BUSINESS AND FINANCIAL LITERACY FOR YOUNG ENTREPRENEURS: EVIDENCE FROM BOSNIA-HERZEGOVINA Miriam Bruhn and Bilal Zia (World Bank, DECFP)

Introduction  What are the determinants of firm growth?  Much of the literature has focused on access to capital and external finance (Banerjee et. al., 2009; De Mel, McKenzie and Woodruff, 2008)  Recent work argues that business management skills are another important driver of firm growth and a key determinant of productivity (Bloom, et. al., 2010; Bruhn et. al., 2010)  Academic interest is matched by a policy interest in training programs that aim to enhance financial and business skills  But we know relatively little about what kinds of programs are effective and for whom

Related Work and Contribution  Effects of financial literacy on households is limited (Cole, Sampson and Zia, 2010)  Evidence on business training is also scarce  Karlan and Valdivia (2010)  Other papers in this conference  Our contribution  Study effects of business training for current and prospective entrepreneurs, using a randomized controlled trial  Focus is not on micro-enterprises, but slightly larger firms  Complement survey data with high quality administrative loan data

Study Setting  Collaborate with a financial institution in Bosnia (Partner) to provide business and literacy financial training to their clients  Clients have a business loan  Look at young clients, age 18 to 35 Youth unemployment is 58 percent in Bosnia Promoting creation, survival, and growth of youth-led enterprises provides one possible solution to unemployment problem

Business and Financial Training  Provided through a local NGO that has experience with business training for university students  Adapted content for loan clients based on client and loan-officer interviews, pilot training with university students  5 module basic course (2 days, 3 hours per day)  General concepts  Business plan  Marketing  Managing the firm’s finances  Business growth  Extra module on external finance (1 day, 3 hours)  Financing sources, importance of financial responsibility, interest rates, diversification, short term & long term, the devil is in the details

Experimental Design  Took 445 interested clients and randomly divided them into 3 groups  Treatment group 1 is offered 5 module course  Treatment group 2 is offered 5 module course plus external finance module  Control group  Stratified randomization based on Partner’s data and baseline survey data  Gender  Above and below median business and financial literacy score  Sector  Missing baseline profits, then sorted by profits within strata

Implementation Challenges  Low participation rate in the training (39%)  Main reason for not participating was lack of time  96% of participants would recommend training to a friend  Few people attended 6 th module (external finance)  In the analysis, combine both treatment groups  One third of clients did not have a business at baseline (they had an exploratory business loan)  Examine effect on business creation  For remaining analysis of business outcomes, keep only individuals who had a business at baseline

Baseline Data (Sample Characteristics) Sample includes all 445 business loan clients Sample includes the 267 clients who had a business at baseline Statistical significance levels: + 15%, * 10%, ** 5%, *** 1%

Empirical Strategy  Estimate causal impact of the training with  y is the follow-up survey outcome variable (e.g. business and financial knowledge, business profits)  TrainingInvite is a dummy variable indicating whether the client was randomly assigned to the treatment group (intention-to-treat)  Control for baseline outcome variable when available (McKenzie, 2011)  Include strata dummies (Bruhn and McKenzie, 2009)  Examine heterogeneous treatment effects by interacting TrainingInvite with baseline characteristics

Business and Financial Knowledge Scores  Find no impact of the training on average levels of business and financial knowledge  But: the training significantly increased business and financial knowledge among individuals with below median baseline levels of business and financial knowledge Statistical significance levels: + 15%, * 10%, ** 5%, *** 1%

Business Creation and Survival  No significant effect on the extensive margin (i.e. business creation and survival) Statistical significance levels: + 15%, * 10%, ** 5%, *** 1%

Business Practices  Treatment group is less likely than the control group to use personal accounts for business Statistical significance levels: + 15%, * 10%, ** 5%, *** 1%

Business Investment  Training led to more investment in the business Statistical significance levels: + 15%, * 10%, ** 5%, *** 1%

Business Performance  Evidence suggests that the treatment increased profits by about 50% for clients with high baseline levels of business and financial knowledge Statistical significance levels: + 15%, * 10%, ** 5%, *** 1%

Business Growth  The treatment increased sales for clients with high baseline levels of business and financial knowledge, no significant effect on employees (slower moving) Statistical significance levels: + 15%, * 10%, ** 5%, *** 1%

New Loans  Treatment group is not more likely than the control group to take out a new loan from Partner (same is true for loans from any source) Statistical significance levels: + 15%, * 10%, ** 5%, *** 1%

Loan Characteristics  Treatment group clients who took out a new loan from Partner have longer term loans (more installments) than their peers in the control group  This is consistent with using loans for investment Statistical significance levels: + 15%, * 10%, ** 5%, *** 1%

Loan Default and Refinancing  The training lowered default rates among clients with low baseline levels of business and financial knowledge  Some evidence that the training led to higher rates of loan refinancing/restructuring Statistical significance levels: + 15%, * 10%, ** 5%, *** 1%

Summary and Conclusion  The business and financial literacy training had no effect on the extensive margin (firm creation or survival)  But: Individuals who already had a business tend to use better business practices and make more investments in their business due to the training  Weak evidence suggests that this increased profits and sales (for individuals with above median levels of baseline financial literacy)  The training lowered loan default rates (for individuals with below median levels of baseline financial literacy)