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Running Head: DO POOR ENTREPRENEURS NEED MICROFINANCE? 1

Do poor entrepreneurs need microfinance?

Pontus Engström

University of Agder

DO POOR ENTREPRENEURS NEED MICROFINANCE?

Abstract

Research on microfinance and economic development has largely ignored how microfinance

fits into entrepreneurship theory, despite claims that all people can become entrepreneurs.

Microfinance is the practise of extending financial services to areas where traditional banks

are not reaching out. Despite a strong growth and a Nobel Laureate, the industry has suffered

from many failures around the world, and microfinance is being critizised for not delivering

what it once promised.

The purpose behind this note is therefore to draw from existing research and position

microfinance in the context of entrepreneurship theory. As an important contribution, this

research note shows how microfinance facilitates the creation of entrepreneurial

opportunities, why government or NGO involvement may be necessary, why business

training is important, and how microfinance practices increases the likelihood of a decision to

exploit and entrepreneurial opportunity.

Keywords: microfinance, entrepreneurship, existence, discovery, exploitation

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Introduction

As a tool to fight poverty and empower women (UNCDF, 2005), microfinance is used

to foster new enterprises – the “engines of job creation” (UNCDF, 2005, p. 15). Despite

claims that all people can become entrepreneurs with the right resources (Yunus, 2013), few

researchers specifically connect microfinance with entrepreneurship theory. Few other

situations involve so much learning on entrepreneurship as does the practice of microfinance

to poor entrepreneurs. The purpose of this paper is therefore to position microfinance in the

perspective of entrepreneurship theory, and help answer the question: do poor entrepreneurs

need microfinance?

Microfinance is the practise of extending financial services to areas where traditional

banks are not reaching out. It involves essentially the funding of micro enterprises, both

equity and debt, but also includes other related services such as insurance, savings, health

care and business training. The 2006 Nobel Laureate and Professor Muhammad Yunus is an

active promotor of microfinance and builds his conviction from his own field experience. In

1974 he experimented by lending a small loan of 27 dollars to 42 female basket-weavers at

subsidized market rates. The subsidized loan created a “spark of personal initiative and

enterprise necessary to pull themselves out of poverty” (Grameen Bank, 2013). Through

small loans, so called microcredit, at subsidized market lending rates, he laid the foundation

for the growth of the microfinance industry.

However, since the late 1990s the industry has suffered many disappointments, such

as the Bolivian credit crisis in 1999 where borrowers became over indebted and microfinance

institutions suffered severe losses, or the crisis in Andhra Pradesh in 2010 with alleged

unethical collections, stealing savings, high interest rates and in general very poor governance

(CGAP, 2010). Microfinance has as a result become heavily criticized by journalists

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(Heinemann, 2013) and researchers (Bateman, 2011) for not delivering what it once

promised.

The problems which have occurred in microfinance has led to on the one hand an

increased risk control by practitioners, and also a focus on a more commercial attitude, led by

the two US institutions ACCION and Harvard Institute for International Development. The

change in organizational form and structure is challenging the original mission of

microfinance – to provide affordable finance to the poor. While the practice of microfinance

is changing, a review of the research literature reveals that researchers largely missed the

linkage with entrepreneurship theory. The purpose behind this note is therefore to draw from

existing research and clearly position microfinance in the context of entrepreneurship theory.

Entrepreneurship theory, as presented here, marries both the character of the individual with

the environment in which the entrepreneurial opportunity exists – two aspects which are

central to microfinance. As an important contribution, this research note shows how

microfinance facilitates the creation of entrepreneurial opportunities, why government or

NGO involvement helps when commercial interests fail, why business training supports

entrepreneurship, and how microfinance practices increases the likelihood of a decision to

exploit and entrepreneurial opportunity. As we will see, poor entrepreneurs benefit from

microfinance as it helps create the existence of entrepreneurial opportunities, it saves the

human capital, and supports the decision to exploit an opportunity.

