Preparing Fertile Ground: How Does the Business Environment Affect Outcomes From Microfinance?

Abstract

We study the role of local business environments in explaining microfinance client outcomes using long-term nationwide administrative data and a natural experiment in a large microfinance market. Positive shocks to the business environment lead to significantly increased employment in exposed client enterprises compared to client enterprises in contextually similar districts but that are unexposed. Furthermore, business environment-level factors are overall more predictive for growth than individual- or business-level characteristics. To broaden the study’s implications and policy relevance, we pool data from prominent microcredit impact evaluations and demonstrate how related business environment factors help explain heterogeneity found in their results.

Keywords: microfinance impact, enterprise growth, business environments, natural experiment

JEL Classification: G21, D22, O12, R1