Microfinance and Education Lecture # 17 Week 10

Structure of this class Further inquiry on adding on “human capital accumulation” in microfinance A case study: Peru Attempting to measure marginal impact of adding business training Methodology and results

Human capital Defined as teaching entrepreneurship Is it a fixed personal characteristic or can it be taught? To answer this question, Karlan & Valdivia (2006) used a randomized control trial to measure: The marginal impact of adding business training to a Peruvian village banking program for female micro-entrepreneurs

Population: about 30 million Over 70% in services Only 9 % in agriculture Fast – growing economy GDP per head $219 Over 40% below the poverty Line Foundation for International Community Assistance (FINCA) (Pioneer of “village banking” Methodology since 1993 Clients: 96% women PERU: BASIC FACTS

Salient features of the “educational program” launched in 2003 Sponsored by FFH 22 weekly sessions in basic business practices for improved entrepreneurial skills: -How a business is -How a business works -Business in the market place - How to treat clients -How to use profits -Where to sell -Use of special discounts -Credit sales -Goods and services produced

These skills should in principle: Increase sales, more workers, and incentives to join the formal sector And Impact household decision making and child labor From the MFI’s standpoint: Higher repayment rates Goodwill and sentiments of reciprocity: higher repayment rates Ambiguous effects on loan sizes and savings volumes Ambiguous effects on client retantion

Attempts to measure impact In two parts of Peru: Ayacucho and Lima randomized-control trials in which pre-existing groups were assigned randomly to control and treatment groups Ayacucho: 55 treatment villages (training was mandatory), and 34 treatment villages (training was voluntary), and 51 were assigned to control group In Lima: 49 treatment villages (training was mandatory) and 50 assigned to control

Implementation problems Mandatory attendance was higher than voluntary Training could not always occur at each meeting and at the same pace because of drop out rates, religious holidays, more time requested for studying  delays in completion and heterogeneity in treatment intensity

Nevertheless, data was gathered Baseline from financial transactions data delivered by FINCA Baseline and follow-up surveys complemented the study via questionnaires involving a variety of questions including socio- demographic characteristics…. Outcomes: 4 categories 1)Institutional 2)Business process, knowledge and savings practices 3)Business outcomes 4)Household outcomes

Estimation strategies DD or FD depending on whether outcome observed in both the baseline and the follow – up Test whether training generates heterogeneous treatment effects along characteristics such as prior interest in training, schooling, marital status…. Marginal effects are then estimated depending on prior characteristics

Results: Institutional Results: -Repayments among treatment groups is 3% points higher than among control groups -Clients in treatment 5% points less likely to drop out -Repayment and retention higher for clients with larger business

2) Business skills and practices Greater business knowledge in treatments Better business practices Maintained sales records Introduced innovations in their businesses Results were mixed with regards to heterogeneous business techniques

3) Business results Sales increase by 16% on average No change in profit margin for retail business For service business, translated into higher profits

Household outcomes No impact on decisions on how to use FINCA loan and savings Clients more likely to separate bills from husbands/partners Child labor is not significant However: Some indication on more education for daughters, and for more educated mothers led to a reduction of number of hours children spent working on the micro-enterprise  Next class: “Social Business”