targeting individuals for microfinance programs: The Impact of educational attainment

1. targeting individuals for microfinance programs: The Impact of educational attainment Nicole Adams American University na0686a@student.american.edu School of International Service

2. RESEARCH QUESTION & HYPOTHESIS QUESTION: Are there measurable characteristics that should be considered for targeting microfinancing candidates that would ensure greater loan repayment rates, thus further incentivizing commercial entities and international organizations to extend the reach of their credit programs? HYPOTHESIS: Microfinance client candidates with higher educational attainment are more likely to repay their loans.

3. LITERATURE REVIEW Chavan & Ramakumar (2002) • A major challenge is distinguishing creditworthy borrowers and enforcing loan repayment. • Programs have had positive income increases, but only marginal adjustments. • Default risks tend to be shifted to borrowers. Basu & Srivatava (2005) • Banks want to ensure their loans are safe and are not willing to help clients manage the bookkeeping of their internal savings and loan accounts. • More wealthier individuals tend to be targets of microfinance programs instead to ensure loan repayment. Coleman (2006) • Wealthier individuals are the ones benefiting from these programs • Poor rural villagers are receptive the concept of loan repayment and do understand creditworthiness is a significant determinant in program participation. Barnes, Morris & Gaile (1999) • Microenterprises are the main source of income for the rural poor. • Educational attainment is statistically significant when assessing client characteristics.

4. DATA DEPENDENT VARIABLE: (O) Loan Repayment Borrowing History; Interest Free Loans INDEPENDENT VARIABLE: (O) Educational Attainment Primary, Secondary, Unattached Secondary OTHER INDEPENDENT VARIABLES: (N) Loan Amount (N) Months Allowed for Payback Borrowing History; (N) Number of Borrowing Transactions Interest-Free Loans (O) Loan Purpose Source: Matlab [Bangladesh] Health and Socioeconomic Survey (MHSS) 1996

5. DESCRIPTIVE STATISTICS:DEPENDENT VARIABLE – LOAN REPAYMENT 0 = Not Repaid 1= Repaid

6. DESCRIPTIVE STATISTICS:INDEPENDENT VARIABLE – EDUCATIONAL ATTAINMENT Education

7. DESCRIPTIVE STATISTICS:INDEPENDENT VARIABLES

8. CORRELATIONS Estimates significant at the 5% level are in boldface, p-values in parentheses. Estimates significant at the 10% level are in boldface and italics.

9. PROBIT REGRESSION ANALYSISDEPENDENT VARIABLE: LOAN REPAYMENT Estimates significant at the 5% level are in boldface, p-values in parentheses. Estimates significant at the 10% level are in boldface and italics.

10. CONCLUSIONS & POLICY IMPLICATIONS • Variables that are indicative of creditworthy candidates for microfinance programs: • Educational Attainment – Higher education levels indicate higher levels of repayment • Number of Borrowing Transactions – More borrowing transactions indicate less chance of repayment • Future Research: • Explore relationship between higher number of borrowing transactions and loan repayment • Policy recommendations: • Microfinance programs in emerging markets should focus on clients who have greater levels of educational attainment and perhaps first time borrowers. • Microcredit institutions should implement educational programs for their existing and return clients, as well as use these programs to attract new clients by educating them on the loan process.