Microfinance and Entrepreneurship at the Base of the Pyramid

There continues to be substantial debate on whether and how providing inclusive access to finance through microcredit promotes entrepreneurship-led development at the base of the pyramid. We contribute to this literature by examining differences in household-level outcomes associated with microfinance loans given for different purposes, and identifying conditions under which the most impact is achieved. Defying common expectations, loans funding microenterprises do not exhibit greater impact than those funding traditional livelihood activities, and loans funding new microenterprises fare particularly poorly. But loan impact improves when multiple members of a borrower group seek livelihood loans together, and when the provided loans better match the individual financial needs of the borrowers. Our findings underscore the need to refine how microfinance is applied as a tool for development.