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April 2012 randomized evaluation sme access to finance


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April 2012 randomized evaluation sme access to finance

  1. 1. Dale FickettContext – Entrepreneurship for DevelopmentThe body of research covering SME’s role in promoting global development outcomes islimited. For example, only 43 articles, of 7,482 published during 1990 – 2006 in “leadingmanagement journals,” addressed entrepreneurship in emerging economies.i However,development economists and practitioners are generally agreed on the following: a)Approaches which engage the poor within the private sector offer a promising method forharnessing competitive markets to achieve poverty alleviation outcomes; b) one suchapproach is the establishment and growth of SMEs which engage the poor; and c) SMEs inthese contexts face a range of constraints as they grow and compete.ii In sum, the researchand practitioner community has established that some SME growth supports economies,creates jobs, addresses gender disparities and alleviates poverty. These outcomes are mostoften enabled when entrepreneurs deploy capital to seize exponential productionincreases.iii The challenge is identifying the conditions in which the growth oftransformational SMEs catalyzes development outcomes; and enabling the policy andpractices which support competitive ecosystems that help those in most need.ABC Bank – New Product StudyThis “pro-poor” SME growth is often constricted by a combination of internal and/orexternal barriers. Access to finance, access to the right talent and skill sets, access tomarkets, and regulatory constraints – can each play a role in limiting the venture’s rate ofgrowth and ultimate scale achieved.iv When introduced, ABC’s new Accounts Receivableproduct will provide a new avenue to access finance, but it may, or may not, catalyzeincremental SME growth which drives development outcomes for targeted beneficiaries. Arandomized control trial (RCT) provides the most robust evaluation possible to establish thecausality between the product introduction and development outcomes, as it establishesthe counterfactual (i.e. what would have happened had the loan not been issued), and thusminimizing the assumptions required to draw ex post conclusions.)Planning: To conduct the intended study several planning activities help focus efforts. First,it is important to establish the key project stakeholders; exactly what they are looking tounderstand; and whether current or previous RCTs have gained the required insight. v“Viability of the product,” may indicate establishing the anticipated market penetration ratefor commercial purposes, or seeking to establish the extent of poverty alleviating impact.Second, it is important to establish precise target beneficiaries and the desired goal. With apoverty impact goal, ABC Bank may be as specific as, “Seek to maximize the marginalincome increases (MII) for those currently earning <$2.00/day PPP.” Third, given thestakeholders agreed goal, a needs assessment framework (see figure 1) is used to establishNeeds Input Outputs Outcome Outcome GoalPeople in poor ABC Bank provides Fixed asset SMEs create work Low-wage earners Increasedrural areas lack SME loans to investments that was not take new jobs or household income,income generating collateralize increase previously take opportunities improvedopportunities. Accounts production and available. for more hours/ economic choices, Receivable. profitability. greater wages. and better levelsThere are credit- Existing employees of health andworthy SMEs that Flexible repayment These investments and local low-wage They start earning education.need loans to terms allow for use sometimes create laborers are able more income, andincrease as working capital, work for the poor, to do the work continue to do theproduction and and enable fixed but may decrease created. work over time.returns. asset investments. work available. Number and value SME days / hours MII for those who of loans written. of new work were living on lessVariables to Measure: SME investments created. than $2/day. made. Figure 1 – Illustrative Needs Assessment Framework
  2. 2. Dale Fickettthe causal links to be tested through the evaluation – testing whether the new product willspur contributions towards the desired goal. Fourth, to gain clarity regarding other (perhapsmore cost-effective) potential interventions, a list of alternatives may be developed. The Theory ofChangevi techniques may be applied to illuminate other pathways to achieve the desiredgoal. Alternatives to the new product may be developed narrowly, such as other products ABC Bankmay introduce; or it may defined so broadly as to include other stakeholder interventions, such asgovernment sponsored conditional cash transfer (CCT) programs. Lastly, a working hypothesis iscaptured and refined through the planning process to describe the anticipated effect of theproduct introduction, such as, “Those SMEs that receive