Returns to Capital — A Randomised Test of Cash and Equipment Grants for Sri Lankan Microenterprises

In the tsunami-hit districts of Galle, Matara and Kalutara on Sri Lanka's southern coast, researchers from UC San Diego, Stanford University and the World Bank designed a field experiment to test whether small firms are held back by credit constraints or by genuinely low returns on capital.

The study aimed to measure how profits respond when microenterprises with fewer than one paid employee receive an unconditional capital injection, compared to a control group that received no grant.

Researchers randomly assigned cash or in-kind equipment grants of roughly 10,000-20,000 Sri Lankan rupees to microenterprises, then tracked profits through repeated follow-up surveys against the untreated control group.

The average real return to capital came out at 4.6% to 5.7% a month (55-63% a year), far above bank lending rates, but the effect disappeared entirely for female-owned enterprises even though male- and female-owned firms looked similar before the grant.

The trial is a landmark in the microenterprise-finance literature and has been replicated with variations elsewhere, but it remained a research field experiment rather than an operating programme, and its stark gender gap in returns cautions against treating capital access as a universal fix for microenterprise growth.