By Ralph De Haas, Heike Harmgart, Britta Augsburg and Costas Meghir, published by European Bank for Reconstruction and Development, November 2012, 8 pages, available at: http://www.ebrd.com/downloads/research/economics/publications/specials/bosnia_mircofinance.pdf
This report from the European Bank for Reconstruction and Development (EBRD) describes a randomized field experiment in Bosnia and Herzegovina analyzing the effects that a lack of credit may have on entrepreneurship and poverty.
The authors pose two interlinked questions: (1) Could microcredit be more inclusive without unduly compromising loan quality?; and (2) What measurable impact does access to credit have on small-scale entrepreneurship and poverty alleviation for those who would normally fail to qualify for microcredit? Microcredit Foundation Ekonomsko kreditna institucija (EKI), a microfinance institution (MFI) in Bosnia and Herzegovina, participated in this study by providing loans and staff support to the participants.
Loan officers across the country interviewed 1,198 potential “marginal” clients – those whose loan applicaitons would normally be rejected due to reasons such as lack of education or insufficient collateral. The clients, however, were not burdened with poor credit histories, over-indebtedness or suspected fraud. Applicants were randomly assigned to two equally sized groups deemed the treatment (loan) group and the control (no loan) group. All participants were re-interviewed 14 months after the survey.
The findings of the field experiment are mixed. While access to credit increased business activity and self-employment compared to the control group, this did not translate into higher profits or household income. Clients in the study with low education levels were more likely than average EKI clients to reduce the school attendance of their children to work in household businesses. Late payments and non-repayment were also more common among the treatment group than among first-time EKI borrowers not included in the study. Clients in the treatment group with pre-existing businesses or higher education levels reduced savings, while less-educated households reduced consumption expenditures to invest in projects made possible due to the loan.
With regards to gender, the authors find that female clients in the treatment are 8 percent more likely to be self-employed compared to the control group. In male client households, children are less likely to attend school. The authors propose the following explanation for these phenomena: access to credit allowed women to create new businesses, which due to their small size did not require such steps as having their children work in the business, investing their savings in the business or reducing consumption to fund it. Male borrowers, in contrast, were more likely to expand pre-existing businesses, and thus may have required larger investments that were partially funded through these additional means.
The authors suggest that one potential explanation for the limited positive impact on profits, household income and consumption is that the observation period of 14 months was too short for borrowers to fully implement investments and realize gains from them. The authors concede, though, that most businesses were in the services and agricultural sectors, which should allow borrowers to complete their investments and reap returns quickly. Another possible explanation is that additional constraints to entrepreneurship exist other than limited credit availability, such as lack of business training. Lastly, the authors argue that their study justifies MFI procedures intended to distinguish relatively reliable clients from riskier borrowers, as broadening the client base can lead to an increase in repayment difficulties.
By Brendan Millan, Research Associate
About the European Bank for Reconstruction and Development (EBRD)
The European Bank for Reconstruction and Development (EBRD) is a multilateral institution headquartered in London. The bank began operations in 1991 upon the agreement of 40 countries and is now owned by 61 countries as well as the European Investment Bank and the European Union. It aims to finance operations that are both commercially viable and assist development in 29 countries in Eastern Europe, Central Asia and North Africa. It does this by providing loans, debt securities, equity investments, guarantees and technical assistance to micro- and small businesses via commercial banks and non-bank microfinance institutions (MFIs). As of January 1, 2013, EBRD has committed approximately USD 10.7 billion through 318 projects.
About Microcredit Foundation Ekonomsko kreditna institucija (EKI)
Established in 1996, Microcredit Foundation EKI is a microfinance institution (MFI) in Bosnia and Herzegovina. EKI, a part of the VisionFund International microcredit program of US-based NGO World Vision International, has 66 offices and 280 employees across the country. EKI financial services are intended to improve small businesses and the agricultural sector. As of 2011, EKI reports total assets of USD 66.8 million, a gross loan portfolio of USD 61.4 million, 35,342 active borrowers return on assets (ROA) of 5.71 percent and return on equity (ROE) of 20.5 percent. The institution does not accept deposits.
About VisionFund International
VisionFund, a US-based nonprofit organization, offers financial services to families living in poverty in the developing world through a network of microfinance institutions in 36 countries in Eurasia, Africa, Latin America and the Caribbean. Its services include small loans and business training and support. VisionFund is part of US-based World Vision International, a Christian relief, development and advocacy organization. As of 2013, VisionFund has a loan portfolio of USD 390 million disbursed to 830,000 small businesses.
About World Vision International
World Vision is a US-based Christian humanitarian organization dedicated to working with children, families and their communities worldwide to reach their full potential by tackling the causes of poverty and injustice. World Vision serves poor people worldwide regardless of religion, race, ethnicity or gender. The organization operates microfinance institutions through its subsidiary VisionFund International. World Vision raised USD 2.79 billion in cash and in-kind gifts during 2011.
Sources and Resources:
 European Bank for Reconstruction and Development: “Microfinance at The Margin: Evidence from Bosnia and Herzegovina” by Ralph De Haas, Heike Harmgart, Britta Augsburg and Costas Meghir, http://www.ebrd.com/downloads/research/economics/publications/specials/bosnia_mircofinance.pdf
MicroCapital.org story, October 15, 2012, “Microfinance Microscope 2012; Impact of Financial Access in Bosnia and Herzegovina; Economic Opportunities and Financial Outcomes of Microfinance”, http://www.microcapital.org/microfinance-publication-round-up-microfinance-microscope-2012-impact-of-financial-access-in-bosnia-and-herzegovina-economic-opportunities-and-financial-outcomes-of-microfinance/
MicroCapital.org story, October 14, 2012, “MF Banka Receives $5.2m from European Bank of Reconstruction and Development for Small Businesses in Bosnia, Herzgovina”, http://www.microcapital.org/microcapital-brief-mf-banka-receives-5-2m-from-european-bank-of-reconstruction-and-development-for-small-businesses-in-bosnia-herzgovina/
MicroCapital.org story, July 10, 2012, “European Bank for Reconstruction and Development Loans $10m to Partner Microcredit Foundation of Bosnia and Herzegovina”, http://www.microcapital.org/microcapital-brief-european-bank-for-reconstruction-and-development-loans-10m-to-partner-microcredit-foundation-of-bosnia-and-herzegovina/
MicroCapital.org story, October 11, 2011, “European Bank for Reconstruction and Development Lends $6.7m to Sparkasse Bank BiH of Bosnia and Herzegovina to Support Small and Medium-Sized Enterprises”, http://www.microcapital.org/microcapital-brief-european-bank-for-reconstruction-and-development-lends-6-7m-to-sparkasse-bank-bih-of-bosnia-and-herzegovina-to-support-small-and-medium-sized-enterprises/
MicroCapital Universe Profile: European Bank for Reconstruction and Development (EBRD), http://microcapital.org/microfinanceuniverse/tiki-index.php?page=European+Bank+for+Reconstruction+and+Development+%28EBRD%29
MicroCapital Universe Profile: Microcredit Foundation Ekonomsko kreditna institucija (EKI), http://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Microcredit+Foundation+EKI
MicroCapital Universe Profile: VisionFund International, http://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=VisionFund+International
MicroCapital Universe Profile: World Vision International, http://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=World+Vision
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