Better Loans or Better Borrowers? Lifting Credit Constraints for Women-Owned Firms in Ethiopia

Abstract

Purpose: Evidence on the relationship between credit and firm growth among micro, small, and medium enterprises relies heavily on the microfinance literature, which finds that credit has only modest impacts on business performance. Our study investigates the impact of meso-credit: larger capital infusions with longer maturities to women entrepreneurs in Ethiopia. We study the impact of individual-liability loans with an average size of USD12,000, or eight times larger than the typical microfinance group-lending offering. Study design: We leverage panel survey data collected from nearly 2000 firms in three post-loan intervention time periods over five years. We employ difference-in-differences and propensity score matching methods to estimate the impact of the loans to women-owned, formal enterprises, relative to a comparison group not offered loans. Findings: Our results suggest that large, individual-liability loans have a significant positive impact on firm growth, with gains of 30% in business income and 50% in employment for firms that borrow, relative to those that do not. Loans also increase the likelihood of survival of existing firms. These effects are not merely driven by positive selection during the loan appraisal process; we find that loans matter even after accounting for borrower characteristics. Contributions: Our paper is one of the first to evaluate the effect of loans to women in the “missing middle” and serves as a proof of concept that larger capital infusions for firms can promote growth. Implications: Policymakers that seek to support the growth of firms should consider redesigning loan products to target underserved market segments, with larger and better-fit credit.