub-groups of borrowers. The research is based on a longitudinal survey conducted between 2015 and 2017 of 500 new clients of the institution, providing a unique dataset of low-income entrepreneurs applying for interest-free microcredit loans. The data was analysed using t-tests to establish baseline differences between borrowers, and regression analysis to explore variations in business and household outcomes over the period. Evidence of significant heterogeneity was found among entrepreneurs at the time of the baseline survey. The longitudinal analysis shows that management experience was positively associated with business growth, but no significant association was found for gender, poverty level and credit experience and these variables were not found to associate with significant variation in employment creation. Nevertheless, the analysis does demonstrate a greater reduction in household poverty levels among those entrepreneurs that were poorer at the time of the baseline survey. Additionally, there was a general decrease of savings frequency over the sample period, particularly among female entrepreneurs. |
| Keywords: | Islamic Microfinance, Entrepreneurship, Client Heterogeneity, Impact, Pakistan |
| Date: | 2020–01–24 |
| URL: | http://d.repec.org/n?u=RePEc:pbs:ecofin:2020-03&r=all |
| By: | Jeremy Clark (University of Canterbury); John Spraggon |
| Abstract: | We report a group liability microfinance lab experiment that tests a mechanism to raise repayment rates among borrowers whose business plans carry higher exogenous risk and return. The mechanism is optional revenue sharing among the group of borrowers, agreed to before their individual business outcomes are realized and loan repayment decisions are made. Such revenue sharing makes loan repayment optimal under more business outcome states, thus increasing the expected benefit to each borrower of repayment to qualify for future loans. We further test the effect of allowing the borrowers to renege on revenue sharing agreements after learning their business outcomes, prior to making their loan repayment decisions. Our results illustrate the problem that exogenously higher risk/return borrowing groups achieve lower loan repayment rates than lower risk/return borrowing groups. We then find that introducing optional revenue sharing significantly increases the high risk borrowers’ repayment rates, but that most of this gain is lost when successful borrowers can renege on revenue sharing agreements. |
| Keywords: | Microfinance; Revenue sharing; Profit sharing; Risk; Adverse selection |
| JEL: | G21 O16 O17 O43 |
| Date: | 2020–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:cbt:econwp:20/01&r=all |
| By: | Fox, Louise |
| Abstract: | Employment opportunities (for youth and non-youth) depend on the development of the economy: structural transformation, rural transformation and employment transformation. In rural areas, employment transformation (to steady, more productive wage employment) takes longer than in urban areas. Strategies to facilitate youth’s entry into employment (the youth-specific employment challenge) have to take account of this. We have limited evidence on how youth handle this challenge in rural areas, and on effects of targeted programmes on this challenge – either the impact of non-targeted agricultural productivity and earnings programmes on youth’s challenges or the impact of targeted youth programmes in rural areas. Certainly, the rural-urban gap in education and learning disadvantages rural youth. Anecdotal evidence suggests that when new off-farm opportunities develop in rural areas, youth are able to access them, while entry into farming may be hindered by lack of access to land. Evidence on programmes in urban areas to help youth enter self-employment may hold lessons for programme design for rural youth. A key lesson is that lack of technical skills does not seem to be the biggest obstacle youth face in entering the labour force. Given that most rural tasks (farm or non-farm) do not require a high degree of technical skill, we can expect that this would be even truer in rural areas. Microfinance (or cash grants) has been helpful in urban settings to help youth start non-farm businesses. Evidence on agricultural extension programmes suggests that peer-to-peer learning works best, perhaps arguing for youth-specific programmes to upgrade farming skills and knowledge, but this needs to be tested. |
| Keywords: | Agribusiness, Agricultural and Food Policy, Agricultural Finance |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ags:unadrs:300928&r=all |