Financial Incentives to Improve Welfare and Business Outcomes among Microentrepreneurs in Egypt
Low-income microentrepreneurs often lack the capital they need to start a new business or expand an existing business, but it is not clear whether capital should be delivered in the form of a loan, cash grant, or in-kind grant. In partnership with three microfinance institutions, researchers conducted a randomized evaluation to measure the impact of providing loans, cash grants, or in-kind grants on microentrepreneurs’ business decisions, outcomes, and overall welfare.
Many policymakers are interested in entrepreneurship as a potential pathway out of poverty. However, low-income microentrepreneurs often lack the capital they need to start a new business or expand an existing one. An ongoing policy debate focuses on the best way to provide capital assistance to microentrepreneurs in low- and middle-income countries: microcredit, unrestricted cash grants, or in-kind grants of specific items. What is the impact of providing loans, cash grants, and in-kind grants on business and household outcomes? How do impacts vary based on microentrepreneur’s education, experience, gender, and other characteristics?
Context of the evaluation
This evaluation took place in Qena, a mostly rural governorate in Upper Egypt with a population of three million inhabitants. Qena is the third-poorest governorate in Egypt; in 2013, 60 percent of households lived below the poverty line. The unemployment rate in Qena was over 9 percent in 2017, with a large gap between men and women (25 percent for women compared to 6 percent for men).
Three microfinance institutions located in Qena –Feda, Redec, and Christan Peace–participated in this evaluation. All three had been selected as recipients of loans or training support from the Sawiris Foundation for Social Development (SFSD) through its recurring job creation competition.
Details of the intervention
In partnership with three local MFIs, researchers evaluated the impact of providing loans, cash grants, or in-kind grants on microentrepreneurs’ business decisions, business outcomes, and overall welfare. To recruit participants, the MFIs hosted community meetings to announce the availability of small loans. Interested individuals were screened to ensure they met the eligibility requirements; applicants had to be between the ages of 18 to 35 and have a reasonable business plan, either for a new or existing business. Eligible individuals completed a baseline survey and provided a feasibility plan for their business idea. Researchers then randomly assigned individuals applying for a loan from any of the participating MFIs to one of four groups:
- Loan: Individuals received the amount of the loan they requested. Loans were required to be repaid within 10 to 12 months and had an average annual interest rate of 15 percent. In addition, individuals received business assistance through soft-skills or vocational training provided by the MFIs.
- Cash grant: Individuals received the amount they requested in cash. They were informed that the cash grant did not have to be repaid and could be spent in whatever way they thought would improve their business most. Individuals also received business training.
- In-kind grant: Individuals were asked to outline exactly how they would like to use the money on their business. NGO staff then accompanied them to the market to buy the items. Individuals also received business training.
- Comparison: Individuals received neither the loan, cash grant, nor in-kind grant. Individuals also did not receive business training.
Results and policy lessons
Study ongoing; results forthcoming.
Crépon, Bruno, Mohamed El Komi, and Adam Osman. "Is It Who You Are or What You Get? Comparing the Impacts of Loans and Grants for Microenterprise Development." Working Paper, May 2020.