Asset-based microfinance for microenterprises: Evidence from Pakistan

We conduct a field experiment offering graduated microcredit clients the opportunity to finance business asset worth four times their previous borrowing limit. implement this using hire purchase contract; our control group is offered zero-interest loan. find large, significant and persistent effects from contracts: treated microenterprise owners run larger businesses enjoy higher profits; consequently, household consumption increases, particularly on food children’s education. A dynamic structural model with non-convex capital adjustment costs rationalises results; highlights potential for welfare improvements through large injections that are financially sustainable microfinance institutions.