Estimating Microbusinesses' Ability to Pay
This study examines whether micro and small businesses in Pakistan have the ability to generate profits that can sustain the interest rates charged by microfinance providers (MFPs). It is based on data from 124 enterprises in trade, agriculture, livestock/poultry, services, and manufacturing.
The study uses effective interest rate to measure the financial cost of borrowing to the enterprise and return on assets to estimate profitability. It presents the profitability results for each sector. Findings include:
- Microbusinesses can afford the interest rates charged by MFPs owing to high turnovers and returns on assets;
- Innovation enables microbusinesses to generate considerable incomes given adequate availability of finance;
- Since small enterprise market segment is immune to competition from large scale commercial businesses, market share of these enterprises is sufficient to cover expenses and generate savings.
The study reveals that there is a need for financing in all sectors covered and that businesses have benefited from microfinance. Further, microbusinesses do not have access to affordable alternative sources of finance. The study states that bigger samples must be examined for each sector to obtain conclusive results.
