Microfinance & effectuation/causation thinking: Evidence from Sri Lankan micro-entrepreneurs Nadeera Ranabahu, Mary Barrett & Lee Moerman Faculty of Business University of Wollongong

INTRODUCTION Microfinance services (MF) Provision of savings, credit, insurance and remittance facilities To poor in unserved or underserved communities For consumption, household risk management, production, entrepreneurial and investment purposes Gulli (1998); Ledgerwood & Gibson (2013) MF is considered a sustainable approach in financing enterprises Eg: Grameen Bank in Bangladesh had disbursed 7,221,574 business loans by the end of 2015 (Grameen Bank 2015)

3 Introduction continued. Prioritising women Joint liability Peer monitoring Individual member Peer group Cluster/centre MFI Armendáriz & Morduch (2010); Karlan & Goldberg (2011) Group lending (solidarity principles)

4 MF practices and solidarity groups may affect entrepreneurial processes and thinking Examples: joint liability may inflict harsh penalties on micro-entrepreneurs who have risky business ventures (Armendáriz and Morduch 2010) peer monitoring may damage existing social networks (Ghatak and Guinnane 1999) Introduction continued. How MF practices relate to entrepreneurial thinking (effectuation and causation)?

5 Causation Entrepreneurs start with specific goals and choose the right means to achieve these goals Effectuation Entrepreneurs take a set of means as given and focus on selecting between possible effects that can be created with that set of means Sarasvathy (2001, 2008) THEORETICAL FOUNDATION Given Goal M1 M2 M3 M4 Means M1 M3 M2 M4 Given Means Imagined Ends

6 Pre-defined menu Shop for right ingredients & amounts, use right utensils Causation Produce the exact meal There is no menu Use the available ingredients & utensils Create a meal Effectuation Sarasvathy (2001, 2008) Theoretical foundation continued.

7 Goals driven approach Select between means to achieve pre-defined goals The bird-in-hand principle (means driven approach) Start with means (identity, knowledge & network) & create new effects PRINCIPLES OF CAUSATION AND EFFECTUATION Expected returns Select the best option with the maximum returns out of different opportunities Affordable loss principle (risk a little, fail cheap) How much one is willing to lose as opposed to calculating the expected returns Sarasvathy (2001, 2008); Dew et al. (2009) (Clipart source : Vos 2013, Causation Effectuation

8 Competitive market analysis Define a market & conduct competitive market analysis Overcoming the unexpected Contingencies are avoided by using accurate predictions and careful planning Acknowledging the unexpected (the lemonade principle) Contingencies are managed by treating unexpected events as opportunities Principles of causation and effectuation continued. Sarasvathy (2001, 2008) Alliances & pre commitments (the crazy quilt principle) Negotiate with stakeholders & form strategic alliances Causation Effectuation

9 Predictive control Relies on projections on how the market will behave in the future to take decisions Non-predictive (the pilot-in-the-plane principle) Take decisions using the entrepreneurs’ own experience Principles of causation and effectuation continued. Sarasvathy (2001, 2008) Causation Effectuation

Random cluster sampling A questionnaire with: – Demographic and business details – Likert scales of effectuation and causation: adapted from Brettel et al. (2012), Chandler et al. (2011) and Wiltbank et al. (2009) SPSS for data analysis SPSS for data analysis 10 METHOD A mixed method approach 1) A survey: entrepreneurs borrowing from a microfinance institute in Sri Lanka 18 branches (4 provinces) 1 branch per province clusters per branch clusters per branch randomly 295 respondents

24 Interviews Purposive sampling Data collection was undertaken in two local languages (Sinhala and Tamil) NVIVO for data analysis Method continued. 3 group discussions 3 focus group discussions 3 Observations Qualitative techniques

Age years31-40 years41-50 years>51 yearsTotal 56 (20%)104 (36%)85 (30%)42 (15%)287 (100%) Education No schoolingYear 1 to 5Year 6 to O/L*Year 12 & aboveTotal 3 (1%)36 (13%)168 (59%)76 (27%)283 (100%) * Similar to British O/L RESULTS Demographic features of the sample Gender: Female (84.5%), Male (15.5%) Some common businesses: Agriculture-related businesses (24.1%) Grocery shops (17.5%) Dressmaking and tailoring businesses (11.2%) Food production (9.0%)

13 Results continued. Overall, entrepreneurs’ use of effectuation was significantly higher than their use of causation in the business start-up phase The extent of effectuation thinking was not significantly different from the extent of causation thinking Use of effectuation thinking was higher than use of causation thinking When a microloan was used in start-up When a microloan was NOT used in start-up Effectuation thinking is influenced by having a micro-loan Effectuation and causation thinking

Effectuation statements Mean (with loan)* Mean (without loan)** Sig. (.05) Causation statements Mean (with loan)* Mean (without loan)** Sig. (.05) Means-driven approaches No Goals-driven approaches No Affordable loss thinking No Expected returns thinking No Acknowledging the unexpected No Overcoming the unexpected Yes Alliances/ pre commitments Yes competitive market analysis No Non-predictive control NoPredictive control Yes * N ranged from 99 to 109 for each principle due to missing data **N ranged from 61 to 71 for each principle due to missing data 14 Effectuation and causation thinking continued.

Alliances/pre-commitments vs competitive market analysis Alliances/pre-commitments are significantly more prominent when respondents use loans. MF institution provides forums to interact with other stakeholders. – Interviewee 24 used contacts established through a training program arranged by the MF institution to obtain feedback about her product. – Peer groups facilitating learnings from each other. 15 Effectuation and causation thinking continued.

16 Effectuation and causation thinking continued. Acknowledging the unexpected vs overcoming the unexpected Micro-entrepreneurs automatically engage in control process to ensure the loan repayment when they use a loan – Changing the revenue flow of the business to suit the loan repayments (eg: Interviewee 10). This occurs due to strict loan repayment procedures of the MFI (Focus group discussion 2, observation 1)

Non-predictive and predictive control There was limited qualitative information about entrepreneurs’ ideas about predictive and non-predictive control However this may be because : – micro-entrepreneurs absorbed from each other or MF institution officers in group forums about predicting returns trying to predict business future. Effectuation and causation thinking continued.

When loans are not in contention: – effectuation thinking is the dominant decision-making logic. Loans seem to facilitate: – causation thinking, especially overcoming the unexpected, using predictive control. – entrepreneurs’ use of pre-agreements/alliances (effectuation) (may be due to the peer guarantee of each others loans) 18 CONCLUSIONS

The loan assessment process should include: – a focus on helping entrepreneurs mobilise their existing skills, knowledge and networks – in addition to making formal plans for the future. Loan repayments are structured and time-bound, business inevitably become systematic to align with loan repayments: – Some micro-entrepreneurs are able to adjust to these changes. – Others may not have the capacity and planning skills. – Micro-entrepreneurs may need to be coached and mentored to manage their financial inflows and outflows. 19 POLICY IMPLICATIONS

Microfinance groups and training programs facilitate entrepreneurs’ network: – Enhance pre-agreements/alliances and mutual learning from each other. – Indirectly, the lending system can also enhance peer learning and the broader entrepreneurial process. – MF institutions should be aware of these spin-off effects and perhaps give increased attention to fostering more opportunities for entrepreneurs to learn from each other. 20 Policy implications continued.

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