We conducted this research in collaboration with Akhuwat – a microfinance organization in Pakistan which provides interest free loans to the poor. The research findings are reported in three core essays.
The first essay explores reasons of non-participation in Akhuwat mi-crofinance. Overall, microfinance has played an important role in provid-ing basic financial services to the poor. Nonetheless, despite being a popular and well funded innovation, a large number of marginalized poor still do not participate in microfinance programs. It is still not clear whether this failure is because of institutional barriers or self-exclusion by the poor. While supply side barriers to participation are well re-searched in literature, the demand side is still a puzzle. This essay inves-tigates this puzzle by exploring reasons of non-participation in Akhu-wat’s microcredit program by comparing group of Applicants and Eligible-non-Applicants. We find that besides personality, both exoge-nous and endogenous learning significantly affect participation. Our analysis also reveals that when individuals perceive microfinance institu-tions’ loan recovery methods to be coercive or high handed, it signifi-cantly reduces the probability of participation.
The second essay examines the effectiveness of Akhuwat microcredit. Lately, in the wake of mixed research findings and media reports about suicide of microfinance borrowers in India, there has been an immense debate on the usefulness of microfinance. In this essay, we estimate re-turn to marginal capital which is a good measure for poor’s affordability of microfinance loans. In order to remove selection bias, we use an ex-perimental design in which we randomly assign microentrepreneurs to treatment and control groups. The treatment group receives an interest free loan from Akhuwat. We find that Akhuwat’s microfinance really helps. Both monthly profits and capital stock of treatment group signifi-cantly increase. Using randomized treatment as an instrument for capital stock, the estimated returns to capital are in the range of 103.2% to 142.8% which are very high compared to market interest rates in Pakistan.
The third essay investigates gender-based heterogeneity in treatment effects. It is generally believed that, compared to men, women entrepre-neurs are more credit constrained and hence are able to generate rela-tively higher returns to capital. Recent randomized studies though do not support this theory. Women entrepreneurs in our sample earn 20% less in monthly profits than men. We find that purdah (veil), an institution which potentially limits women’s access to labor markets, is associated with lower monthly profits. We also find that the labor market price per-sonality traits differently across genders. Though exhibiting large and significant heterogeneity, both male and female entrepreneurs benefit from access to additional capital.