Climbing the economic ladder: The role of microfinance institutions in promoting entrepreneurship in Pakistan

Abstract

AbstractFinancial inclusion has received widespread attention from policymakers and researchers in recent years and is viewed in most macroeconomic studies as an engine of economic growth. By contrast, analyses at the micro‐level have largely focused on microcredit rather than microfinance and reached more ambiguous conclusions. In particular, the literature concurs on the modesty of the impact of such programmes on poverty, if any. In this paper, we examine the effect of access to microfinance rather than microcredit only, as other financial services, such as savings for instance, can be put to the same use as credit by loosening constraints on investment or helping poor households to withstand shocks. Using nationally representative micro‐data from Pakistan, we provide evidence that having geographical access to a microfinance institution raises the likelihood for an individual to move from a low‐earning occupation such as being a salaried employee, farm worker or even a housewife to a more profitable entrepreneurship status. The effect is stronger in poorer regions, even after accounting for the nonrandom opening of financial branches. We conclude that financial inclusion should be further regarded as an effective ally in the fight against poverty.