Essays on Small Scale Finance and Recipient Behaviour

These essays consider various aspects of the access to finance to micro-entrepreneurs who remain outside the purview of the banking sector primarily due to lack of collateral. An innovative way to provide access to finance - microfinance - originated from Bangladesh and has since then spread to all over the world. Evidence points to micro-enterprises earning returns well above market interest rate. It is therefore puzzling that hardly any study has found a significant impact on various development indicators for households receiving a microcredit loan. This coupled with high indebtedness and defaults by borrowers resulting in the collapse of several microfinance organizations across the world has raised questions about the fundamentals of the microcredit model and led to a rethinking of microfinance at large. In line with this, we look at an alternative model of microcredit with zero interest rate and voluntary contributions being used by Akhuwat, a microfinance organization in Pakistan. Chapter 2 has details about this organization and chapter 3 about a telephone survey of the borrowers of the organization that was conducted to collect information in addition to that in the organization database.

In chapter 4, the analysis of monthly data on voluntary contributions provide evidence that the organization is rewarding borrowers for their contributions by giving them repeat loans and that borrowers are strategically timing these voluntary contributions through their loan cycles to maximize impact. In the case of joint liability loans, borrowers in poorly performing groups make on average higher voluntary contributions, and voluntary contributions in a previous loan cycle correlate with borrower discipline in a subsequent loan cycle. Thus, voluntary contributions can signal borrower quality, and joint liability borrowers appear to be using them to signal their quality independently of their group.

Microcredit loans were traditionally extended to groups of people who were held jointly liable for the payments of each other. However, there is no clear evidence that joint liability does lead to better borrower performance and recent years have seen a shift towards individual liability lending. In Chapter 5, utilizing the exogenous shift from individual to joint liability lending by a microfinance organization in Pakistan, we find evidence of significant improvement in borrower discipline. We also use the exogenous variation in number of months borrowers had till the expiry of their individual liability loans at the time of the shift to study the kind of groups they formed. Using this time that borrowers had as an instrument, we find that they are more likely to form groups with people they knew from before and met weekly. The time that borrower had to form group also correlated positively with borrower discipline.

Chapter 6 investigates the impact on micro-entrepreneur households of unconditional transfers in a Randomized Control Trial setting. In a situation of no commitment, it looks at the second order effects on the household of an exogenous shock to the enterprise. Even with no repayment for principal or additional interest charge, there is no significant impact on the consumption and education expenditures of these households. We focus on the demographic and labour supply response and find that households of male and female owned enterprises adjust differently. Households of male run enterprises experienced a rise in fertility while those of women saw a decline in the number of other women working in the household and thereby in overall hours worked in the household. For male run enterprise households, there appears to be no substitution away from work towards leisure as the household feels richer. We did not find evidence that the rise in fertility is a pure income effect and so it appears to be associated with different choices made by the two genders when in charge of resources.