BUSINESS AND FINANCIAL LITERACY FOR YOUNG ENTREPRENEURS:

EVIDENCE FROM BOSNIA-HERZEGOVINA

Miriam Bruhn and Bilal Zia (World Bank, DECFP)

Introduction

What are the determinants of firm growth? Much of the literature has focused on access to capital

and external finance (Banerjee et. al., 2009; De Mel, McKenzie and Woodruff, 2008)

Recent work argues that business management skills are another important driver of firm growth and a key determinant of productivity (Bloom, et. al., 2010; Bruhn et. al., 2010)

Academic interest is matched by a policy interest in training programs that aim to enhance financial and business skills

But we know relatively little about what kinds of programs are effective and for whom

Related Work and Contribution

Effects of financial literacy on households is limited (Cole, Sampson and Zia, 2010)

Evidence on business training is also scarce Karlan and Valdivia (2010) Other papers in this conference

Our contribution Study effects of business training for current and prospective

entrepreneurs, using a randomized controlled trial Focus is not on micro-enterprises, but slightly larger firms Complement survey data with high quality administrative

loan data

Study Setting

Collaborate with a financial institution in Bosnia (Partner) to provide business and literacy financial training to their clients Clients have a business loan Look at young clients, age 18 to 35

Youth unemployment is 58 percent in Bosnia Promoting creation, survival, and growth of

youth-led enterprises provides one possible solution to unemployment problem

Business and Financial Training Provided through a local NGO that has experience with

business training for university students

Adapted content for loan clients based on client and loan-officer interviews, pilot training with university students

5 module basic course (2 days, 3 hours per day) General concepts Business plan Marketing Managing the firm’s finances Business growth

Extra module on external finance (1 day, 3 hours) Financing sources, importance of financial responsibility, interest

rates, diversification, short term & long term, the devil is in the details

Experimental Design

Took 445 interested clients and randomly divided them into 3 groups Treatment group 1 is offered 5 module course Treatment group 2 is offered 5 module course plus external

finance module Control group

Stratified randomization based on Partner’s data and baseline survey data Gender Above and below median business and financial literacy

score Sector Missing baseline profits, then sorted by profits within strata

Implementation Challenges

Low participation rate in the training (39%) Main reason for not participating was lack of time 96% of participants would recommend training to a

friend

Few people attended 6th module (external finance) In the analysis, combine both treatment groups

One third of clients did not have a business at baseline (they had an exploratory business loan) Examine effect on business creation For remaining analysis of business outcomes, keep only

individuals who had a business at baseline

Baseline Data (Sample Characteristics)

Sample includes all 445 business loan clients

Sample includes the 267 clients who had a business at baseline

Female 0.35 0.35 0.98Age 28.1 28 0.8Completed secondary school 0.85 0.80 0.19Risk averse 0.68 0.71 0.53

Treatment group average

Control group average

p-value of difference (treatment – control)

Avg. employees 2.30 2.10 0.56Avg. business age (yrs) 4.9 5 0.823Registered 0.20 0.30 0.09* Avg. monthly profits (KM, w/o outliers) 841.00 728.00 0.38Services sector 0.541 0.463 0.23Farming sector 0.20 0.25 0.3

Treatment Group Control Group p-value of difference (treatment – control)

Statistical significance levels: + 15%, * 10%, ** 5%, *** 1%

Empirical Strategy

Estimate causal impact of the training with

y is the follow-up survey outcome variable (e.g. business and financial knowledge, business profits)

TrainingInvite is a dummy variable indicating whether the client was randomly assigned to the treatment group (intention-to-treat)

Control for baseline outcome variable when available (McKenzie, 2011)

Include strata dummies (Bruhn and McKenzie, 2009)

Examine heterogeneous treatment effects by interacting TrainingInvite with baseline characteristics

Business and Financial Knowledge Scores

Find no impact of the training on average levels of business and financial knowledge

But: the training significantly increased business and financial knowledge among individuals with below median baseline levels of business and financial knowledge

Statistical significance levels: + 15%, * 10%, ** 5%, *** 1%

(1) (2)Treatment -0.002 0.239*

(0.104) (0.131)Treatment*Above median baseline financial literacy -0.248

(0.181)R-squared 0.188 0.183Observations 396 396Mean of dependent variable in control group 1.129 1.129

Dependent variable: Business and financial knowledge score

Business Creation and Survival

No significant effect on the extensive margin (i.e. business creation and survival)

Statistical significance levels: + 15%, * 10%, ** 5%, *** 1%

(1) (2) (3) (4) (5)Treatment -0.015 0.021 0.03 0.021 0.063

(0.053) (0.079) (0.027) (0.062) (0.099)Treatment*Above median baseline fin lit -0.063 -0.074

(0.107) (0.128)Treatment*Had business at baseline -0.004

(0.068)Had business at baseline 0.645***

(0.055)R-squared 0.089 0.089 0.409 0.115 0.117Observations 396 396 396 267 267Mean of dep. variable in control group 0.439 0.439 0.439 0.611 0.611

