Assessing the impacts of microfinance on economic growth

  • Emdad Haque

    Student thesis: Doctoral Thesis

    Abstract

    Throughout the last four decades, microfinance has been deployed as a poverty reduction strategy (PRS) all over the world. This trend has grown fast especially in the Global South, and is associated with mainstream finance, public policy, commercial banks and development strategies. Its integration with the United Nation’s microfinance year, the Millennium Development Goals (MDGs and SDGs) and Nobel prizes, has put a substantial emphasis on microfinance and inclusive finance. Researchers and policy practitioners now place a renewed emphasis on linking microfinance with the macroeconomy. However, despite its vast expansion, advocates across the globe are acknowledging its shortcomings and criticisms. Despite the wide global appreciation for microfinance, and the extensive literature on this topic, it is astonishing to discover that there is little empirical support for its gains and only limited studies have assessed its role in financial development, economic growth, or productivity at a country and macro level. This study investigates trans-national microfinance’s impact on an integrated economy with three groups of data sets: 77, 38 and 25 microfinance pioneering countries. It assesses the impact of microfinance on factor productivity, factor accumulation, financial development and GDP. It checks robustness with income inequality/welfare and other socio-economic variables. A number of tests and techniques are conducted, including endogeneity, correlation-coefficient matrix, unit root, initial GDP values incorporation, Ordinary Least Squared and Two Stage Least Squared tests. The study differentiates between GDP level and GDP growth. The study distinguishes endogenous and exogenous growth and highlights the importance of factor-driven and productivity-driven growth. Findings suggest that microfinance is positively correlated with GDP level and total factor productivity (TFP); and negatively related to GDP growth. There is a stronger impact with lagged variables. The microfinance instrument exhibits slightly different impacts on 25 MF pioneering countries compared with the other, wider sets of countries. In this study, microfinance showed a non-significant impact on income inequality (measured with the Gini index) and on accumulated factors (human capital and industrial capital). This indicates a difference in qualitative and quantitative productivity. Microfinance and GDP possess a cause-effect relationship. Findings apparently indicate a non-linear concave relationship (impact on GDP increases at a decreasing rate), partially consistent with Solow’s growth model and conditional convergence. Overall, the findings demonstrate the direct and indirect impact of microfinance. The research opens a new door for macro and public policy implications. The study discusses both the welfare and commercial aspects of microfinance. Certain renovations and a comprehensive financial model could provide more efficient allocation of resources, reduction of informational asymmetries and diversification of investors’ portfolios.
    Date of Award2021
    Original languageEnglish
    SupervisorCraig Applegate (Supervisor) & Tesfaye Gebremedhin (Supervisor)

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