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.
Read other posts from the 10 Research Questions on Improving Financial Access series focused on the questions that need answers if we are to make informed decisions on how to improve financial access
The series has been compiled as a framing note on the FAI site and later as part of a collection of studies to be published in a forthcoming book.