Microcredit and poverty

Microfinance at the margin: experimental evidence from Bosnia and Herzegovina

January 25, 2012

Speaker: Britta Augsburg, Institute for Fiscal Studies (IFS)

We use a randomized controlled trial to analyze the impact of microcredit on poverty reduction among Bosnian households without prior access to finance. The participants consist of 1,200 individuals that a Bosnian microfinance institution would normally have just rejected on the basis of its regular screening procedures. As part of the trial a random selection of half of these potential borrowers nevertheless received a loan. We find that access to credit allowed these borrowers to start and expand small-scale businesses but that the impact on consumption was heterogeneous. Because liquidity constraints were not completely relaxed, borrowers needed additional resources to meet the minimum investment costs. Households that already had a business and those that were highly educated could use their savings. In contrast, business start-ups and low-educated households had insufficient savings and needed to reduce consumption. Moreover, in these cases young adults aged 16-19 started to work more and attend school less. To develop a unified interpretation of these findings we construct a model of investment decisions when a minimum amount of capital is required.

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