To lift families out of poverty, most microfinance institutions (MFIs) target female borrowers. Yet a new field experiment in Sri Lanka suggests that MFIs are courting the wrong clients: “Poor urban men with high ability stand to benefit a lot from microfinance,” concludes David McKenzie, a senior economist at the World Bank and one of the study’s authors.
After receiving large infusions of cash or equipment, women’s businesses on average did not become more profitable, the researchers found. But after random capital windfalls, men’s businesses did enjoy an average annual profit boost of 60 percent. In addition, men with fewer assets but more cognitive ability netted even greater profits after the “capital shocks.”
The poorest, smartest women also put their influxes of capital to profitable use, says McKenzie. Yet MFIs “aren’t going after the poorest of the poor” or the smartest of the smart—male or female. In- stead, MFIs seek clients with some physical collateral. That’s because physical collateral predicts loan repayment—MFIs’ main measure of success.
For the experiment, McKenzie and his colleagues randomly assigned 385 firms with less than $1,000 in capital to receive either a $100 cash grant, a $200 cash grant, a $100 equipment grant, a $200 equipment grant, or, in the control condition, no grant. Women headed half of the firms. The researchers also assessed participants’ cognitive ability with a number recall test and measured their risk aversion with a lottery game. (Entrepreneurs’ risk aversion was not related to their businesses’ profits.) They then surveyed participants quarterly for the next two years.
The Sri Lankan experiment is the first randomized controlled trial to examine how microloan-like injections of capital affect the profits of small, poor businesses. Related studies in Mexico, Brazil, and Ghana similarly show that women-owned businesses generate smaller returns. But as McKenzie points out: “We’re looking at the average poor business, not necessarily the average microfinance client. Microfinanciers may choose their clients well” so that borrowers benefit more from loans. As organizations increasingly rely on microfinance to alleviate poverty, however, they will reach more deeply into the general population of microentrepreneurs. This study suggests that many of these small business owners may have trouble repaying their loans—let alone rising above poverty.
In other research, McKenzie is exploring why blasts of capital do not help female-headed businesses as much as they help male-headed ones. His findings suggest that sex differences are not due to ability, access to finance, or risk aversion, but rather to the types of businesses women run. Exclusively female sectors such as lace making and food preparation are often difficult to scale up, he says: “You can’t really find more neighbors to sell food to.” In contrast, many male or mixed-sex enterprises, such as grocery stores, have room to grow.
“Women also don’t invest optimally,” he finds. “They invest in durable equipment rather than working capital, often because they are afraid their husbands will take the money.”
Suresh de Mel, David McKenzie, and Christopher Woodruff , “Returns to Capital in Microenterprises: Evidence from a Field Experiment,” Quarterly Journal of Economics, 73, 2008.
Read more stories by Alana Conner.