Practical Innovations in Entrepreneurial Microfinance

Millions of people use microfinance to grow small businesses — including 90 million in India alone — but a 2015 meta-study of microfinance randomized controlled trials concluded that economic impact, while sometimes modestly positive, has not been transformative. Factors encouraging low defaults (e.g., loan size, fixed repayment, and interest rate structure) have not evolved substantially since the 1970s. However, microcredit that is designed to allow borrowers to undertake high-return, long-term entrepreneurial investments may be more effective at increasing income. To help microentrepreneurs access credit that can truly transform their livelihoods, the National Bureau of Economic Research is bringing together researchers from the Harvard Business School and partners from Sanghamithra Rural Financial Services to develop and test new microfinance loans with personalized terms. With support from USAID Development Innovation Ventures (DIV), the team will test, refine, and standardize new variations of microfinance loans into a personalized credit product that is designed to help businesses grow sustainably. The project will identify and survey high potential microentrepreneurs to gauge their interest in personalized credit, learn about their investment plans and ambitions, and use this information to design and offer loans with personalized terms. An evidence-based, personalized microfinance product has the potential to be scaled by microfinance institutions to reach more microentrepreneurs around the world.