Asset-based Microfinance for Microenterprises: Evidence from Pakistan
We conduct a ﬁeld experiment offering graduated microcredit clients the opportunity to ﬁnance a business asset worth four times their previous borrowing limit. We implement this using a hire-purchase contract; our control group is offered a zero-interest loan. We ﬁnd large, signiﬁcant and persistent effects from asset ﬁnance contracts: treated microenterprise owners run larger businesses and enjoy higher proﬁts; consequently, household consumption increases, particularly on food and children’s education. A dynamic structural model with non-convex capital adjustment costs rationalizes our results; this highlights the potential for welfare improvements through large capital injections that are ﬁnancially sustainable for microﬁnance institutions.