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

61 Pages Posted: 11 Mar 2020 Last revised: 27 Mar 2020

See all articles by Jonathan Fu

Jonathan Fu

University of Zurich - Department of Banking and Finance; Center for Sustainable Finance and Private Wealth

Annette Krauss

University of Zurich - Department of Banking and Finance / CSP

Date Written: March 24, 2020

Abstract

Transformative effects on microfinance client business growth are expected in financial inclusion's traditional theory of change, yet have largely been unrealized in most randomized controlled trial studies on microcredit. While instructive, the broader policy relevance of individual studies may be limited by their localized geographic coverage and relative invariance of business environments in which respective client businesses operate. In this paper, we draw on longer-term nationwide administrative data from a leading Cambodian financial service provider and exploit a natural experiment to test if and to what extent differences in business environments affect clients’ business growth. Our main finding is that 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. The effect is particularly strong for small (rather than micro-) enterprises and clients located in districts with larger local economic markets. Furthermore, factors relating to enterprises’ business environment are more predictive for growth than those relating to business characteristics. To broaden our argument and policy relevance, we then pool data from past microcredit impact evaluations to demonstrate how a number of related business environment factors help explain the heterogeneity found in their results. In those data, we observe, for example, that subnational differences in levels of trust in formal institutions are particularly strongly related to greater levels of employment in client businesses, and that areas with access to better infrastructure and larger markets show signs of particularly higher client profits. Our results suggest that financial access in isolation is less likely to trigger the desired transformative effects, or may not be fulfilling its real potential, unless coupled with the right opportunities in the business environment. Policy implications are that microfinance clientele respond to opportunities provided by local business environments and that national and subnational governments can play more active roles in improving business framework conditions.

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

JEL Classification: G21, D22, O12, R1

Suggested Citation

Fu, Jonathan and Krauss, Annette, Preparing Fertile Ground: How Does the Business Environment Affect Outcomes From Microfinance? (March 24, 2020). Available at SSRN: https://ssrn.com/abstract=3532466 or http://dx.doi.org/10.2139/ssrn.3532466

Jonathan Fu (Contact Author)

University of Zurich - Department of Banking and Finance; Center for Sustainable Finance and Private Wealth ( email )

Plattenstrasse 32
Zürich, CH-8032
Switzerland

HOME PAGE: http://https://www.bf.uzh.ch/de/persons/fu-jonathan

Annette Krauss

University of Zurich - Department of Banking and Finance / CSP ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

HOME PAGE: http://www.bf.uzh.ch

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
33
Abstract Views
251
PlumX Metrics