Previous research has found large impacts of cash grants on the growth of microentrepreneurs but limited impacts of loans. Randomised experiments that provide cash grants have found returns to capital that range from 7.6-11.4% per month, whereas experimental studies of classic microcredit products have found limited impacts on profits on average – see e.g., the summary by Banerjee, Karlan, and Zinman (2015). A first-order question remains: is the gap in the growth of existing firms generated by microcredit versus grants driven by the types of microentrepreneurs who select into microfinance, or is the structure of standard microfinance itself poorly suited to the investment opportunities of microentrepreneurs? This study aims thus to establish what is the best way to provide financing that can unlock the biggest impacts for firms in low-income countries.
The researchers will implement a randomised controlled trial in Egypt to test whether the borrowers who select into the standard microcredit model are constrained by its structure. The entrepreneurs who apply for a classic microcredit product will be randomised into the following groups: a) Control, b) Standard low-interest microcredit, c) Flexible low-interest microcredit, d) Standard low-interest microcredit plus asset guarantee, e) Cash grant of equal size to the loan. The various treatment arms will allow the researchers to test variants of microcredit on the same sample on which grants are also offered, thus allowing them to determine if the differences in outcomes between grants and loans are due to the differences in the characteristics and contexts of the contract details rather than the experimental samples.
This study speaks directly to policy because it will allow to evaluate what is the best way to provide financing that can spur growth for microenterprises in low-income countries. In fact, few studies in the literature test variants of microcredit on the same sample on which grants are also offered. To ensure that the findings from the evaluation will be conveyed clearly to policy partners and donors, and to support efforts to scale up what works, the project’s partner J-PAL will use both MENA- and global-based teams of policy associates and managers to translate the research findings into action. In addition, the researchers will present the findings of the project to partner institutions and will coordinate with microfinance institutions in Central and South America as well as in South Asia.
