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

Abstract

After five decades of rapid expansion of microfinance worldwide, little is known about its aggregate effects and whether the “microfinance promise” of poverty reduction holds at the macro level. Challenging questions have arisen. Here we explore the dynamic response of microfinance on economic growth, financial deepening and income inequality. Countries are grouped into three broad clusters (stable, moderate and poor) based on macro‐institutional variables. Our results show that microfinance has a significant long‐term ability to affect the broader economy. However, the impact and dynamics of microfinance differ substantially across macro‐institutional environments. It grows in weaker environments, reaches its peak in developing economies, and then gradually “dies out” in more stable economies. While there is evidence of a positive impact of microfinance at the aggregate level, the response is different depending on whether countries are poor, moderately developed or economically stable. Once countries climb up the macro‐institutional “ladder,” microfinance can take a different shape and its relationship with other macroeconomic fundamentals can change. Our results indicate that microfinance has the strongest effect when the external environment is supportive and proactive; in weak environments, microfinance cannot grow sufficiently. Therefore, more attention should be given to supporting the socioeconomic dimensions of economies.

Microfinance outreach and aggregate welfare

“…The following equation represents our baseline model: Microfinance can promote an efficient financial sector and higher economic growth, increase productivity and induce greater investment (Sultan & Masih, 2016). Thus, improved access to finance implicitly captured by microfinance outreach (X it ) would increase economic growth (Alimukhamedova, 2019;Aziz & McConaghy, 2014;Donou-Adonsou & Sylwester, 2017;Raihan et al, 2017). Microfinance outreach can further boost household consumption through profits generated by businesses financed through microfinance loans.…”

Helping when it matters: Optimal time for supporting women’s self‐employment in India

“…In fact, countries that have implemented policies to support equal access to finance result in greater female business ownership (Islam et al, 2018). However, access to finance alone does not automatically translate into improved entrepreneurial activity (Banerjee et al, 2015) and must be complemented with other socioeconomic support (Alimukhamedova, 2019).…”

Access to Microfinance Institutions and Official Banks and the Impact on Small Business in Togo

“…Among the work that exists, from both microeconomic and macroeconomic perspectives, a significant number is increasingly devoted to understanding the functioning of the microcredit market, its imperfections, and credit rationing. Also, recent analyses have focused on the microeconomic and macroeconomic impacts of microfinance in an integrated environment (Amendariz & Labie, 2011;Alimukhamedova, 2019). However, studies from a macroeconomic perspective are relatively more recent due to a lack of data (Imai et al, 2012;Kamel & Ben, 2018).…”