The Impact of Microfinance: Evidence from Eritrea

Since 1996, a saving and Microcredit Program (SMCP), has been operational in Eritrea. Until now no comprehensive impact assessment has been conducted on the program. The objectives of this study are to: (a) ascertain the determinants of household decision to participate early in the program; (b) identify the factors that influence loan size; (c) determine the impact of SMCP as well as the effect of duration of exposure, loan cycle and loan size on the welfare of the participating households in terms of income, expenditure, household asset acquisition, housing improvement and monthly enterprise sales. The study relies on a cross-sectional household survey that was conducted in 2016. The findings indicate that age, perception of SMCP timeline on loan disbursement and formal education positively and significantly affect early participation in SMCP. Regionally, Anseba region is less likely to influence early participation in SMCP. Tesseney region, Bilen ethnicity, individual loan, duration of exposure and formal education appeared to have positive and significant influence on the loan size of SMCP clients. Furthermore the study confirmed SMCP has a positive and significant impact on household asset acquisition and housing improvement of its borrowers. The paper also analysed the effect of duration of exposure in the program, loan cycle and loan size on the outcome variables. The results show that duration of exposure, specific year of exposure and specific loan cycle have significant effect on household asset and housing improvement. Moreover dummy loan cycle and loan size have positive and significant effect on income. While duration of exposure and loan size have positive and significant effect on monthly total enterprise sales. However only duration of exposure has significant effect on monthly household expenditure.