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Entrepreneurship Theory and Microfinance

While the concept of an entrepreneur goes back to the writing by Richard Cantillion

(1680 – 1734), and later further developed by Jean Baptist Say (1767 – 1832) in the early

1800s, it really is Joseph Schumpeter and his book “The theory of economic development”

from 1934 which has and still today makes up the foundation of entrepreneurship theory (Van

Praag, 1999). Schumpeter´s framework portrays a dynamic framework where demand and

supply interact in a circular flow, striving to a balance in equilibrium but interrupted by some

form of change (Schumpeter, 1934). New products, new customers, new technology etc.

alters the balance, and leads to new opportunities. New structures destroy the old ones, which

Schumpeter calls the “process of creative destruction” which is “what capitalism consists in

and what every capitalist concern has got to live in” (Schumpeter, 1950, p. 83-84). Central in

his theory is that individual wants drive the supply, and in meeting these wants the

entrepreneur innovates to find ways to meet the demand. This means that the entrepreneur is

working in an environment where risk and uncertainty is part of the game. For instance, a

baker will not know for certain how much bread will be consumed. Uncertainty is also key to

economic development (Knight, 1921), and through the uncertainty comes economic profit.

To quote a well known successful entrepreneur, Steve Jobs, in his way of explaining his view

about forecasting his own life: “you can´t connect the dots looking forward, you can only

connect them looking forward” (Stanford University, 2005).

Schumpeter (1934) writes that “entrepreneurs are a special type” (p. 84) which may

explain why one stream of research is concerned with the description of who the entrepreneur

is. Numerous studies find common characteristics among entrepreneurs in terms of being less

risk averse (Brockhaus, 1980; Kihlstrom & Laffont, 1979), having high

independence/autonomy (Beugelsdijk & Noorderhaven, 2005; Hornaday & Bunker, 1970),

willing to adjust to change (Sexton & Bowman, 1985), internal locus of control (Brockhaus,

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1982), having an achievement need (McClelland, 1967), tolerance for ambiguity (Schere,

1982), and being persuasive (Sexton & Bowman, 1985) to mention a few.

However, many studies fail to measure those entrepreneurs who fail and drop out of

the sample, and when including those reveal that risk adversity is not different than other

parts of the population (Brockhaus, 1980). In addition, the studies are typically from a US

context, and when studies are performed on Europe (Beugelsdijk & Noorderhaven, 2005), the

findings differ. When solely focusing on the nature of the individual one neglects to capture

the variety in the identified entrepreneurial opportunities and how this affects the decision to

start a business (Gartner, 1990). Shane & Venkataraman (2000) writes that “empirical

support (or lack of support) for attributes that differentiate entrepreneurs from other members

of society is often questionable, because these attributes confound the influence of

opportunities and individuals” (p. 218). A conclusion is that much research on characteristics

thus have failed to explain entrepreneurship.

A second stream of research has looked at the role of the environment, seeking to

identify under what circumstances entrepreneurship will take place such as the dynamics of

an industry (Hannan & Freeman, 1993), the market structure (Acs & Audretsch, 1990), the

dynamics of technological change (Tushman & Anderson, 1986), the socio-cultural status of

entrepreneurship (Begley & Tan, 2001) etc. This research has also fails to adequately explain

entrepreneurship, primarily as it lacks the effect of the individual (Shane, 2003).

Merging Two Streams of Entrepreneurship Research

In order to bring about a coherent view of entrepreneurship Shane & Venkataraman

(2000) propose a conceptual framework for entrepreneurship, which merges the two main

streams of entrepreneurship research to provide a holistic general theory of entrepreneurship

(Shane, 2003). Specifically it combines the existence of entrepreneurial opportunities in a

certain setting with the individual´s ability to discover and exploit these. Figure 1 is an

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illustration of the framework, in which three conditions pertaining to the existence, the

discovery and decision to exploit must be present in order for entrepreneurship to take place.

