Working paper title: "Credit contracts, business development and gender: Evidence from Uganda"

By: Andreas Madestam, Selim Gulesci, Francesco Loiacono, and Miri Stryjan

Abstract

We examine the effect of credit contract design on business growth, focusing on how improved financial products can alleviate credit and risk constraints for firms in the absence of well-functioning credit or insurance markets. These products should address not only credit and risk-related limitations but also other factors influencing borrower decisions, such as the diversion of funds due to sharing pressures. As these concerns are typically more pressing for women, financial solutions that benefit male-owned firms may not be equally effective for female-owned enterprises. In our experiment, entrepreneurs borrowing from a major Ugandan lender were randomly offered modified contracts with varying repayment schedule flexibility or an equivalent cash transfer. We find that increased repayment flexibility results in higher profits after five years, with the optimal flexibility level depending on the entrepreneur's gender. By contrast, cash transfers do not affect firm outcomes. Our analysis reveals that male-owned businesses increase hiring and generate higher profit under flexible repayment contracts, while female-owned businesses benefit more from less flexible grace-period contracts. We present suggestive evidence that the differences are driven by kinship taxation on female entrepreneurs.

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