Impact of microcredit on returns to capital: Evidence from a randomized experiment in Pakistan

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IZA Seminar

Place: Schaumburg-Lippe-Str. 9, 53113 Bonn

Date: 02.07.2013, 12:15 - 13:30


Presentation by 

Arjun S. Bedi (ISS, Erasmus University Rotterdam)


The global microfinance movement is driven by the claim that once poor micro-entrepreneurs are provided access to capital, they will be able to generate high returns. The existing evidence on returns to capital is mixed and perhaps too limited to substantiate this claim. This paper reports on a field experiment from Pakistan in which an exogenous shock in the form of interest free loans was provided to randomly selected microenterprises. A year later we find that treated enterprises record a substantial increase in their working capital, and an increase in monthly profits but no increase in hours worked l. The estimate average monthly returns to capital lie in the range of 8.6 to 11.9 percent. These returns are much higher than the interest rates charged by microfinance institutions in Pakistan.

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