The framework does not imply that Discovery leads to the Decision to Exploit, but implies

that the Decision to Exploit follows the Discovery which follows the Existence of

Entrepreneurial opportunities etc.

Note: llustration based on an interpretation of Shane & Venkataraman (2000)

Defining Entrepreneurship

The term entrepreneur stems from French and the word “entreprendre”, which means

“to undertake”. Its first half, “entre”, means between and the other half, “prendre” means to

take. In other words, at the center of economic development is the entrepreneur, who through

innovation mixes the available resources, such as markets, products, production methods,

etc., into new combinations (Schumpeter, 1934). If an equilibrium state would be reached,

where everything is fully priced, there would be no need for an entrepreneur (Hayek, 1948).

To be clear, being an entrepreneur is not synonymous with being a manager of a

business. In studies of microfinance, it is sometimes assumed that all people running a

business are entrepreneurs. For instance, are Yunus´ basket weavers from 1974

entrepreneurs? What about street entrepreneurs in Bangalore? Are all clients of a

microfinance institution (small banks providing micro credit) entrepreneurs? Schumpeter

(1934) distinguishes between two kinds of individuals: “mere managers and entrepreneurs”

(p. 83). Being entrepreneurial is “not a profession and as a rule not a lasting condition” (p.

EntrepreneurshipDecision to Exploit

Entrepreneurial Opportunities

Discovery of Entrepreneurial Opportunities

Existence of Entrepreneurial Opportunities

Figure 1 Conceptual framework for entrepreneurship

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78). A static non-evolving small business is not a form of entrepreneurship. Rather,

entrepreneurship involves the creation of something new. It is the creation of new business,

both new firms and within existing businesses. Sometimes the term intrapreneurship is used

in regards to entrepreneurship within an existing business.

Central to the conceptual framework by Scott Shane is that entrepreneurship is created

at what Shane calls the “nexus of enterprising individuals and valuable opportunities” (Shane,

2003, p. 9). The nexus allows academicians and practitioners in microfinance to better

understand the process of discovery and exploitation and the routes to improved

entrepreneurship. By focusing on a holistic view on entrepreneurship, researchers can better

advance our understanding of entrepreneurship and how microfinance can contribute in this

regard.

The Existence of Entrepreneurial Opportunities

The existence of entrepreneurial opportunities means that the market allows for

products and services to be sold at a price greater than the cost. Importantly, in the creation of

new products or services, there is a belief by the entrepreneur that there is a profit to be made.

Schumpeter (1934) referred to this as the entrepreneurial profit. It implies that there is

imperfect information about costs and prices, which allows for mispricing. In addition, the

absence of competition from other like-minded individuals is crucial to the chance of reaping

an entrepreneurial award (Casson, 2005). The litterature provide two different views on how

entrepreneurial opportunities come to exist. Schumpeter (1934) argues that entrepreneurial

opportunities come about through changes in technology, politics, demographics and the

surrounding environment which create new information, which then can be used to combine

new products and services. The alternative view is that the opportunities exist, but that the

information held by different individuals lead to different discoveries (Kirzner, 1973). These

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two views come together in Shane & Venkataraman, (2000), representing two different forms

of opportunities.

Money as medium of exchange. In many areas of the world, the lack of financial

institutions create obstacles to entrepreneurial opportunities. In a barter economy it makes for

high transaction costs where one good is exchanged for another. How many goats are needed

in an exchange for a cow for instance? Savings is also difficult. Just imagine saving some

fresh meet for a purchase at a later stage. Money, even mobile money such as M-PESA in

Kenya, hence acts as a medium of exchange and makes exchanging goods and services more

efficient with less time spent on searching for suitable exchange partners (Jack & Suri, 2011;

Jones, 1976; Saving, 1971). Through lower transaction costs it allows for more

entrepreneurial opportunities.

