The greatest return on investment

This page in:

I previously posted on the myth of the entrepreneurial middle class. A post on the India Development Blog on What Does Productive Loan Use Look Like reminded me of this issue. Michael Chasnow reports on new research on the use of credit in the slums of Hyderabad. Here are the reasons people took out loans (often not from any microfinance institution, and at interest rates of 80%):

  • Health expenses (17%)
  • Marriage (13%)
  • Temporary difficulty (10%)
  • Home construction (10%)
  • Consumption (10%)
  • Start a new business (7%)
  • Business expansion (1.33%)

The use of credit to invest in business falls pretty low on the list. Chasnow questions the efforts of microfinance institutions to closely monitor loan use or to create specialized products to promote business development. I would tend to agree with this point of view.

As mentioned in my earlier posting, even the middle class in developing countries tends not to invest in businesses but in things like better health and education. Perhaps the greatest return on investment is really in these types of human capital investments. Trying to force microcredit to support business creation would then seem wrongheaded. Rather, efforts to promote entrepreneurialism really require increasing the return on investment in small businesses over that of investment in human capital - and that means improving the operating environment faced by SME entrepreneurs.


Ryan Hahn

Operations Officer

Join the Conversation

The content of this field is kept private and will not be shown publicly
Remaining characters: 1000