PEP researchers in Uganda conducted an experiment to investigate how entrepreneurial risk tolerance determines credit demand and borrowing decisions amongst young entrepreneurs. Their findings have informed policy decisions relating to the Ugandan Government’s Youth Unemployment Strategy and their intervention helped young entrepreneurs develop business skills.
In 2011, the Ugandan government launched the Youth Venture Capital Fund (YVCF) as part of their initiatives to promote youth entrepreneurship. The government introduced the youth entrepreneurship interventions to help address the high levels of unemployment among people aged 18 to 30.
The YVCF provides credit people aged 18 to 30 who have had a business for at least three months. The financial institutions that provide the credit also mentor the young entrepreneurs. However, lower numbers than expected decided to apply and those with adequate business skills training were particularly hesitant to access the resource. This led to a high default rate, creating problems for operating the initiative as a revolving fund.
PEP research to address the evidence gap
Suspecting that risk tolerance could influence borrowing decisions among young entrepreneurs, a team of local researchers was granted PEP support under the first Policy Analysis on Growth and Employment (PAGE) initiative, to conduct an experimental impact assessment.
The team received intensive training and mentoring, international peer-review, and policy engagement and communications guidance as part of PEP’s support through the PAGE initiative.
The main objective of this study was to provide a deeper understanding of the personal factors associated with risk tolerance and the effect that credit counselling has on young entrepreneurs’ willingness to use credit for business expansion.
Assessing risk tolerance and improving business skills
The research team set up a randomized control trial involving 555 people aged 18 to 35 who owned a business at the time of the study. From the group, participants were chosen at random to attend specialized two-day business clinics.
To measure entrepreneurial risk tolerance, all individuals participated in a laboratory experiment where they were asked to choose between 10 progressive combinations of safe and risky investment options. Both the potential payoff and the uncertainty of returns on investment increased as the participant progressed.
The team found that that the level of credit demand is closely linked to personal entrepreneurial risk tolerance, which can be modified through credit counselling. The team’s findings are summarized in their PEP policy brief, and presented in detail in Working Paper 2016-22.
Those who attended the credit counselling clinics understood the need to ensure resources were used responsibly. They exhibited a better understanding of financial management and the risks associated with borrowing funds without a clear business plan.
Participant, Spencer Ivan from Mbarara, said: “I learnt how to generate business ideas, raise capital, and handle risks and uncertainties in my business. All these were a result of attending a business clinic. I am now self-employed and my entrepreneurial skills are developing day by day."
Similarly, entrepreneur Sam Lubwama, 30, appreciated the offer of training before receiving credit. He said: “Receiving business and credit management training before the consideration of fund acquisition in the YVCF was a very good idea. The business clinic was very useful in explaining how to better access and use credit to grow my business.”
As well as demonstrating that young entrepreneurs with business training are more likely to make good investments than those without training, the National Evaluation Sub-committee indicated team’s findings would inform policy decisions related to the government’s Youth Unemployment Strategy.
Embracing new technology to reach young entrepreneurs
“Finding a large sample of people willing to take part in an experiment is always a challenge. Being able to contact young entrepreneurs via U-Report made a huge difference to our research,” said team leader Juliet Ssekandi, “Our collaboration with UNICEF and the Ministry of Gender, Labour and Social Development was key in making this happen."
From a database of almost 250,000 youth who had voluntarily enrolled in UNICEF’s U-Report social mobilization program, the team sent a recruitment SMS message to subscribers in the five districts of Uganda that had the highest enrolment numbers and access to the Youth Venture Capital Fund (YVCF).
Subscribers received an introductory SMS saying that the Ministry of Gender, Labour and Social Development would be holding clinics to raise awareness of the YVCF. Those interested were then invited to reply stating their interest via SMS.
“Being able to contact our target population for the study using the U-Report platform meant that we were able to easily authenticate the information needed to undertake the study,” said team member Sam Galiwango.
A significant career-promoting experience
The team’s research work has had a lasting impact for the team members, as well as the intervention participants. It led to multiple invitations to share their methodology and findings at the international level. These opportunities included invitations to present at the 2014 Youth Employment in Sub-Saharan Africa conference organized by the IDRC in Senegal, and the 2016 African Growth and Development Policy impact evaluation workshop organized by IFPRI in the USA. Several members were also selected to conduct further research using the methodologies they had developed during the PEP research.
In December 2016, the team organized a national policy conferencein Kampala to discuss their findings and policy recommendations. Following the conference, representatives of the Ministry of Gender, Labour and Social Development and the Ministry of Finance, Planning and Economic Development requested that the research team present their findings and policy recommendations to the senior management of the ministries.
As a result of team’s consultation activities, which led to a high level of exposure for the researchers and their specialized expertise, each member greatly benefited in terms of their career with promotions and appointments to influential roles, such as senior government economists. Team member Benjamin Kachero said: “The technical expertise I developed with PEP training led to my role supporting policy evaluation design for the Directorate of Monitoring and Evaluation within the Office of the Prime Minister.”