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

Maazullah Khan, Arjun S. Bedi*

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

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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.

Original languageEnglish
Pages (from-to)93-107
Number of pages15
JournalJournal of Development Effectiveness
Volume14
Issue number2
DOIs
Publication statusPublished - 2022

Bibliographical note

Funding Information:
We thank the International Institute of Social Studies, Erasmus University Rotterdam for financial support. This paper is based on the first author’s PhD thesis submitted to Erasmus University Rotterdam in 2016.

Publisher Copyright:
© 2021 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group.

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