Optimizing Network Referrals to Identify and Recruit Credit Worthy Entrepreneurs

Principal Investigators: Emily Breza, Harvard University; Arun Chandrasekhar, Stanford University; Francisco Muñoz, PhD Candidate, Stanford University
Research Team: Rupika Singh, IFMR LEAD; Khushboo Gupta, IFMR LEAD
LEAD Centre: Centre for Microfinance (CMF)
Focus Area: Financial Inclusion, MSME
Project Geography: Uttar Pradesh, India
Partner: Sonata Microfinance
Status: Completed

Background:

Recent studies have shown that while microfinance encourages business creation, the overall impact on business profits is modest at best. It is possible that greater access to credit may have a larger impact if it is targeted towards more entrepreneurial individuals or businesses with high growth potential. This study uses lessons from network theory to restructure the recruitment protocol of a lender in order to increase both the volume and quality of applicants.

The quality of word-of-mouth referral process, used by many MFIs, depends on the location of initial seeds in a social network. This study aims to identify a process by which to obtain referrals from central individuals who are both better connected and have more information about others’ creditworthiness and entrepreneurial capacities. Furthermore, this study will explore how social constraints may affect the quality of the referrals.

This study was conducted in partnership with a MFI operating in India. This study uses lessons from network theory to restructure the recruitment protocol of a lender to increase: (i) The volume and (ii) The quality of applicants by targeting more central individuals in a market, who are both better connected and have more information about others’ creditworthiness and entrepreneurial capacities. These central individuals are asked to refer businesses from their community for a loan. Furthermore, this study explores how social constraints affect the quality of the referrals.

Related Resources
Policy Brief: Optimizing Network Referrals to Identify and Recruit Creditworthy Entrepreneurs