Stimulating Microenterprise Growth: Experimental Evidence from Uganda

From August to October 2012, 1,550 microenterprise owners in Uganda were offered randomly either a loan, grant, businesses skills training, a combination of these programs, or no program (the control group). They were then followed up and interviewed 6 months and 9 months after the programs to determine what the initial results of the program were. The impact of the loans and grants six months after the programs ended were large, positive and significant, while there appeared to be no effects from training. The results divide along gender lines. Men benefitted substantially from the loans, increasing their profits by 54%, but did not benefit from the cash. Women had some small but insignificant benefit from cash, but did not see business improvement for the loans. Consistent with a model of family pressure in business investment decisions, the results are sensitive to how close family members are: women without family members living nearby benefit from grants, loans and trainings, while women with family nearby do worse than the control group. The effects for men are driven by family proximity as well, though men benefit from having family nearby.

Three months later, these results had largely disappeared for women. Women with family nearby still do worse than the control group, while those with far families do no better than the control. A simple test for targeting of loans by excluding those behind on payments leads to a positive and sustained effect from the loan with training program for women with family who are far away, suggesting that better targeting could lead to more encouraging results.

These results are unique in the literature and point to some of the problems that women in particular have with maintaining their business. This is also the first study to find positive and significant effects on business growth from microfinance. The results though are for short-run effects only. The next data collections will follow-up these businesses approximately two years after the end of the programs to determine if these effects are still present, or if they have now disappeared. In addition, more detailed data will be collected for female owned businesses to better understand how family pressure has affected their business and what can be done to alleviate this effect.

2012-08-01

2012-11-01

The main questions of interest for the next rounds of data collection include a range of indicators on the following topics:

1. Income
The existing data collection has focused on outcomes for the main business. Individuals and households in Africa though often have multiple sources of income. It is not clear from the current data if the money from the grants and loans was used for productive investment in other enterprises, or has replaced other income. A detailed exploration of the other businesses run by the individual and others within the family will be conducted.

2. Intra-household bargaining and money allocation
The issue of money allocation within the household is important, especially for married women. The initial results of the SYB evaluation show a negative effect for married women with family living nearby. It is not yet clear what happened to the money women received. It is common for women in Africa to have little or no control over money they earn or receive and are expected to give money to their husbands or extended family for both productive and non-productive investment. This new survey will explore women’s bargaining power over money within the household to determine what might have led to these negative results and determine where the money went.

3. Investment in household welfare
While the initial results for men with training and loans has been to increase business profits, it is not clear what the men did with the money. There are currently no consumption or savings impacts from the program. It is possible that men simply use the extra money for short-term individual consumption, which would not have significant welfare implications. It is also possible that there is a hidden welfare effect on business or household assets and investment. The household survey will thus explore the household assets and spending further to determine if there is a positive welfare effect from the programs.

4. Unintended consequences
The initial results have raised a number of questions about the unintended consequences of the programs, especially for family employment and child schooling. The household survey will further explore this issue to better understand whether the business owners pulled children out of school to work in the business, and if so, for how long.

From August to October 2012, 1,550 microenterprise owners in Uganda were offered randomly either a loan, grant, businesses skills training, a combination of these programs, or no program (the control group).

Individuals have been randomly selected and split into five different groups. 406 were assigned to the loans intervention, 401 to the loans and training, 167 to grants, 219 to grants and training, and 357 to the control group. The sample sizes were based on power calculations after taking into account implementation budget limitations.

A local microfinance organization, PRIDE Microfinance, provided the loans. Unknown to the participants, the loans were guaranteed by the ILO as the sample came from all businesses that expressed interest in a loan. These businesses may not have fit the lending requirements of PRIDE, and so a guarantee was decided upon to mitigate risk. PRIDE normally provides loans with an interest rate of 26% and requires 100% collateral. Lenders reduced the interest rate to 20% and described the program as a special promotion to individuals. For those who were not able to provide 100% collateral, PRIDE agreed to accept 50% collateral instead. This special promotion was designed to encourage participation in the loan program and to reflect what a subsidized loan program might be like if conducted in the future. Individuals were then required to repay the loan in monthly installments, starting in the first month.

The ILO delivered the cash grants through PRIDE bank accounts. The ILO then contacted individuals to attend information meetings explaining how the cash grant program would work. They were then asked to open a free savings account, where the money would be deposited.

The ILO conducted the trainings using the Start and Improve Your Business (SIYB) training modules. This training program reached 4.5 million people in 100 countries from 2003 to 2010. Researchers have evaluated the trainings experimentally twice before. First, Mano et al 2012 looked at the effect of giving training to 53 business owners. In keeping with other training results, they found survival rates increased, as did the incidence of good business practices such as keeping budgets, with no consistent effects on business profit. de Mel et al (2008) also use the SIYB training on female business training and cash grants in Sri Lanka. They found no effect on profits for those already in business for training, but some initial effect for the grants that disappears after the second year. There is also increased entry for those without business and some income growth. The trainings have thus been evaluated previously and have presented mixed results. It was decided not to pursue a pure training treatment arm, but instead use trainings as a potential augmenting effect on the use of cash grants and loans to test if training can increase the effects of decreasing capital constraints through better business management practices or attitudes.

Randomization was done in an office by a computer in Stata.

Randomization was done at the individual level, stratified by region.

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1550 business owners.

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Individuals have been randomly selected and split into five different groups. 406 were assigned to the loans intervention, 401 to the loans and training, 167 to grants, 219 to grants and training, and 357 to the control group. The sample sizes were based on power calculations after taking into account implementation budget limitations.

https://www.poverty-action.org/sites/default/files/publications/Rethinking.pdf