Asset-Based Microfinance for Microenterprises: Evidence from Pakistan

We run a field experiment offering graduated microcredit clients the opportunity to finance a business asset worth four times their usual borrowing limit. We implement this using a hire-purchase contract; our control group is offered a zero-interest loan at the usual borrowing limit. We find large, significant and persistent effects: treated microenterprise owners run larger businesses with higher profits; consequently, household consumption increases, particularly on food and children’s education. A dynamic structural model with non-convex capital adjustment costs rationalises our results and allows counterfactual analysis; this highlights the potential for welfare improvements through large capital injections that are financially sustainable.

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Authors

Dr. Faisal Bari IDEAS

Keywords

• Microfinance
• Microfinance Institution (MFI)

Cite this publication

Bari, F., Malik, K., Meki, M. & Quinn, S. 2024. Asset-Based Microfinance for Microenterprises: Evidence from Pakistan. American Economic Review, 114 (2): 534-74.DOI: 10.1257/aer.20210169

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