Political institutions & grassroots development

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When and under what conditions has microfinance been most successful? Microfinance institutions have been widely credited as an important tool for alleviating poverty, but what is it that affects them, their success and survival, their ability to reach the poorest clients? This project addresses an untapped area of political economy by bridging the gap between grassroots development and the broader macro-level political environment. Going beyond gender discussions, economic explanations, and normative policy prescriptions which have dominated the microfinance literature, this research argues that the regulatory framework and democratic institutions have a key role to play through empirical testing of these relationships. Microfinance can only do so much to assist the poor and support entrepreneurs if legal structures do not createan enabling environment. Cross-national regression models, institution-level microfinance data and detailed case studies of Sri Lanka and Nepal confirm that it is indeed the institutional environment that shapes microfinance and its ability to reach the poor population. Alternative explanations of gender equality and the presence of international and local microfinance networks fail to sufficiently explain differences across states. In some ways, microfinance has achieved much in bringing financial services to the poor in spite of adverse political conditions with inefficient markets and ineffective governments. However, it is also positively influenced by political freedoms, stability and policies that create more opportunities for funding and protect borrower and lender rights.