Capital availability. There are various studies on the impact of capital on start-ups

(see Table 2 below). Some researchers find a positive impact (Gaspar, 2009; Pennings, 1982;

Samila & Sorenson, 2011), whereas others argue for a reverse causality, i.e. that it is the

number of start-ups which drive the availability of capital, not the other way around (Kreft &

Sobel, 2005). Going back to Schumpeter it is the wants which lead to the supply, thus

supporting the latter view. However, as Steve Jobs once said: “A lot of times people don´t

know what they want, until you show it to them” (Business Week, 1998). Thus introducing

money, such as the Mobile currency M-PESA, awakens a need. In this regard,

communication is important. In a study in Nigeria, funding was avaiable but it had little

impact as it turned out that many of the entrepreneurs were not aware that funding existed

(Oyefuga, Siyanbola, Afolabi, Dada, & Egbetokun, 2008). The research literature lacks

studies on the effects of capital availability on entrepreneurship in poverty struck areas.

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Previous researchers may both be correct in that there is a causual direction going

both ways. On the one hand we have the capital providers (supply), but on the other hand we

have the micro entrepreneurs (demand). For money to be lent, someone needs to ask for a

loan, although a good micro banker can awaken this need with the micro entrepreneur. An

increase in the capital availability shifts the supply curve to the right, see Figure 2 where P is

the cost of capital and Q is the capital availability, for instance micro loans. The effect is a

lower cost of of capital, which thus increases the odds of creating entrepreneurial profits. The

effect of having subsidized funding mirrors the effect of increasing the supply, as when the

donors request less in return, the capital availability is increased.

Figure 2 An increase in the capital availability lowers the lending rates

Reluctance to debt. Several studies have shown that not all people are interested in

taking on debt (Johnston and Morduch, 2007; Magil and Meyer, 2005; Navajas and Tejerina,

2004). Approximately half of the eligible households take up a loan, and many rely on other

forms of informal sources of credit (Karlan, Morduch, & Mullainathan, 2010). This thus

D1

S2

S1

Q1 Q2

P2

P1

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creates an inelastic demand curve, where an increase in the supply of capital creates a lower

cost of capital, but has no impact on for instance the number of microloans offered.

Market imperfection. When the market fails, Keynesian economic theory often

points to government involvement (Keynes, 1936). Previous studies by (Evans & Jovanovic,

1989; Evans & Leighton, 1989) show that imperfect capital markets adversely effect

entrepreneurship, thus warranting government involvement. In addition to government

involvement, non-profit organizations may also play an important role (Weisbrod &

Dominguez, 1986). In the case of the growth of the microfinance industry both non-profits

and governments have been active. For instance, one of the largest microfinance investment

vehicles in the world is Oikocredit, which is a non-profit organization founded by churches.

Another example is the Grameen Bank which since its start had strong financial backing from

the central bank of Bangladesh as well as the Ford Foundation. Government involvement in

D2

S2

S1

Q1

P2

P1

Figure 3 An Increase in the capital supply with an inelastic demand curve has little effect on outreach

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the case of a non-functional financial market is motivated not the least as the alternative will

be to pick up the social cost of high unemployment. China is another example (Zhou, Xing,

& Tong, 2009) where government has initiated several microfinance programs. Even the

growth of the venture capital market in the US was initiated through the small business

investment act of 1958 (Brewer III & Genay, 1996; Coles Jr., 1973). The EU is currently

pushing forward with some initiatives to foster better funding of micro enterprises.

The Discovery of Entrepreneurial Opportunities

While there maybe several entreprenurial profits in existance, there is also a need for

the discovery of the entrepreneurial opportunies. In a world with perfect information all

products and services are sold or bought at prices which are at equilibrium. There will not be

any other better or worse products or services and no need for people to change their

behavior. In such a world there would no entrepreneurial opportunities to be discovered.

