01 Jul 2013
A solution to the triple whammy of financial challenges facing micro-entrepreneurs in Ghana could be on its way thanks to a new research project from London Business School.
Stephen Anderson-Macdonald, PhD candidate, London Business School, explains the problem: “The majority of micro-entrepreneurs in developing countries face what’s been called a triple whammy: their incomes are small, irregular, and uncertain. These cash flow constraints make it difficult to invest in assets such as equipment or inventory for their businesses.
“When small business owners get cash in their hands it is often not invested directly into the business. Instead, the loan money is all too often spent on personal expenses. This reality prevents micro-entrepreneurs from benefiting fully from business loans. By not fully investing in the business, the entrepreneur fails to reap the potential rewards from the loan, and struggles to grow his or her firm.”
London Business School has been awarded funding from USAID’s Development Innovation Ventures (DIV) for a project in Ghana that will identify the effectiveness of different loan products designed to give micro-enterprises the boost they need to become successful small and medium enterprises.
Anderson-Macdonald, Rajesh Chandy, The Tony & Maureen Wheeler Chair in Entrepreneurship and Academic Director of the Deloitte Institute for Innovation and Entrepreneurship, London Business School, Om Narasimhan, Professor of Marketing, London School of Economics, and Anja Lambrecht, Assistant Professor of Marketing, London Business School, will be looking at the impact of two different loan products they have designed for this project. The researchers are working with Financial Republic, a micro-finance institution based in Ghana, to offer the innovative financial products to over 3,500 small businesses.
Half of the businesses in the study are offered a ‘locked-in’ product, where the loan funds must be invested in business assets focused on enhancing productivity such as new equipment, inventory or vehicles. The other half of the businesses are offered the second ‘unlocked’ product, where the loan funds are unrestricted and the entrepreneur can decide how they would like to spend the money.
Commenting on the research, Dr Lambrecht said: “This project is a unique opportunity to better understand how the design of micro-finance products affects their adoption and usage. The research will show whether restricted loans that give the entrepreneur no flexibility in how funds can be invested can actually improve business outcomes. The project has been made possible through very close collaboration with Financial Republic, the micro-finance institute in Ghana.”
The researchers secured initial seed money from the Deloitte Institute of Innovation and Entrepreneurship (DIIE), as well as research grants from the R&D Management Association (RADMA). Now with the USAID funding, they are able to launch their randomized control trial (RCT) to rigorously evaluate the impact of the new loan products on important economic and social outcomes. Perhaps these new loan products, tailored to the realities of micro-entrepreneurs in emerging markets, will herald a welcome switch in business strategy for marketing to micro-businesses across Africa and other emerging markets.
The researchers will be tracking each of the businesses over time to compare the effects of the two loan types on how the entrepreneurs manage money, how their businesses perform, and how they and their families are affected by this.