Collateralised Lending for Microenterprise: Impact, Misallocation and Moral Hazard

This project will analyse the impact of an innovative, targeted and collateralized credit programme that seeks to make motorcycle taxi drivers the owners of their vehicles.

Institute for International Economic Studies, Stockholm University
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Bodas (motorcycle taxis) are a widespread mode of transport in Uganda and Sub-Saharan Africa: there are over 200,000 bodas in Kampala alone. However, most boda drivers rent instead of owning their own boda. Tugende (a for-profit social enterprise) is exclusively specialised in providing loans to boda drivers via a collateralized loan product. Tugende supplies the bike and loan and the customer makes repayments until the loan is paid off and the bike is theirs. This should be hugely profitable for drivers. This proposal intends to analyse the impact of this collateralized credit programme that seeks to make boda drivers the owners of their vehicles. Can this programme successfully enable entrepreneurs to avail of a high return investment opportunity (purchasing their own boda) where traditional microcredit has failed?

The project will begin by randomly inviting some boda drivers to apply to the programme, with others serving as a control group. This “encouragement design” allows estimation of the return to being invited. The researchers will then randomly allocate cash transfers amongst the study participants that will cover the down payment on the motorcycle. This will explore how wealth interacts with relatively small initial costs of investment to limit investment and create misallocation, not reaching those with the highest potential returns. A final inquiry will randomly inform some existing drivers that their motorcycles are tracked using GPS (enabling Tugende to recover the bike in case of default). GPS and administrative data will then be used to study how this influences risky behaviours, as well as default.

By combining the impact evaluation with a randomized cash transfer, this research will gain a new understanding of the extent of misallocation of small amounts of capital at the microenterprise level. The evidence produced could be utilised with the purpose of offering a loan product with field-tested impact, increasing take-up and increasing the efficiency of investment by microentrepreneurs as well as improving borrower behaviour.