However, rarely are decisions taken in such a way that resources are optimally located. As

mentioned previously, a part of an entrepreneur´s reality is the uncertainty of the future

(Knight, 1921). Knight (1921) separate risks and uncertainty, suggesting that risk pertains to

things which are known, whereas uncertainty is things one cannot forsee. Risk pertains to

situations where we have knowledge of the probabilities, whereas with uncertainty we do not

know the probabilities. Through uncertainty comes economic profit. In terms of discovering

an entrepreneurial opportunity, it is worth noting that it is the perceived entrepreneurial

opportunity, i.e. with some risks. In fact, when push comes to shove there may be no

entrepreneurial profit.

Access to information. Why are some people more likely than others to identify

entreprenurial opportunities? In the earlier example, Muammued Yunus facilitated in the

creation of an entrepreneurial profit when lending money at a subsidized interest rate to the

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42 female basket-weavers. We do not know if it was him who saw the idea, or if it was the

group leader. Yunus is well-educated professor from Chittagong University in Bangladesh

with a PhD from Vanderbilt University. Yunus had the knowledge and experience to see that

by offering a loan at a subsidized rate, an entrepreneurial opportunity would emerge for the

basket-weavers. What makes it possible for someone to discover an opportunity rather than

someone else is that they hold information which the other person does not (Kirzner, 1973).

Indeed, the access to information can come from life experience, business education, social

networks, information searches (Shane, 2003). See Table 1 for an overview of research on

business training and the impact on entrepreneurship in a microfinance context.

Recognizing the opportunity. The cognitive nature of the discovery process implies

a strong reliance on the individual, and not on the group. In microfinance, as exempliefied in

particular in Bangladesh by Grameen Bank, the use of group lending still requires unique

capabilities with the individuals and in particular the group leader, whose role is vital in the

performance of the group (Hermes & Lensink, 2007; Paxton, Graham, & Thraen, 2000).

Assuming entrepreneurial opportunities exist, why are some people more likely to discover

an opportunity than others? Research highlights two key aspects behind the discovery: 1)

absorptive capacity and 2) cognitive processes (Shane, 2003).

In the context of microfinance, often the human capital, or business experience, is

limited. Studies have suggested that the human capital may be a stronger limiting factor to

business success than access to capital (Bjorvatn & Tungodden, 2010; Berge, Bjorvatn, &

Tungodden, 2011; Berge, Bjorvatn, Juniwaty, & Tungodden, 2012). Berge et al. (2011) found

in randomized field experiments that “training had a significant effect on the business of

males, increasing profits by around 20-30 percent, whereas we do not find any evidence of

the training improving profits of the businesses of females” (p. 11). Given the lessons from

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entrepreneurship theory we can also conclude that discovering entrepreneurial opportunities

needs access to information and developed cognitive skills.

Table 1Selected studies on business training and cognitive skills

Author Country Method FindingsBjorvatn & Tungodden (2010)

Tanzania Randomized control trial

Business training positively effects performance, especially for those with high math skills.

Kessy & Temu (2010) Tanzania Survey and regression analysis

Business training improved growth (revenues and assets)

Karlan & Valdivia (2011) Peru Randomized control trial

Business training improved business knowledge, practices and revenues.

Berge et al. (2011) Tanzania Randomized control trial

Business training positively affects business performance, whereas grants do not.

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The Decision to Exploit Entrepreprenurial Opportunities

The mere discovery of an opportunity is not enough to explain entrepreneurship.

There must also be a decision to exploit the entrepreneurial opportunity. This decision is

taken with regards to the expected value from the opportunity. In deciding to exploit an

entrepreneurial opportunity, the potential individual entrepreneur must be weigh the

opportunity against the opportunity of doing something else, such as pursuing education or

employment. Both monetary and psychic costs need to be incorporated into the equation, in

addition to a compensation for the risks involved, an uncertainty premium. To a poor person,

there may however not be many other opportunities. This may therefore create situations

where entrepreneurship is undertaken despite an at best neutral entreprenurial opportunity.

