The Causal Relationship of Microfinance and Economic Development: Evidence from Transnational Data

Abstract

The purpose of this study is to investigate the so far underexamined statistical causality of the relationship between microfinance and economic development. For a representative transnational dataset covering the period 1995 -2012 we instrumentalize pairwise vector autoregressive (VAR) estimation models and the Granger approach. We utilize prevalent microfinance institutions' (MFI) performance indicators as measures of microfinance as well as relevant economic development indicators that not only measure economic and capital growth but also poverty, income inequality and labor participation. We find bidirectional causal interactions between both MFIs' social and financial performance and economic development. Based on our results important implications for microfinance theory, research and practice can be derived. Future empirical research should account for the statistical causality between microfinance and economic development. In practice, purposeful and progressive action that considers the directions of causality between microfinance and economic development verified within our study should be taken to promote economic growth and poverty alleviation.

The microfinance promise—can it be kept? A macro perspective

“…Our results are also consistent with those of other related studies (Lopatta & Tchikov, , ; Donou‐Adonsou & Sylwester, ; Lacalle‐Calderón et al, ) that find a positive and significant contribution of microcredit to economic growth. These studies also explore the exact transfer channels of microfinance such as total factor productivity, human capital, private investment, labour markets and others.…”

“…In the microfinance context, to the best of our knowledge, cluster analysis has never been used. There are several studies that analyse the external environment for MFI operations (Ahlin et al, ; Vanroose, , ; Vanroose & D'Espallier, ) and the economy‐wide effect of microfinance itself (Kai & Hamori, ; Imai et al, ; Hermes, ; Lopatta & Tchikov, , ; Lacalle‐Calderón et al, ; Donou‐Adonsou & Sylwester, ; Agbola et al, ). Most of these studies, however, exploit cross‐section or panel‐data analysis to find the macro‐institutional factors important for microfinance operations without explicit grouping or clustering.…”

The Impact of Microfinance on Economic Development: The Case of Tunisia

“…On the one hand, competition in the microfinance market has a negative effect on the scope and performance of MFIs. Lopatta and Tchikov (2017) use Granger's approach to verify the statistical causality between microfinance and economic development. They identify microfinance, and evaluate the specific contribution of these institutions through the performance of MFIs in economic development.…”

“…They focused on economic development and cost reduction and profitability. Lopatta and Tchikov (2017) outline two thoughts about microfinance, the first thought examines the business case for self-sufficiency of MFIs and looks at microfinance from the perspective of individual MFIs. According to Cull and al.…”

“…Created by the non-governmental organization "Enda Inter-Arabe", which introduced micro-credit in Tunisia in 1995. Our study follows the approach of Lopatta and Tchikov (2017) which examines the impact of microfinance on economic development.…”