From Outputs to Outcomes - Understanding the True Impact of Investments in Lending Institutions

Areas we want to focus on for deeper insights - Excerpts from MicroVest's 2023 Impact Report

The influence of productive loans on end borrowers’ business income and job creation

While microfinance has provided access to credit for millions of previously underserved populations worldwide, research on its impact on increasing business income remains inconclusive. Business outcomes can be influenced by factors such as the entrepreneur’s experience, industry dynamics, loan size, repayment flexibility, and the broader macroeconomic environment. Another thesis linked to microfinance is its ability to spur entrepreneurship by providing loans to aspiring entrepreneurs and those unable to secure jobs in the formal job market. These loans help individuals start or expand their small businesses, which can, in turn, create additional employment opportunities within the community as business proceeds are reinvested and enterprises grow. Within microfinance, the majority of microbusinesses are sole proprietorships who do not employ others but may receive unpaid help from family members.

The opportunity to assess the impact of loans on job creation is expected to be more evident than at the SME level and we will continue to explore scientifically validated methods to evaluate and enhance our future approach to understanding the impact of financing on business income and job creation. 

Next steps

MicroVest will be introducing a new metric to track the number of remunerated employees at end borrower businesses. This addition to our metrics set aims to assess year-over-year trends in job growth at the end borrower level. Furthermore, we will continue our collaboration with 60 Decibels to expand the sample set across our portfolio, enabling us to monitor business impact more comprehensively and gain insights into potential linkages.

The impact of loans, non-loan financial services, and training & education on improving end borrowers’ ability to manage finances

Several mechanisms are at play when linking access to financing with improving individuals' ability to manage their finances. While loans can finance the sustainability of a business and potentially increase income, this alone is unlikely to lead to improved financial management capacity unless the increase in business income is substantial enough to offset the impacts of poor financial management practices. Financial literacy training, for example, can equip individuals with the knowledge to make informed decisions about saving, borrowing, and spending. Additionally, business training imparts essential skills for managing cash flow, budgeting, and pricing products and services, which significantly enhance business sustainability. Despite these multiple approaches, it remains challenging to establish a direct link between access to financing and improved financial management abilities without taking into account other influences, such as access to non-loan financial services, coupled with financial literacy and business training. We aim to further understand and prove the pathways to improved financial management through lending and other financial and non-financial services.

Next steps

In Q4 2024, MicroVest introduced new metrics to assess non-loan products and non-financial services offered to clients. We will continue to triangulate these metrics to identify opportunities for providing technical assistance, supporting our RFIs in delivering comprehensive financial services, financial literacy, and business training to their borrowers. Furthermore, we will maintain our collaboration with 60 Decibels to evaluate the progress of a larger sample size of our RFIs across these areas.

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