The impacts of business training on microfinance borrowers: Evidence from a randomized laboratory experiment in Tanzania

Abstract

In recent years microfinance has gained increasing attention from the academic and development communities. It is often cited as a solution to poverty in the developing world, claiming that the poor need only access to financial capital in order to improve their standard of living. Studies, however, have shown that small entrepreneurs borrowing from microfinance institutions (MFIs) may not only need access to financial capital, but also may benefit from human capital enhancement programs such as business training and entrepreneurial skills. With a growing number of small entrepreneurs turning to microfinance institutions to meet their credit constraints, there is a need to examine the potential of microfinance business training programs for entrepreneurs’ business performance. This study uses data from a randomized and incentivized economic lab experiment on microfinance borrowers in Tanzania to analyze the direct effects of a business training program on performance and entrepreneurial behavior. Our analysis finds a statistically significant effect of training on treated clients when payout and performance on business related questions are used as dependent variables. After controlling for education, gender and cognitive ability, we find no difference between treatment and control clients in performance on general knowledge questions, but we do find a treatment effect in payout from the lab (used as a proxy for performance) and in performance on business related questions. Furthermore, we find that attendance in the training program is also overall significant for determining performance on business questions and on payout, however depending on the entrepreneur’s previous education, we find decreasing marginal returns to training. This suggests that the greatest effect of the training will be for those participants who have the least amount of education. The first section outlines the theory, presenting existing research on human capacity building programs for microcredit borrowers. We then discuss the lab experiment and the source of the data, incorporating issues on randomization, data quality, and a description of the participants. The next section outlines the methodology for our study, explaining the variables to be analyzed and the regressions used. The following section explains our results. The final section provides some concluding remarks.