Written by Dean S. Karlan, the President and Founder of Innovations for Poverty Action (IPA) and Professor of Economics at Yale University, and Martin Valdivia of The Group for the Analysis of Development (GRADE), this report is based on a study conducted in a Peruvian village to assess the impact of business training on microfinance institutions (MFIs) and their clients. The 44 page document was published by the Economic Growth Center, Yale University in July 2006 and the full text of the report is available here.
The report evaluates the impact of entrepreneurship training to microfinance programs by conducting a randomized control trial with the clients of the Foundation for International Community Assistance (FINCA), an MFI established in Peru in 1993. The study was conducted with FINCA’s clients – poor, female micro-entrepreneurs – in the cities of Lima and Ayacucho in Peru. As part of the study, pre-existing lending groups of FINCA were randomly divided into either treatment or control groups. Treatment groups received business training as part of their mandatory weekly meetings whereas the control groups did not receive any training and continued to remain a credit and savings only group. An initial assessment of the performance of the MFI and its clients was conducted before the start of the study. This was followed by a follow-up survey between one and two years after the start of the program.
The goal of the business training was to improve business outcomes and overall welfare for clients and to improve institutional outcomes for the MFI. The training materials were developed through a collaborative effort between FINCA, Atinchik, the Peruvian consulting firm specializing in the generation of training materials for micro-entrepreneurs and the International development organization, Freedom From Hunger (FFH). The training included general business skills, strategy training, discussions and various short exercises. The training, however, did not include any client-specific business problems. The content of the training in both the locations was the same but the presentation differed to cater to the educational levels of the population. In Ayacucho, 55 out of the 140 (3,265 clients) FINCA-sponsored village banks were assigned to a mandatory treatment group, 34 to a voluntary treatment group (training was optional to the clients) and remaining 51 received no training. In Lima, 49 out of 99 FINCA’s village banks were assigned to mandatory treatment and the remaining 50 received no treatment.
The results of the study were divided into four categories of outcome variables, each of which were given equal weight by the report: 1. Institutional 2. Business process and knowledge 3. Business outcomes 4. Household outcomes. From an institutional perspective, the repayment rate among treatment groups was higher than control groups and the dropout rate of treatment groups lower than their control counterparts. However, no change in FINCA’s loan size or cumulative savings was observed. With respect to business skills and practices, treatment groups were more aware of good business practices including reinvesting profits in their business, maintaining sales records and maintaining withdrawal records. From a business results perspective, the treatment groups were better able to identify strategies to reduce fluctuations in their sales by way of diversification of their good and services.Overall, the results contributed to an increase in income and profits for the treatment groups. With regard to household outcomes, the study expected that improved business success would empower the female micro-entrepreneurs with respect to their husbands/partners in business and family decisions by giving them more control of their finances. However, no significant impact in this respect was observed. The report attributed it to the fact that most women were already managing their own business and finances and hence no discernible difference was observed. The study also found that increased household income led to an increase, although not too significant, in the number of hours female children dedicated on average to school work as opposed to labor or housework.
The report concludes by saying that the implementation of such training strategies benefits both the MFIs and their clients. Micro-entrepreneurs become better equipped to smooth fluctuations between good and bad periods and increase their business incomes whereas the repayment rates and client retention for MFIs also increases. The report also states that an evaluation of the ongoing sustainability of these improvements would be essential. This is in addition to the need to assess how the training program can be replicated in different contexts.
By Bharathi Ram, Research Assistant
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