BUSINESS AND FINANCIAL LITERACY FOR YOUNG ENTREPRENEURS: EVIDENCE FROM BOSNIA-HERZEGOVINA. Miriam Bruhn and Bilal Zia (World Bank, DECFP)

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1 BUSINESS AND FINANCIAL LITERACY FOR YOUNG ENTREPRENEURS: EVIDENCE FROM BOSNIA-HERZEGOVINA Miriam Bruhn and Bilal Zia (World Bank, DECFP)

2 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

3 Related Work and Contribution Effects of financial literacy on households is limited (Cole, Sampson and Zia, 2010) Evidence on business training is also scarce, though some studies are now coming through Karlan and Valdivia (2010); Drexler, Fischer and Schoar (2010); Gine and Mansuri (2011); De Mel, McKenzie and Woodruff (2011). 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

4 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

5 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

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8 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

9 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 6 th 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

10 Baseline Data (Sample Characteristics) Sample includes all 445 business loan clients Treatment group average Control group average p-value of difference (treatment control) Female Age Completed secondary school Risk averse Sample includes the 267 clients who had a business at baseline Treatment Group Control Group p-value of difference (treatment control) Avg. employees Avg. business age (yrs) Registered * Avg. monthly profits (KM, w/o outliers) Services sector Farming sector Statistical significance levels: + 15%, * 10%, ** 5%, *** 1%

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12 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

13 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 Dependent variable: Business and financial knowledge score (1) (2) Treatment * (0.104) (0.131) Treatment*Above median baseline financial literacy (0.181) R-squared Observations Mean of dependent variable in control group Statistical significance levels: + 15%, * 10%, ** 5%, *** 1%

14 Business Creation and Survival No significant effect on the extensive margin (i.e. business creation and survival) Dependent variable: Has business at follow-up (1) (2) (3) (4) (5) Treatment (0.053) (0.079) (0.027) (0.062) (0.099) Treatment*Above median baseline fin lit (0.107) (0.128) Treatment*Had business at baseline (0.068) Had business at baseline 0.645*** (0.055) R-squared Observations Mean of dep. variable in control group Statistical significance levels: + 15%, * 10%, ** 5%, *** 1%

15 Business Practices Treatment group is less likely than the control group to use personal accounts for business Dependent variable: Uses personal account for business Has credit card for business (1) (2) (3) (4) Treatment *** ** (0.079) (0.137) (0.063) (0.095) Treatment*Above median baseline fin lit (0.166) (0.129) R-squared Observations Mean of dep. variable in control group Statistical significance levels: + 15%, * 10%, ** 5%, *** 1%

16 Business Investment Training led to more investment in the business Invests savings in business Dependent variable: Implemented new production processes (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 (0.079) (0.115) R-squared Observations Mean of dep. variable in control group Statistical significance levels: + 15%, * 10%, ** 5%, *** 1%

17 Business Performance Evidence suggests that the treatment increased profits by about 50% for clients with high baseline levels of business and financial knowledge Dependent variable: Profits May 2010 Increased profits (1) (2) (3) (4) Treatment ( ) (1, ) (0.080) (0.129) Treatment*Above median baseline fin lit (1, ) (0.162) R-squared Observations Mean of dep. variable in control group Statistical significance levels: + 15%, * 10%, ** 5%, *** 1%

18 Business Growth The treatment increased sales for clients with high baseline levels of business and financial knowledge, no significant effect on employees (slower moving) Dependent variable: Increased sales Log employees (1) (2) (3) (4) Treatment (0.079) (0.127) (0.120) (0.239) Treatment*Above median baseline fin lit 0.282* (0.158) (0.274) R-squared Observations Mean of dep. variable in control group Statistical significance levels: + 15%, * 10%, ** 5%, *** 1%

19 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) Took out loan from Partner after Currently has business loan from training any source (1) (2) (3) (4) Treatment (0.037) (0.055) (0.074) (0.120) Treatment*Above median baseline fin lit (0.075) (0.152) R-squared Observations Mean of dep. variable in control group Statistical significance levels: + 15%, * 10%, ** 5%, *** 1%

20 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 Dependent variable: Loan amount Number of installements Interest rate (1) (2) (3) (4) (5) (6) Treatment * 7.866*** ( ) (1, ) (2.865) (2.918) (0.645) (0.581) Treatment*Above median baseline fin lit (1, ) (5.268) (1.165) Control for loan amount Yes Yes Yes Yes R-squared Observations Mean of dep. variable in control group Statistical significance levels: + 15%, * 10%, ** 5%, *** 1%

21 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 Dependent variable: More than 30 days past due Refinanced or restructured (1) (2) (3) (4) Treatment * (0.018) (0.032) (0.020) (0.032) Treatment*Above median baseline fin lit (0.037) (0.040) Control for loan amount Yes Yes Yes Yes R-squared Observations Mean of dep. variable in control group Statistical significance levels: + 15%, * 10%, ** 5%, *** 1%

22 Summary and Conclusion The business and financial literacy training had no effect on the extensive margin in our sample(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) Promising result for financial/business literacy advocates