In the mid-1970s, microfinance began a new era of growth, pioneered by the work of
Professor Muhammad Yunus and the Grameen Bank, with a mission to eradicate poverty
from the face of the earth.
Presently, more than 200 million individuals globally have a microfinance loan,
compared to 13 million in 1997 (Reed, Marsden, Ortega, Rivera, & Rogers, 2014).
Microfinance is today synonymous with external entrepreneurial finance in the informal
economy, and it is beginning to reach magnitudes where significant population groups
are being affected. However, research has struggled to find support for the argument that
microfinance helps individuals get out of poverty (Roodman & Morduch, 2013), and
critiques by some journalists and researchers have been harsh on microfinance (Bateman
& Chang, 2012; Heinemann, 2013). This thesis therefore adresses several firm-level
drivers and issues of microenterprises, the modus operandi in the informal economy.
The informal economy can be assumed to follow a similar entrepreneurship
process (Shane & Venkataraman, 2000) to the formal economy, although it is also
somewhat more isolated, since few buyers from the formal economy ever buy goods or
services from the informal economy (Böhme & Thiele, 2012). Further, many
microentrepreneurs in the informal economy become involved in similar business
activities to their friends and neighbors, particularly construction, wholesale and retail
trade, and restaurants. This creates an environment where competition is high and where
it may also be difficult for entrepreneurship opportunities to exist, especially if the cost of
borrowing capital is excessively high. Through the rise of microfinance institutions,
capital can potentially be provided at more affordable interest rates than those offered by
local loan sharks.
If money is not available, engaging in trade or general business activities will
involve high transaction costs, which hinder the formation of entrepreneurial
opportunities even further. By introducing money as a medium of exchange, transaction
costs are lowered, thus enabling more entrepreneurial opportunities to exist. The same
holds true for the increased use of mobile money.
Discovering an entrepreneurial opportunity requires keeping a close eye on the
market and understanding what customers need. This study was performed on
microentrepreneurs in Ecuador, clients of Banco D-Miro, who have been running a
business over some years and can be assumed to be somewhat experienced at this. A
common characteristic for all individuals in our sample is that they have at one point
approached microfinance institutions to seek a loan for their microenterprise. We argue
that that act is a symbol that this individual is following an entrepreneurial process and
has decided that taking out a loan is a priori good for their business. In addition, our
sample includes individuals who previously have had a loan, but are not longer clients. To
sum up, there are a number of key lessons learned from this thesis:
1. Risks of failure leads to risk aversion in borrowers
Those who decide to take on debt earn a higher ROA and have higher sales growth as a
form of insurance against the risk of default. These results are partly based on prospect
theory (Kahneman & Tversky, 1979) which suggests that since individuals tend to
exaggerate the fear of failure in comparison to a sure gain. In the informal economy, we
see a high variability in performance level.
2. Microdebt has no impact on ROA or growth, but impacts profits positively
The panel study shows that in microenterprises a higher leverage is positively related to
increased profits, but has no impact on the operating efficiency (ROA) or sales growth.
This implies that the provision of microdebt is adding more income to the
microentrepreneurs, income that will be used on improved housing or education.
However, using debt does not improve the operating efficiency nor does it help the
business grow, thus hindering the poor microentrepreneur on his or her path out of
poverty. The resource-based view (Barney, 1991) predicted that resources are key to the
performance, as have others researchers (D. S. Evans & Jovanovic, 1989) but as shown
here in the informal economy, microdebt is only impacting profits, not ROA or sales
growth. These findings imply that microdebt as a resource is not helping the
microenterprises create a competitive advantage, but it does add extra income to the
3. Firms face a curvilinear (concave) relationship between size and performance
My findings indicate a curvilinear (concave) relationship between the size of the
microenterprise and ROA on the one hand and between size and profits on the other.
No affect is measured on sales growth. This findings illustrates the challenge of growing
a small business. As the size increases, the profits and profitability may actually decrease
initially and later increase, but before the microentrepreneur will likely have given up long
before reaching that stage. This links to previous resources that suggest diminishing
economies of scale (Armendáriz & Morduch, 2010), a finding contrary to observations of
formal firms. However, my findings suggest that the relationship is concave and the
positive economies of scale, as Adam Smith once predicted, kick in at a later stage.
4. Human capital investments (education/age) are not enhancing performance
The results show no impact from education on microenterprise performance. In fact, the
other parameter of human capital, experience (measured as age), is seen to be negatively
correlated which could be a cohort effect, or may illustrate that younger
microentrepreneurs take more risks than older. This suggests that human capital in the
informal economy is not a resource that helps microentrepreneurs improve performance.
5. The relationship between debt and performance is negatively moderated by
number of employees
The cross-sectional study shows a negative moderating effect on the relationship between
leverage and performance, such that leverage has less impact on performance in smaller
firms than larger firms. In previous studies (Honig, 1998) it was found that the
relationship varied depending on number of employees. This study achieved somewhat
6. Both entrepreneur characteristics and firm characteristics matter in the
decision to finance
Drawing inspiration from human capital theory and the resource-based view, the results
indicate that, contrary to previous research, entrepreneur characteristics matter more in
the informal economy than in the formal economy. I find that being older, not married,
and more financially literate increases the likelihood that microdebt will be undertaken.
Traditional firm characteristics such as size, asset structure, and performance (ROA) are
also positively linked to the decision to finance. For the informal economy, it was found
that growth intent was also a key driver in the decision to finance, which is typically not
found in research in formal economies. In terms of leverage, those who are financially
more literate are more likely to take on more debt. Among the firm characteristics, it was
again found that size and performance impacts leverage positively, but it was also found
that asset structure is negatively related with leverage.
7. Financial literate microentrepreneurs achieve higher ROA and profits
The findings show a strong positive relation between financial literacy and ROA and
between financial literacy and profits, suggesting that financially literate
microentrepreneurs make better investment decisions. This illustrates again how a key
resource, in this case a skill, helps microentrepreneurs earn higher returns. However,
when relating to sales growth, financial literacy was not seen to have any impact. Perhaps
other skills such as marketing (Webb, Morris, et al., 2013) are more important for growth.
8. Knowing successful role models helps the microentrepreneur achieve higher ROA
My results show a significant relationship between those microentreprenurs who indicate
that they know a succesful role model and their performance in terms of ROA,
suggesting that the role model has a positive impact on the operating effiency and
perhaps the microentrepreneurs’ ability to make more sound investments.
The purpose of this thesis was to address the impact of microfinance on
microenterprise performance in the informal economy through research-based theory
(Barney, 1991) and human capital theory (Becker, 2009), as well as an exploration of the
impact of financial literacy (Lusardi & Mitchell, 2014) and role models (Bosma et al.,
2012). In addition, this thesis also investigated the role of entrepreneur (e.g., human
capital and financial literacy) and firm characteristics in financial decision making. The
essays are summarized in the introduction of this thesis and are also illustrated in Figure 5
relative to how they fit in with entrepreneurship theory. By positioning the practice of
microfinance within entrepreneurship theory, I try to better explain successes and failures
in using microfinance, and the critical interplay between the environment and the
individuals. My thesis sheds light on the role microdebt has in relation to entrepreneur
characteristics. I argue that while microdebt enhances ROA and profits, it does not affect
sales growth. The thesis shows the importance of understanding the characteristics of the
microentrepreneur and that relevant skills, such as financial literacy, do have an impact
on the bottom line of microenterprise. After all, economic and social development is not
created by external sources from above, but through “its own initiative, from within”
(Schumpeter, 1934, p. 63).
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