Principal investigator: Viviane Pires Ribeiro
Article title: TEACHING ENTREPRENEURSHIP: IMPACT OF BUSINESS TRAINING ON MICROFINANCE CLIENTS AND INSTITUTIONS
Article authors: Dean S. Karlan and Martin Valdivia
Location of the intervention: Lima and Ayacucho, Peru
Sample size: 4591 clients of the Foundation for International Community Assistance (FINCA)
Main theme: Finances
Primary variable of interest: Human Capital
Type of intervention: Business training
Evaluation method: Experimental Evaluation (RCT)
Evaluation Context
FINCA-Peru is a small, non-profit, financially sustainable microfinance institution operating in Peru since 1993, providing credit and empowering its clients with the mission of improving the socioeconomic situation of the poor. The institution sponsors village banks for low-income micro-entrepreneurs, offering access to formal financial services and teaching its clients how to save, requiring weekly or monthly savings deposits that correspond to the size of the loan taken out, encouraging additional voluntary savings for which they receive market interest rates. Most of its micro-entrepreneurs are women and young people with little formal education. Each client of the institution holds, on average, $233 in savings and an average loan of $203, with a recovery rate of 99%. FINCA charges sufficient interest to be self-sustaining.
Intervention Details
Karlan and Valdivia (2006) evaluate the marginal impact of adding entrepreneurship training to a microcredit program in Peru. The research was conducted with FINCA-Peru, located in Lima and Ayacucho. The authors randomly assigned pre-existing loan groups to either treatment or control groups. Treatment groups received the training as part of their mandatory weekly meetings, and control groups remained as they were before, a credit and savings group.
In Ayacucho, of the village's 140 banks (3.265 clients), 55 were assigned to a mandatory treatment group (clients had to remain with the training at their weekly bank meeting), 34 were assigned to a voluntary treatment group (clients were allowed to leave after loan repayment, before the start of training), and 51 were assigned to a control group that received no additional services beyond the credit and savings program. In Lima, of 99 banks sponsored by FINCA (1.326 clients), 49 were assigned to mandatory treatment and 50 were assigned to the control group (there was no voluntary support group in Lima).
The entrepreneurship training materials were developed through a collaborative effort between FINCA, Atinchik, and Freedom from Hunger (FFH). The training began in October 2002 in Lima and in March 2003 in Ayacucho, totaling 22 weekly sessions. The aim was to improve basic business practices, such as: customer service, profit management, sales location, use of special discounts, credit sales, and the goods and services produced.
Methodology Details
The research was developed from three data sources: Financial transaction data from the FINCA database, which contains reports of all operations carried out by the bank's clients at each scheduled meeting, including information on loan cycles, breakdown by loan payment, interest, mandatory and voluntary savings, late payment penalties, and some socioeconomic characteristics (age, education, and main economic activity of the business); a baseline survey before the randomization results; and a follow-up survey up to two years later. The baseline and follow-up surveys included a variety of questions about sociodemographic characteristics and general information about the client's family and business.
Result
The authors divided the results into four categories: (1) institutional results, (2) business processes, knowledge and savings practices (this category verifies whether the specific practices taught in the training were adopted), (3) business results, (4) domestic results, including empowerment in decision-making and child labor (issues related to the time that children between six and fifteen years of age dedicate to domestic work and school activities).
Institutional Results: Significant effects of business training on customer repayment and retention were identified; however, no changes in loan size or cumulative savings were identified. Repayment rates among the treatment groups are three percentage points higher than among the control groups. Customers in the treatment group are four to five percentage points less likely to churn. The results also show that the improvement in repayment rates and customer retention is stronger for customers with larger businesses (measured by sales) and for those who expressed less interest in business training in the baseline survey.
Business skills and practices: the authors administered a questionnaire containing questions about business knowledge, marketing strategies, use of profits, and record keeping. The results indicate that training participants demonstrate greater business knowledge, answering a higher number of questions correctly (10 percentage points). The training increased the likelihood of individuals reinvesting profits in their businesses by four percentage points, sales records kept by their businesses by three percentage points, and withdrawal records kept by their businesses by seven percentage points.
Business results: The training helped improve customers' understanding of strategies aimed at reducing fluctuations in their sales.
Domestic results: no impact was detected on domestic decision-making, such as using FINCA loans and savings for either making money or family decisions. Regarding child labor, the results show that for mothers with higher levels of formal education, training reduced the number of hours children worked in the company. The corresponding increase in education is positive, but not statistically significant.
Lessons in Public Policy
Can entrepreneurship be taught, or is it a fixed personal trait? According to the researchers' study scenario, the answer is yes, it is possible to teach individuals to engage in certain business practices that lead to increased sales. Client reports regarding the implementation of the strategies taught in the program (separation of household and business income/expenses, reinvestment of profits in the business, maintenance of sales and expense records, and proactive thinking about new markets and profit opportunities) may have contributed to increased business income for clients, mainly by smoothing out fluctuations between good and bad periods.
From an institutional perspective, the intervention also has positive effects. Marginal revenue is obtained through increased customer retention and repayment rates. The fixed cost of managing a village bank is high, but the variable cost of each individual customer is very low. Improving customer retention rates generates more revenue than the marginal cost of providing the training. Thus, this is a profitable venture for FINCA, as the authors identified positive impacts on repayment and customer retention rates for the lender.
Reference
Karlan, D., & Valdivia, M. (2011). Teaching entrepreneurship: Impact of business training on microfinance clients and institutions. Review of Economics and statistics, 93(2), 510-527.
