Abstract
I investigate whether the degree of labor market imperfections in a country affect microfinance institutions’ (MFIs) profitability and impact MFIs’ effectiveness in improving low-income households’ inclusion in financial markets. I find that the financial performance of MFIs is high in heavily regulated labor markets. I also find evidence of a substitution between MFIs’ outreach performance and labor market regulations. Overall, the evidence is consistent with the view that microfinance is most successful when the demand for microcredits increases as rigid regulations decrease the number of outside job opportunities.
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