In the large microfinance markets of Asia, a common but seldom-discussed observation is that the microenterprises nominally tied to microcredit borrowing rarely grow substantially, especially after the first few years. There are many possible reasons to explain this, including borrowers' simple lack of imagination, lack of management capacity, low profitability at scale, limited ability to hire trusted workers, risk aversion, lack of access to sufficient capital for productive growth investments, poor policy environments, and insufficient access to larger markets.
What role do financial institutions play? Making microcredit loans more flexible may help – though microfinance institutions worry that being more flexible may increase risk and costs. The lack of growth may also be due to competing household needs like childcare. Even if financial access makes a big impact at first, the long-run impact hinges on the extent of continuing gains.
This is the third post in the Ten Research Questions on Improving Financial Access series. For previous installments, please visit: "10 Research Questions on Improving Financial Access" and "How much does Consumption Smoothing Contribute to the Welfare of Families?" The 10 Research Questions series will be compiled and available as a framing note on the FAI site and later as part of a collection of studies to be published in a forthcoming book.
