Managerial Capital, Financial Literacy, and Access to Finance

Miriam Bruhn (DECFP) Bilal Zia (DECFP)

Dean Karlan (Yale University) Antoinette Schoar (MIT Sloan)

GFDR Seminar March 7, 2012

Outline

• Why focus on managerial capital and financial literacy for firms?

• Evidence from two studies – Business and financial literacy training for

microfinance clients in Bosnia-Herzegovina – Management consulting services for micro,

small, and medium-sized enterprises in Mexico

Access to finance and firm growth

• Studies have found high returns to capital in microenterprises, ranging from 5 to 60 percent per month

• At the same time, recent impact evaluations find little effect of microcredit on investment and firm growth

Maybe firms lack management and financial skills for using loans optimally

• A number of microfinance institutions provide business and financial training on – Accounting and record keeping – Business planning – Marketing and strategy – Financial literacy and use of external finance

• Does this type of training improve knowledge, business practices and firm performance?

Paper Target group Effect on business knowledge or practices

Effect on business performance (sales, profits…)

Karlan and Valdivia (2011)

Female microfinance clients in rural Peru

+ 0

Drexler, Fischer and Schoar (2011)

Savings and credit bank clients in the Dominican Rep. (90% women)

0 for formal training + for rules-of-thumb

+ for rules-of-thumb training in bad weeks, but no effect on average outcomes

Berge, Bjorvatn, and Tungodden (2011)

Microfinance clients in Tanzania

+ for both women and men

0 for women + for men

Giné and Mansuri (2012)

Microfinance clients in rural Pakistan

+ for both women and men

0 for women + for men

Field, Jayachandran and Pande (2010)

Female bank clients in India

n/a + on having any personal income for upper caste Hindus

Bosnia business training study (Bruhn and Zia)

• Collaborated with a microfinance institution in Tuzla, Bosnia-Herzegovina (Partner) – Tuzla = 3rd largest city

• Offered business and financial literacy training to clients with a business loan – About one third are women – Focus on young clients, age 18 to 35

• Use randomized control trial to study the effects of training on business outcomes and loan terms

Business and financial training • Provided through local Entrepreneurship Development

Center (EDC) that specialized in training university students

• Adapted content for microfinance clients based on client and loan-officer interviews, pilot training with university students

• 6 module basic course (3 days, 3 hours per day) – General concepts – Business plan – Marketing – Managing the firm’s finances – Business growth and financing investment – External finance: financing sources, importance of financial

responsibility, interest rates, short term & long term

Training logistics, incentives, costs

• Training held for groups of 6-10 participants

• Sessions available on different days, allowing participants to chose timeslot that fits into their schedule

• Two local consultants scheduled sessions and made reminder calls

• Free cost transportation to training location

• 50 KM (US$35) compensation for participation (equivalent to 1 day worth of business profits)

• Cost per participant 350 KM (US$245) incl. compensation

Study design

• Randomly divided 445 clients who had expressed interest in training into – Treatment group: Invited to participate in the

course – Control group: Did not participate in the course

• Randomization was stratified by gender to allow us to study effects on men and women separately

Implementation challenges

• Low training participation rate (39%) – Main reason given was lack of time – 96% of participants would recommend training to a

friend

• One third of clients did not have a business at baseline (they had an exploratory business loan) – Examine effect on business creation – For analysis of business performance, keep only

individuals who have a business

Baseline characteristics All 445 business loan clients

267 clients who had a business at baseline

Treatment group average

Control group average

p-value of difference

Female 0.35 0.35 0.98 Age 28.1 28.0 0.8 Has secondary education 0.85 0.80 0.19

Treatment group average

Control group average

p-value of difference

Employees (incl. owner) 2.3 2.1 0.56 Business age (years) 4.9 5.0 0.82 Profits Mar ’09 (KM), trimmed 731.6 611.8 0.32 Services sector 0.54 0.46 0.23 Farming & livestock sector 0.19 0.25 0.30

Follow-up survey and admin data

• Follow-up survey conducted on average 9 months after training – Over the phone due to funding constraints – Interviewed 396 out of 445 study clients

