CREDIT Development Seminar: Gharad Bryan, LSE

Big loans for small firms (with Dean Karlan and Adam Osman)

Abstract: Constraints to growth for medium-sized enterprises in low income countries remain a puzzle and a challenge, for academics and policymakers respectively. We collaborated with a lender in Egypt that sought to examine whether some ”micro” borrowers already in their portfolio could indeed make profitable (for both the lender and borrower) use of radically larger loans. We find mostly null average effects on borrower profitability (lender profitability increases, because nobody defaults).Critically, we collect psychometric data that identifies dramatic heterogeneity, with the top quartile of treatment effects averaging a 77% increase in profits, and the bottom quartile of treatment effects averaging a 52% reduction. This highlights capital constraints not being the only constraint to growth, and the importance of understanding complementary entrepreneurial and personal capabilities when targeting policy to expand small and medium enterprise markets.