GLOBAL FINANCIAL DEVELOPMENT REPORT 2014
BOX 3.2
FINANCIAL INCLUSION FOR FIRMS
Returns to Capital in Microenterprises: Evidence from a Field Experiment (continued)
age enterprise in the sample, the authors estimate the real return to capital at about 5.4 percent per month (65 percent per year), which is substantially higher than market interest rates. By examining the heterogeneity of treatment effects, the authors investigate the importance of imperfect credit and insurance markets. They claim that, within a context of imperfect markets, returns to shocks to capital stock should be greater among entrepreneurs who are more constrained and more risk averse. The authors fi nd that returns vary substantially based on the ability and household wealth of the entrepreneurs. The returns to shocks to capital stock are higher among more constrained entrepreneurs (those entrepreneurs with fewer household assets, that is, less wealth) and entrepreneurs with higher ability as measured by years of education and digit span recall. On the
that a local bank allocates credit to microenterprises with more household assets, that is, collateral, and not to enterprises exhibiting particularly high returns. Another reason why microenterprises may have difficulty obtaining bank loans is that they are often opaque given their usually inadequate documentation on formal accounts. MFIs use lending techniques that allow them to provide credit to these small, informationally opaque firms. They employ intensive screening technologies to collect information on potential borrowers, including visits to the borrower’s house or firm. These screening technologies imply high costs, meaning that these institutions typically charge higher interest rates than banks. However, given that the returns to capital are also high among microenterprises, credit from MFIs could potentially lead to more investment and growth in these firms (see, for example, Khandker, Samad, and Ali 2013). Despite the difficulties associated with financing microenterprises, there are some examples of banks that have successfully catered to microenterprises. For example, in
other hand, returns to capital do not vary signifi cantly with measures of risk aversion or uncertainty in sales and profits. The observed heterogeneity of returns seems to suggest that the high returns are more closely associated with missing credit markets than missing insurance markets. The high returns at low levels of capital stock estimated by the authors indicate that entrepreneurs starting out with suboptimal capital stocks would be able to grow by reinvesting profits. Individuals might remain inefficiently small for some time, but would not be permanently disadvantaged. The authors fi nd, however, such high levels of returns somewhat puzzling. It is unclear what prevents fi rms from growing incrementally by reinvesting profits. The results point to the need for a better understanding of how these microentrepreneurs make investment decisions.
Brazil, Banco Santander has been promoting entrepreneurship and encouraging the growth of small businesses by making microloans to informal microfirms that are unable to obtain loans otherwise. The majority of their loans go to businesses run by women. In Chile, Banco Estado, through its subsidiary, BancoEstado Microempresas, targets segments of the population that are generally not served by commercial banks. Relying on its broad countrywide capacity, the bank provides financial services to microenterprises and low-income households.
Does microcredit promote investment? Several recent studies have used rigorous research designs to examine whether microcredit promotes investment and firm growth, but have come up with mixed results. Most papers tend to find positive effects on some business outcomes, but not on others, raising additional questions. A study conducted in Mexico City shows that improved access to microloans led to increases in inventory investment and fixed
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