I summarized the body of evidence regarding business profits and household income for credit groups (post # 30) and then added what we know about the same for savings groups (# 31). The evidence so far indicates that average business impacts are modest and average income impacts are minimal at best. Would the results be improved if we offered business education to these groups?
I make a distinction between “business education” and “financial education.” The latter refers to communications and training to improve personal and household money management skills, including understanding of how to use available financial services (savings, credit, insurance, etc.) as well as physical assets and social capital to prepare for lifecycle events, manage unexpected financial crises, ensure adequate consumption and even major purchases by the household, and invest in business opportunities. In short, financial education is about knowledge and tools for meeting one’s financial needs. Clearly, such knowledge and skills are likely to improve management of a microenterprise or small business for survival, profitability and growth. Thus there is overlap between the content of business and financial education. However, business education necessarily deals with several more topics, like choosing an income-generating activity (IGA), increasing profits, increasing sales and managing the IGA. My question is about the effects of education targeted to the needs of those who manage IGAs and more sophisticated business entities. I will explore the efficacy of financial education in Theme Four on savings and household consumption.
Recognizing the low level of business management skills and experience among Credit with Education groups, Freedom from Hunger developed a set of three business education modules in the early 1990s to offer, along with health and nutrition education, to the women in these credit groups. The training aims to improve basic business practices, not to teach specific income-earning skills. Here are the three original modules and their component “learning sessions” designed for delivery as part of weekly or regular group meetings:
- Manage Your Business Money (Separate Business and Personal Money; Use Business Loans for Your Business; Calculating Profits; Track, Plan and Invest Your Business Money; Decide How to Use the Profits of the Business to Satisfy the Needs of the Business and Your Personal Needs; Prevent Business Losses; Manage Credit Sales; Review)
- Increase Your Sales (Know Your Customers; Treat Your Customers Well; Sell to Different Kinds of Customers; Improve Your Products and Services; Sell New and Complementary Products and Services; Seize Opportunities to Sell; Sell Where Customers Buy the Most; Set the Right Price; Promote Your Business With Good Selling Practices; Plan for Increased Sales)
- Plan for a Better Business (Use Planning Steps to Grow Your Business; Examine How Your Business Is Doing; Decide How You Can Improve Your Business; Develop and Test New Business Ideas; Plan How Much to Make and Sell; Plan Business Costs; Plan for More Profit; Find Resources for Your Business; Prepare for Unexpected Events)
Dean Karlan and Martin Valdivia (2006) conducted an RCT in collaboration with FINCA Peru and Freedom from Hunger to test the effectiveness of this kind of business education. The following summary was provided in an impact review for Freedom from Hunger by Bobbi Gray and Dean Karlan.
A baseline and a follow-up survey were conducted in two of FINCA Peru’s program areas, representing both urban and rural clientele. The study first randomly assigned village banks to receive either credit with business education (the three Freedom from Hunger business education modules in the rural area and a modified pair of modules in the urban area) or credit only. Two years later, the study compared clients in the two treatments, looking for changes in knowledge and behavior regarding business practices and in revenue and income. The study categorized the findings on four different levels:
Business Skills and Practices
Clients receiving education demonstrated greater business knowledge as measured by the number of questions they answered correctly about suggested business practices. The training increased the likelihood that individuals re-invested their profits in their businesses, maintained sales records for their businesses, and maintained records of cash withdrawal from their businesses. These clients were more likely than credit-only clients to indicate they made a change or an innovation in their businesses in the prior year.
Clients receiving business education had higher business revenues in the month prior to the follow-up survey than credit-only clients and, most notably, when measuring variation in revenues per month, these clients had higher revenues during seasons when sales were expected to be down. Thus, it is inferred that the education helped the clients identify ways to reduce sales fluctuations during months when revenues dip for others. Cost margins remained the same; hence the results indicate an improvement in business income as well.
Household-level outcomes were measured by household decision-making and child labor. There were no detectable changes at the household level in terms of decision-making, keeping the client’s personal money separate from her husband’s money, or decision-making on the use of the loan. Regarding child labor, the number of hours that female children dedicated, on average, to school and schoolwork was greater for the clients receiving business education. However, there was no indication that the female children spent less time in the business or in housework, suggesting that the female children spent less time in leisure. This implies that the training potentially changed the mother’s preference for education for her daughters.
Institutional outcomes were fairly strong. Repayment rates and client retention among clients receiving education were higher than among credit-only clients. The researchers inferred that clients may have placed high value on the training they received, causing them to stay in the program. Yet, concurrently, clients getting education were more likely to cite the length of the weekly meetings as a reason for dropping out. Interestingly, improvement in repayment rates and client retention were strongest for education-treatment clients who expressed the least interest in the business training at baseline. This result indicates the importance of marketing the education to clients, since the highest impact was on those who indicated the least demand for the service. There were also higher repayment rates and client retention among education-treatment clients with larger businesses as measured by sales volume.
In conclusion, the business education succeeded in helping clients smooth their business revenues through good and bad times, which is a very positive finding. However, there was no evidence of business growth and/or increased household income due to the business education.
In their book More Than Good Intentions (pp. 94-98), Dean Karlan and Jacob Appel describe this FINCA Peru study as well as two more recent studies of three distinctly different types of business education, in the Dominican Republic and in Mexico. Again they report increased business profits mainly in bad months, thereby smoothing income rather than increasing it over the year. The results also show that the type of education (complex vs. simple, generic vs. personalized) makes a real difference in impact on business performance.
Other impact studies by Freedom from Hunger and others include business education as part of the treatment, but they mix business education with financial and/or other types of education (such as health and nutrition) without isolating the effects of business education from effects of the other components of the treatment.
Like the results found in research on the effects of microfinance by itself (without other, non-financial services), we see once again that poor clients benefit in terms of stabilizing business profits and probably household income, which is a very good thing. But if and when annual income is lifted for some businesses and households, it is usually not by much. It seems that removing such constraints as lack of access to financial services and lack of business management knowledge and experience is still insufficient for the great majority of the poor to overcome the geographic, economic and social circumstances that keep them poor. But removing these constraints does seem to alleviate their poverty by reducing their vulnerability to variable consumption and financial shocks. I will explore the evidence for this benefit in greater depth in Theme Four.