Returns to Interest-free Microcredit: evidence from a Randomised Experiment in Pakistan

Maazullah Khan and Arjun Bedi

Journal of Development Effectiveness, 2022, vol. 14, issue 2, 93-107

Abstract: The existing experimental evidence on returns to capital is based on randomisation of either interest-bearing loans or grants. This paper reports on a field experiment conducted in Pakistan in which interest-free loans were randomly provided to microenterprises. The study was conducted in co-operation with Akhuwat Islamic Microfinance. We find that treatment leads to a substantial increase in working capital and in business profits. Using randomised treatment as an instrument for capital, we find average monthly returns to capital of 8.6 to 11.9 percent a month. These returns are higher than the interest rates charged by conventional microfinance institutions in Pakistan.

Date: 2022
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DOI: 10.1080/19439342.2021.1964578

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