Microfinance at the Margin: Experimental Evidence from Bosnia and Herzegovina

This study analyzes the impact of microcredit on poverty reduction and entrepreneurial activity among households without prior access to finance. It uses a randomized controlled trial (RCT) on 1,200 individuals that EKI, a Bosnian MFI, would normally have rejected on the basis of its regular screening procedures. The RCT randomly selected half of these households for a loan.The study found that access to credit allowed borrowers to start and expand small-scale businesses but that the impact on consumption and other outcome variables was heterogeneous. It develops a unified interpretation of these findings by constructing a model of investment decisions when a minimum amount of capital is required. Findings include:

• Borrowers needed additional resources to meet minimum investment costs;
• Households that already had a business and those that were highly educated could run down their savings;
• Less-educated households had insufficient savings and had to reduce consumption;
• Young adults who belonged to less educated households started to work more and their school attendance dropped.

The study concludes that access to microcredit stimulated investments in both new and existing businesses, but refrains from quantifying its overall welfare effects.