Small business owners often encounter significant challenges when seeking the necessary funding to expand their businesses, particularly in low-income economies. Nonetheless, recent research suggests that offering larger loans for asset purchases may offer a viable solution to this widespread issue. Dr. Simon Quinn discusses the findings of a pioneering study and the potential of alternative microfinance models in supporting the expansion of small businesses.
The Challenges Confronting Entrepreneurs
Entrepreneurs aiming to acquire assets frequently confront the formidable task of accumulating a substantial lump sum of money. In low-income economies, traditional microcredit often falls short in meeting these needs as the debt-based cash loans provided are too small and inflexible. Consequently, business owners struggle to make significant investments in their businesses. Accumulating enough cash to make the purchase is also unrealistic, particularly when funds are limited and there are more pressing expenses to address.
The Impact of Larger Loans
A study conducted by Dr. Simon Quinn and his co-authors from Lahore University of Management Sciences and the University of Oxford in partnership with Akhuwat, a Pakistani non-profit lender, sought to investigate whether larger loans could facilitate the expansion of small businesses. The study provided loans of approximately £1,500 to “graduated borrowers” who had repaid at least one prior regular loan and had identified a fixed asset they wished to purchase for their business. The clients in the sample expressed interest in acquiring items such as auto-rickshaws, sewing machines, cameras, and light machinery.
The study divided approximately 750 clients into three groups, offering them different types of loans. The clients who received either fixed or flexible repayment loans were found to experience an average 11% increase in profits compared to the control group that received standard microfinance loans. This profit surge also resulted in an eight percent rise in household income and a six percent increase in household consumption, with a noteworthy portion allocated to education spending, particularly for girls. The success of Akhuwat in recouping its cash further demonstrated the viability of supporting graduated borrowers through the provision of larger loans.
Exploring Innovative Microfinance Strategies
In addition to providing evidence of the benefits brought by asset-based microfinance, Dr. Quinn highlights the potential of performance-based microfinance through his involvement in a project in Kenya. The project involved financing fixed capital investments within the supply chain, offering bicycles to local “micro-distributors” and tying loan repayments to their purchases. These innovative strategies offer promising possibilities for establishing a better sense of “mutuality” between lenders and clients, particularly for businesses that are digitizing their transactions.
Looking Ahead
Dr. Quinn recognises the growing relevance of performance-contingent microfinance as more small businesses continue to digitize their operations. His ongoing work with co-authors to pilot a scheme in Lahore that enables women to borrow to buy auto-rickshaws further emphasizes the potential for linking loan repayments to earnings from the assets being financed. The intersection of development economics and finance presents a wealth of opportunities for innovative research that can benefit not only lenders and academic researchers, but also non-governmental organizations and corporations with a focus on social responsibility.
The Future of Microfinance Research
The impact of these findings extends beyond academic circles and appeals to various audiences, from bank lenders and NGOs to companies seeking to implement socially responsible initiatives. Dr. Quinn also underscores the relevance of this research to students, particularly those studying economics, finance, and data science. The opportunities presented by working with diverse datasets, including those from microfinance studies, offer invaluable learning experiences and inspiration for future generations of professionals in these fields.
In conclusion, the potential of alternative microfinance models to drive sustainable improvements for small businesses and households is evident from the research findings discussed by Dr. Quinn. As the world of finance continues to evolve, the exploration of innovative strategies and the integration of data-driven decision-making hold promise for creating meaningful impact in supporting the growth of small businesses and improving the lives of individuals in low-income economies.