Microequity for microenterprises in Pakistan

Project Active from to Firms

Traditional market based investments in microentrepreneurs are largely structured and financed through debt, or small loans. Microentrepreneurs rely heavily on micro-loans with short repayment windows. This means that profits generated are often quickly dispatched into repaying outstanding loans, rather than reinvested into growing a business. Relying exclusively on debt-based financing for microenterprises maybe therefore be inhibiting opportunities for growing and scaling more successful microenterprises. Solutions to address this constraint may come from developing alternative financial instruments for microentrepreneurs, in the form of microequity. In addition to providing a more flexible source of capital, microequity may further stimulate demand for entrepreneurship and foster wider economic and employment growth in Pakistan and beyond.

Relative to debt-based financing, microequity investors may be willing to take higher risks in favour of higher potential returns to their investments. In line with this, microequity investments are more likely to produce firm growth for the following reasons:

  • Unlike debt, equity investments are focused on long-term returns
  • Equity investments can acts as implicit insurance to entrepreneurs
    • Unlike debt repayments which are often rigidly fixed, equity allows for flexible repayments
    • Repayment Flexibility ensure that repayments can be reduced if microentrepreneurs are faced with local or macroeconomic shocks

To test this assumption, we aim to run a framed lab-in-field experiment in order to help us develop a new micro-equity product for microentrepreneurs in Pakistan. We wish to assess the following:

  1. Demand for an equity-like product from microentrepreneurs
  2. Awareness of and understanding by participants of the structure of an equity product
  3. Effect of this equity product on the investment behaviour of microentrepreneurs.
  4. Test for any heterogeneous effects that might be attributable to key characteristics of the participants – namely their gender, the type of enterprise, as well as their own behavioural characteristics such as time and risk preferences.