On the empirics of microfinance institutions and local economic development in Africa

Abstract

ABSTRACT The link between finance and growth is a well-researched area, yet this relationship at the local level has received little empirical scrutiny. We trace the operations of Microfinance Institutions (MFIs) in Africa. We examine the role played by MFIs on local economic development using a model capturing both local geography and MFIs dynamics for the periods 1992–2015. Our sample is representative of 2,170 MFIs operating in 144 cities, 154 towns, and 14 villages in Africa. Using night time data to capture economic growth, our key hypothesis is that MFIs drive local economic progress. Conditioning on the geographical location of MFIs, we find that the presence and density of MFIs increase as the growth in light density and the estimate retains its statistical significance. The results suggest that MFIs operations may foster local economic activity.