New evidence on microfinance

A new randomized trial from Bosnia and Herzegovina.

The study population consists of loan applicants that regular screening would have marginally rejected.

Access to credit allowed borrowers to start and expand small-scale businesses. Households that already had a business and where the borrower had more education, ran down savings, presumably to complement the loan and achieve the minimum investment amount. However, in less-educated households consumption went down.

A key new finding is a substantial increase in the labor supply of children aged 16-19 year old together with a reduction in their school attendance, raising important questions about the unintended intergenerational consequences of relaxing liquidity constraints for self-employment and business creation or expansion.

Paper here.

20 thoughts on “New evidence on microfinance

  1. //A key new finding is a substantial increase in the labor supply of children aged 16-19 year old together with a reduction in their school attendance…//

    This might be a logic outcome of a broken labour market. If the option is to choose between school and unemployment, you choose school, even if you are very poor. Then, say, the microcredit scheme opens up the possibility to create your own jobs for the family. Now, the choice is between schooling and work in the family business. That is quite something else.

    Assuming that the labout market is still broken, schooling probably won’t help you much anyway, so it might be the best option.

  2. There’s actually quite a bit of evidence that micro credit can increase child labor, and at ages well below the late teen years in the B-H study. A number of NGOs that sponsor micro credit programs are beginning to add staff training on CL.

  3. I have a friend who recently started a business through US Bank. They gave him a credit card where he can expense everything he buys to his new company, and the bonus points he’s given are set up such that now every time he buys anything ever he’s making money. True financial innovation at work.