• 89% response rate

• Administrative data from Partner on all loans that clients had in 2010 – Includes loan amount, loan term (number of

installments), repayment status, interest rate

Small (if any) impact on knowledge

1.1 1.2

1.0

1.2 1.4

1.0

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

All Men Women

ControlTreatment

• Knowledge index: Number of correct answers to 3 questions (Knows VAT law, knows what credit registry is, understands diversification)

Impact on business knowledge

• Effect on measured business knowledge is positive (for men), but not statistically significant

• Phone survey measures only basic business knowledge

• Cannot conclude that the training didn’t have an effect on knowledge overall – Look at business practices and find positive effect

Business survival and creation

• Business survival rates are low (61%)

• Training did not increase survival rates

• Only one client who did not have a business at baseline had started a business by follow-up – No impact of training on business creation

• In the analysis of training impact on business outcomes, focus only on the 170 clients who had a business at baseline and follow-up

Measures of business practices

• Follow-up survey asked questions about business practices/changes – During the past year, did you…

• …develop any new products? • …implement a new production process? • …start a new marketing campaign?

– Do you separate business and personal accounts? – Did you invest savings into the business?

• Use average z-score to summarize these 5 measures (Kling, Leibman, and Katz, 2007)

Positive impact on business practices

0.0

0.1

-0.2

0.2

0.3

0.0

-0.3

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

All Men Women

ControlTreatment

• Index of 5 business practices (higher is better)

Positive impact on sales

Note: Effect only statistically significant for women

47 50

39

62 63 63

0

10

20

30

40

50

60

70

All Men Women

ControlTreatment

• Percent of firm owners who say they increased or maintained sales during past year

Positive impact on profits for women Dependent variable: Profits May 2010 (trimmed top 5%)

Treatment -217.2 -567.0 (346.8) (411.4)

Treatment*Female 1587.1** (684.8)

N 99 99 R2 0.224 0.268 Interaction F-test p-value 0.057 Control group mean men 1910.0 Control group mean women 559.1 Control group mean 1445.6

Note: High non-reporting, only 64% of business owners provide profits Statistical significance levels: * 10%, ** 5%, *** 1%

Additional evidence on profits

Note: Effects are not statistically significant

50 53

44

62 63 64

0

10

20

30

40

50

60

70

All Men Women

ControlTreatment

• Percent of firm owners who say they increased or maintained profits during past year

Summary: Impact on business performance

• Training increased profits for female entrepreneurs by about 80%

• Positive impact on sales, particularly high for female entrepreneurs

Impact on Partner loans (admin data) • Percentage of firm owners who took out a loan

from Partner during the year after training

22

15

39

17 15 11

0

5

10

15

20

25

30

35

40

45

All Men Women

ControlTreatment

Impact on all loans (survey data) • Percentage of firm owners who had a business

loan from any source at time of follow-up

76 73

83

71 67

84

0

10

20

30

40

50

60

70

80

90

All Men Women

ControlTreatment

Impact on new loan terms (admin data)

• Average number of installments for new Partner loans

23 24 21

28

22

39

0

5

10

15

20

25

30

35

40

45

All Men Women

ControlTreatment

Summary: Impact on new loans

• Due to the training, female entrepreneurs were more likely to take out loans from sources other than Partner – Training discussed different financing options

• Training caused new borrowers from Partner to

obtain longer-term loans – Particularly large effect for female entrepreneurs

• Loan term increased from 21 months in the control group to 39 in the treatment group

• No impact on default rates for Partner loans

Conclusions from Bosnia study

• The business training had no effect on firm creation or survival

• In contrast to most of the previous literature, find positive effects on female entrepreneurs’ profits and sales

• Caveat: Results are noisy and not equally strong in all specifications (small sample issues)

Cost effectiveness?

• Cost per participant incl. transportation and compensation for time was US$245

• Increase in monthly profits for female entrepreneurs was US$730 (3 times the cost) – Don’t know for how many month this increase persists

• Why don’t more entrepreneurs participate in training? – Don’t find increased profits for all subsamples

• Lack of information about returns and uncertainty? – Credit constraints?

Some related questions

• The training was very short and had no effect on performance of male-owned firms – Can more in-depth advisory services have larger

effects?

• Do credit constraints prevent firms from using these services?