We may call this form of entrepreneurship as necessity driven, i.e. that a person is pulled into

entrepreneurship because of lack of other options. Research has shown that necessity driven

entrepreneurship does not lead to economic development (Acs, 2006).

Industry and environment. Research has shown that the type of industry has an effect

on the likelihood of new firm formation (Taylor, 1996). Within an industry there are many

conditions that influence opportunity exploitation such as knowledge conditions, demand

conditions, industry life cycles and industry structure (Shane, 2003, P. 121). In an industry

which is relatively more capital intensive such as agriculture, microfinance plays a role, as

the more capital intensive an industry is the less the number of firms founded (Audretsch &

Mahmood, 1995). In terms of the institutional environment and its influence on the

opportunity exploitation, Shane (2003) highlights three areas: (1) the economic environment;

(2) the political environment; and (3) the socio-cultural environment. Here it is in particular

the economic environment where microfinance plays a major role.

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Wealth (societal and personal). From a society perspective the availability of credit is

usually higher in good times (Campbell, 1992). Personal wealth, on the other hand, allows for

self-financing of ventures which allows the entrepreneur to maintain more control over

direction of the new venture, which non-theless is a challenging balancing act (Saxton,

Saxton, Steen, & Verreynne, 2010). Several studies show support that wealth or wealthier

people are more likely to become entrepreneurs (Blanchflower & Oswald, 1990; Evans &

Jovanovic, 1989; Jackson & Rodkey, 1994; Paulson & Townsend, 2004). Goldstein (1984)

proposes on the other hand that under-capitalization improves entrepreneurship as it on the

one hand vows for increased cost consciousness and on the other hand allows for less

diversified ownership. In a microfinance perspective, it may seem awkward to talk think

about wealth, but it highlights the importance of savings, and why savings may influence

entreprenurship positively.

Economic stability and capital availability. A stable economic environment is

positive to entreprenurship (Harper, 1998). One worry is inflation and a unstable currency,

particularly as it adds to the uncertainty when buying a good at one point and selling it later.

In many of the countries where microfinance is used, inflation is running high, which may be

a hinder to entrepreneurship.

The decision to exploit an entrepreneurial opportunity will also be affected by the

capital availability. As discussed earlier, previous research supports the proposition that

capital availability affects new firm formation rates, see table X. In the conceptual framework

of entrepreneurship, it both affects the availability of entrepreneurial opportunities and the

decision to exploit.

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Table 2Selected studies on the impact of entrepreneurial funding

Author Country Method FindingsPennings (1982) USA Regression analysis Capital availability increased firm

formation rates

Dobbin & Dowd (1997)

USA Multiple regression analysis

The British capital market had a positive impact on new railroad ventures in the US

Kreft & Sobel (2005)

USA Granger-Sims causality test on data between 1991 and 2002 for 43 US states

Entrepreneurial activity results in a capital inflow.

Oyefuga et al. (2008)

Nigeria Qualitative study. Questionnaires and interviews.

Although the scheme had been helpful to some SMEs, most of them were not aware of its activities and potentials.

Gaspar (2009) Portugal Questionnaire 74% of entrepreneurs, who obtained funding from venture capital, would not have started a business without that support

Samila & Sorenson (2011)

USA Panel data: 329 US metropolitan areas from 1993 to 2002

Finds that increases in the supply of venture capital stimulate the production of new firms

Psychological factors. As discussed earlier, one research stream has attempted to

identify psychological characteristics which explain entreprenurship. However, the factors

alone do not make individuals undertake entrepreneurial opportunities. It has an influence but

is not a direct cause. Despite all the right psychological characterstics, there still may not be a

decision taken to exploit.

