DP15768 Asset-based Microfinance for Microenterprises: Evidence from Pakistan

Author(s): Faisal Bari, Kashif Malik, Muhammad Meki, Simon Quinn
Publication Date: February 2021
Keyword(s): Capital Adjustment Costs, Microfinance, Randomized field experiment
Programme Areas: Financial Economics, Development Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15768

We conduct a field experiment offering graduated microcredit clients the opportunity to finance a business asset worth four times their previous borrowing limit. We implement this using a hire-purchase contract; our control group is offered a zero-interest loan. We find large, significant and persistent effects from asset finance contracts: treated microenterprise owners run larger businesses and enjoy higher profits; consequently, household consumption increases, particularly on food and children's education. A dynamic structural model with non-convex capital adjustment costs rationalises our results; this highlights the potential for welfare improvements through large capital injections that are financially sustainable for microfinance institutions.