Look at these issues in the Mexico study

Mexico consulting services study (Bruhn, Karlan, and Schoar)

• Randomized impact evaluation of a program that provided management consulting services to micro, small and medium size enterprises – The program was implemented with IPPC, a training

institute of the state of Puebla • Close to Mexico City (5.9 million inhabitants)

– The provision of services was highly subsidized, so enterprises paid only between 10%-25% of the actual costs, depending on firm size

32

Program content: Consulting services

• Participating enterprises were paired with one of 9 local consulting firms – Consultants met with enterprises for at least 4

hours a week for a one year period – Consultants were asked to (1) diagnose the

problems that prevented the enterprises from growing, (2) suggest solutions that would help solve the problems and (3) assist in implementing solutions

33

Study sample

• IPPC advertised the program widely within Puebla to attract eligible enterprises – Only firms formally registered with the tax

authority were eligible to participate – The program was designed to include funding for

• 100 micro firms (<=10 employees), • 40 small firms (11-50 employees) • 10 medium-sized firms (51-250 employees)

34

Research design and program take-up

• 432 firms signed a letter of interest, saying they would participate if offered a spot in the program

• Randomly selected 150 firms to be offered a spot (treatment group), the remaining 282 firms serve as the control group – Out of these 150 firms, only 80 firms (53%) ended

up participating in the program • Others said they had changed their mind or did not have

sufficient funds to pay their share of the costs anymore 35

Data • Baseline survey

– Conducted after firms signed letter of interest but before they were assigned to treatment and control groups

• Follow-up survey conducted at program end

– Re-interviewed 88% of firms interviewed at baseline

• Administrative data from Mexican Social Security Institute (IMSS) for 2 years before and 3 years after the program on 59% of the sample – Number of employees – Daily wage bill – Averages for treatment and control group (confidentiality)

36

Baseline characteristics

• Median firm had 6 full-time employees (average = 14)

• Median monthly sales of $9,500 (average = $63,000)

• Median monthly profits of $2,200 (average = $12,000)

37

45

30

25

Sector

ServicesManufacturingCommerce

38

Examples of firms in the study

• Pet and toy store • Run by father and son • 8 employees (in 3 branches)

39

• Pest control services • Sole proprietorship • 4 employees

Front entrance The entrepreneur in his office

Main office Water distribution truck

• Water transportation • Sole proprietorship • 6 employees

40

Topics that firms worked on with the consultants (from 8 case studies)

Topic covered with consultant Number of firms Define mission and vision statements 6 Accounting and record keeping 5 Clearly assign responsibilities 5 Sales strategy and advertising (marketing) 4 Strategically select location & number of sales points 2 Quality control 2 Access to credit or alternative financing solutions 2 Human resources management and hiring practices 2 Mediate family problems in family firms 1 Pricing strategy 1 Cost reduction 1 Identify most profitable products and focus on these 1 Employee training 1 Leadership training for firm owners 1

41

Impact on business practices: Comparing treatment and control groups at follow-up

42

86%

44%

93%

57%

0%10%20%30%40%50%60%70%80%90%

100%

Keeps formal accounts New marketing campaign

ControlTreatment

Impact on firm performance and employment

• Compared to the control group, treatment group enterprises had significantly higher productivity in the follow-up survey

• Don’t find increases in sales, profits, or employment

at the end of the program…

• …but Social Security Institute (IMSS) data shows higher number of employees and wage bill 2-3 years after the end of the program

43

Average number of employees (IMSS data)

10 10 10 10

14 15

0

2

4

6

8

10

12

14

16

1 year after program 2 years after program 3 years after program

Control Treatment

Average daily wage bill (IMSS data, US$)

162 169 185

163

263 294

0

50

100

150

200

250

300

350

1 year after program 2 years after program 3 years after program

Control Treatment

Reasons for not using consulting services (control group firms)

Self-reported reasons for not using consulting services

Percentage of firms mentioning this reason (multiple mention)

Would be a good investment, but don't have funds

46.3

Don't know what the benefits would be 22.2

Simply hadn't considered it 18.5

Didn't need the services 13.9

Didn't know these services existed 7.4

Not worth the cost 5.9

Other 11.1

Conclusions

• Management consulting services can increase firms’ productivity and lead to firm growth in the medium run

• Many firms are not using these services, perhaps due to financing constraints – Services need to be paid upfront and growth happens

2-3 years later – Banks reluctant to fund investments that don’t have

tangible collateral