Microfinance and entrepreneurship at the base of the pyramid

Abstract

AbstractResearch SummaryThere continues to be substantial debate on whether and how providing inclusive access to finance through microcredit promotes entrepreneurship‐led development at the base of the pyramid. We contribute to this literature by examining differences in household‐level outcomes associated with microfinance loans given for different purposes, and identifying conditions under which the most impact is achieved. Defying common expectations, loans funding microenterprises do not exhibit greater impact than those funding traditional livelihood activities, and loans funding new microenterprises fare particularly poorly. However, loan impact improves when multiple members of a borrower group seek livelihood loans together, and when the provided loans better match the individual financial needs of the borrowers. Our findings underscore the need to refine how microfinance is applied as a tool for development.Managerial SummaryComparing across microfinance loans given for different purposes, we find that the average impact associated with loans supporting traditional livelihoods is at least as high as that for loans supporting microenterprises, and that the impact of loans specifically funding new microenterprises is lower than those for growing existing microenterprises. We also find that the impact of livelihood loans is greater when multiple members of a borrower group are engaged in livelihood‐focused activities, and that loans that better match borrowers' specific needs have a superior impact. We conclude that we need to move beyond the black‐or‐white debate regarding whether microfinance works to a nuanced understanding of when it is effective, that is, examining conditions under which microcredit customers—whether aspiring entrepreneurs or not—can thrive.