Asset-based microfinance for microenterprises: evidence from Pakistan

Abstract

We run a field experiment offering graduated microcredit clients the opportunity to finance a business asset worth four times their usual borrowing limit. We implement this using a hire-purchase contract; our control group is offered a zero-interest loan at the usual borrowing limit. We find large, significant and persistent effects: treated microenterprise owners run larger businesses with higher profits; conse- quently, household consumption increases, particularly on food and children’s education. A dynamic structural model with non-convex capital adjustment costs rationalises our results and allows counter- factual analysis; this highlights the potential for welfare improvements through large capital injections that are financially sustainable.