Dependent variable: Has business at follow-up

Business Practices

Treatment group is less likely than the control group to use personal accounts for business

(1) (2) (3) (4)Treatment -0.218*** -0.278** 0 -0.022

(0.079) (0.137) (0.063) (0.095)Treatment*Above median baseline fin lit 0.095 0.034

(0.166) (0.129)R-squared 0.287 0.289 0.146 0.147Observations 169 169 170 170Mean of dep. variable in control group 0.655 0.655 0.172 0.172

Dependent variable:Uses personal

account for business

Has credit card for business

Statistical significance levels: + 15%, * 10%, ** 5%, *** 1%

Business Investment

Training led to more investment in the business

(1) (2) (3) (4)Treatment 0.106** 0.087** 0.165*** 0.156**

(0.044) (0.047) (0.061) (0.077)Treatment*Above median baseline fin lit 0.029 0.014

(0.079) (0.115)R-squared 0.19 0.19 0.227 0.227Observations 169 169 170 170Mean of dep. variable in control group 0.017 0.017 0.121 0.121

Dependent variable:

Invests savings in business

Implemented new production processes

Statistical significance levels: + 15%, * 10%, ** 5%, *** 1%

Business Performance

Evidence suggests that the treatment increased profits by about 50% for clients with high baseline levels of business and financial knowledge

(1) (2) (3) (4)Treatment -65.828 -1485.965 0.051 -0.102

(837.310) (1,149.150) (0.080) (0.129)Treatment*Above median baseline fin lit 2675.04+ 0.245+

(1,635.066) (0.162)R-squared 0.179 0.202 0.084 0.099Observations 108 108 170 170Mean of dep. variable in control group 2642.162 2642.162 0.224 0.224

Profits May 2010 Increased profitsDependent variable:

Statistical significance levels: + 15%, * 10%, ** 5%, *** 1%

Business Growth

The treatment increased sales for clients with high baseline levels of business and financial knowledge, no significant effect on employees (slower moving)

(1) (2) (3) (4)Treatment 0.062 -0.115 -0.011 -0.116

(0.079) (0.127) (0.120) (0.239)Treatment*Above median baseline fin lit 0.282* 0.169

(0.158) (0.274)R-squared 0.067 0.087 0.306 0.308Observations 169 169 170 170Mean of dep. variable in control group 0.207 0.207 0.681 0.681

Dependent variable:Increased sales Log employees

Statistical significance levels: + 15%, * 10%, ** 5%, *** 1%

New Loans

Treatment group is not more likely than the control group to take out a new loan from Partner (same is true for loans from any source)

(1) (2) (3) (4)Treatment 0.002 -0.006 -0.045 -0.118

(0.037) (0.055) (0.074) (0.120)Treatment*Above median baseline fin lit 0.014 0.118

(0.075) (0.152)R-squared 0.053 0.054 0.188 0.191Observations 445 445 170 170Mean of dep. variable in control group 0.169 0.169 0.759 0.759

Took out loan from Partner after

training

Currently has business loan from

any source

Statistical significance levels: + 15%, * 10%, ** 5%, *** 1%

Loan Characteristics

Treatment group clients who took out a new loan from Partner have longer term loans (more installments) than their peers in the control group

This is consistent with using loans for investment

(1) (2) (3) (4) (5) (6)Treatment 0.429 603.03 4.939* 7.866*** -0.117 0.205

(849.055) (1,421.171) (2.865) (2.918) (0.645) (0.581)Treatment*Above median baseline fin lit -1006.045 -4.886 -0.537

(1,760.976) (5.268) (1.165)Control for loan amount Yes Yes Yes YesR-squared 0.2 0.205 0.537 0.544 0.452 0.453Observations 80 80 80 80 80 80Mean of dep. variable in control group 4392 4392 22.68 22.68 20.461 20.461

Dependent variable:

Loan amount Interest rateNumber of installements

Statistical significance levels: + 15%, * 10%, ** 5%, *** 1%

Loan Default and Refinancing The training lowered default rates among

clients with low baseline levels of business and financial knowledge

Some evidence that the training led to higher rates of loan refinancing/restructuring

(1) (2) (3) (4)Treatment -0.019 -0.048+ 0.034* 0.015

(0.018) (0.032) (0.020) (0.032)Treatment*Above median baseline fin lit 0.052 0.034

(0.037) (0.040)Control for loan amount Yes Yes Yes YesR-squared 0.041 0.044 0.09 0.091Observations 3901 3901 3901 3901Mean of dep. variable in control group 0.06 0.06 0.039 0.039

Dependent variable:More than 30 days

past dueRefinanced or restructured

Statistical significance levels: + 15%, * 10%, ** 5%, *** 1%

Summary and Conclusion

The business and financial literacy training had no effect on the extensive margin (firm creation or survival)

But: Individuals who already had a business tend to use better business practices and make more investments in their business due to the training

Weak evidence suggests that this increased profits and sales (for individuals with above median levels of baseline financial literacy)

The training lowered loan default rates (for individuals with below median levels of baseline financial literacy)