the product and which operate withinindustry sectors with the greatest labor density, will create the most additive work and the greatestmarginal income increases for those living on less than $2 PPP per day PPP.Design: Building upon the planning stage decisions and the presumed needs assessmentlogic in figure 1, the RCT design would include the following characteristics: 1. The SME entity, as treatment recipient, to serve as the unit of randomization; 2. A simple lottery is the method of randomization amongst screened participants, with screening provided by standard loan origination proceduresvii; 3. Stratification by industry sector may be considered to ensure adequate participation to investigate the dimension of the hypothesis related to labor density; 4. Threats to the design include: non-borrower survey participation, positive spillovers due to increased local demand for non-borrowers’ offerings, negative spillovers as labor rates increase, crossovers where non-borrowers access ad hoc credit from cash-flush borrowers, and data quality issues, especially related to establishing employees’ pre-existing income levels; 5. Optimal sample size (N) will be based upon ABC Bank’s position regarding minimum effect size, and balancing the statistical significance of the findings (e.g. power [κ]; significance level [α]) with the cost of extending the sample size of the pilot; and 6. Variables to Measure (see figure 1), as one implementation consideration, will be gathered by enumerators from borrowers and non-borrower SME owner/operators and all employees at SME work sites, at the time of project initiation, and over the two years during which production gains are expected to be realized. Data accuracy will be established through techniques such as random re-surveys; and enticements for non-borrowers will be utilized, such as preferential treatment in future lending.viiiStakeholder Engagement: Ongoing collaboration with ABC Bank and other programstakeholders (e.g. independent donors) improves focus, enables the decision-makingrequired during the planning activities, establishes consensus on design, ensures datacollection (e.g. origination, uptake, collections), establishes access to SME owners andemployees, and engenders support for post-study scale-ups and report dissemination.Critical success factors related to stakeholder management include: early identification ofkey constituencies; engagement with IPA SME Initiative funders and identification ofopportunities to leverage their capabilities to enhance program delivery; definition ofgovernance and preferred communications; identification of cross-initiative synergies ordependenciesix; meaningful engagement with external stakeholders.Benefits: ABC Bank, other researchers, policy makers, and development practitioners wouldbenefit from the establishment of a proven impact treatment, theory to explain the impactachieved, pragmatic M&E enhancements to show how and why the product should bescaled, and establishment of the intervention’s cost-effectiveness relative to other options.
  3. 3. Dale Ficketti Bruton, G., Ahlstrom, D. and Obloj, K. (2008). “Entrepreneurship in Emerging Economies: Where Are WeToday and Where Should the Research Go in the Future.” Entrepreneurship Theory and Practice, 32(1), p. 1.ii Brennan, L. and Fickett, D. (2011) “Developmental Entrepreneurship in Sub-Saharan Africa: AssessingFinancial and Social Returns.” IIIS Discussion Paper Series, No. 386, November 2011, p. 17. Retrieved from: Banerjee, A. & Duflo, E. (2011). Poor Economics, New York, NY: PublicAffairs.p. 219-234.iv “About Small & Medium Enterprise.” (2012). Retrieved April 12, 2012, from Publications – Microfinance. (2012). Retrieved April 12, 2012, from What is theory of change? (2012). Retrieved April 12, 2012 from Screening recommendations ensure adherence to credit risk and other underwriting requirements at ABCBank and those of other Limited Partners committing capital, while also mitigating against selection bias andensuring a representative control group.viii Figure 1 captures a sub-set of required data, with additional data sources including loan officers, SMEowners, and employees. Other design considerations include: budget, timeline, documentation ofassumptions, prerequisites to meet target beneficiaries’ needs.ix Over time, the portfolio of SME projects will collectively meet the challenge of identifying the conditions forpro-poor growth, and enable required policy and industry practices. Project interaction across the SMEInitiative enables synergy, and efforts should dovetail with those of other research initiatives in meetingbroader IPA goals. For example, opportunities to leverage the network of affiliates and related assets shouldbe investigated (e.g. publication on social capital or microfinance).Note: This document is being furnished to IPA as a part of the recruitment process it draws heavily frominformation available through Innovations for Poverty Action (see and the Abdul LatifJameel Poverty Action Lab (see