Non-psychological factors. These factors include factors such as education, business

experience, age and social position. Education increases the likelihood of exploiting an

opportunity, because it improves the expected return. The understanding of the

entrepreneurial process improves (Casson, 1995). Moreover, Isaga (2012) studied 300 small

and medium sized entrepreneurs in Tanzania, involved in the the furniture industry, and

found a positive effect of demographics on business growth. In addition, previoius work

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experience improves the ability to discover an opportunity. Therefore business training is also

important in the decision to exploit entrepreneurial opportunities.

Over time, as a person gets more experience, the opportunity costs of pursuing alternative

strategies may rise. Therefore, age is a factor influencing the likelihood of discovery. Shane

(2003) claims that “age has a curvlinear relationship with the likelihood of opportunityh

eploitation” (p. 89). From a certain age and onwards the willingness to bear risk typically

decreases.

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Discussion and Conclusion

The existence of an entreprenurial opportunity indicates that a product or a service

can be sold at at price greater than its cost. Key to this will be a heterogeneous market, with

imperfect information. If money is not available, making business involves high transaction

costs. By introducing money as a medium of exchange transaction costs are lowered, thus

allowing for more entrepreneurial opportunities. Through the availability of more capital it

allows for a lower cost of capital, which has a positive effect on the availability of an

entrepreneurial profit. At the heart of Schumpeter´s theory of economic development is that

everything starts with a want. If there is a relucatance to taking up loans, an increase in the

availability will not effect entrepreneurship. When the credit markets are not working, NGOs

or governments, who ultimately bare the cost anyway, may benefit from interfering, and to

stimulate the creation of a market. But the existence of an opportunity does not automatically

lead to a discovery. It takes experience and cognitive skills to discover an opportunity, which

is why business training is essential in connection to microfinance. When deciding to

undertake an opportunity, theory says one should weight the opportunity against other

opportunities. To a poor person, the choice of becoming a micro enterpreneur may involve

few or no other options. Thus, entrepreneurship may in a poverty struck area, be undertaken

despite a expected neutral entrepreneurial profit. Wealth has been seen as important factor in

many other regions in terms of promoting entrepreneurship. Therefore, savings led

microfinance may contribute to an increase in number of decisions to undertake

entrepreneurship. In taking a decision to exploit an opportunity, the availability of funding

once again plays an important role. Lastly, the nature of the individual will in relation to the

nature of the entrepreneurial opportunities facilitate the decision to exploit an opportunity.

Starting a business is risky. The failure rates of new ventures is high. Audretsch &

Mahmood (1994) find in an analysis of more than 11,000 enterprises started in 1976, that

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22% survived over the following 10 year period. In a study on UK industrial enterprises in

north east England, Holmes, Hunt, & Stone (2010) find a survival rate of 23.3% over a 24

year period, thus a higher survival rate over a longer time period. Roughly half of all

entrepreneurs fail in their organizational efforts (Aldrich, 1999). The conditions for

entrepreneurship may be extra demanding to a poor person, and lead to situations where a

poor entrepreneur is pulled into entrepreneurship – necessity driven – and be forced to juggle

several microloans (source of overindebtedness). Microfinance may be to some be seen as a

lottery ticket. Clearly, the consequences of such decisions on average will be negative.

The purpose of this article was to put the role microfinance capital in the context of

entrepreneurship theory. As seen, microfinance can under certain circumstances facilitate in

the existence of entrepreneurial opportunities, and also be influential in the decision to exploit

an entrepreneneurial opportunity. The note makes nine propositions, of which four relate to

the existence of entrepreneurial opportunities, one to the discovery stage, and three more at

the decision to exploit stage. Entrepreneurship is a complex and multifaceted phenomenon

which needs a holistic and comprenhensive framework such as the one used in this note. By

positioning the practice of microfinance within entrepreneurship theory, it helps researchers

better explain successes and failures in using microfinance, and the critical interplay with the

environment and the individuals. After all, economic and social development is not created

by external sources from below, but through “its own initiative, from within” (Schumpeter,

1934, p. 63).

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