Does microlending affect innovation and entrepreneurship? Evidence from Ethiopia

Abstract

This study examines the effect of group lending and an incremental loan structure on the innovativeness of borrowers’ business activities. A person-situation interaction model is proposed where group lending and incremental loans moderate the likelihood an individual engages in innovative business activities. A total of 340 semi-structured interviews were conducted in Ethiopia with microloan borrowers in 2013. The results suggest a different moderating effect of group lending depending on how an individual’s predisposition to innovate is measured. Group loans negate the predictive validity of creativity in determining the likelihood to engage in innovative business activities, however group loans positively moderate the relationship of a predisposition to purchase innovative products on innovative activities. The results also suggest a sorting effect where individuals high in creativity are more likely to take individual loans than group loans. The results also suggest no effect of a desire to take future loans on the likelihood of engaging in innovative business activities.