Abstract
The purpose of this study is to investigate the so far underexamined statistical causality of the relationship between microfinance and economic development. For a representative transnational dataset covering the period 1995 - 2012 we instrumentalize pairwise vector autoregressive (VAR) estimation models and the Granger approach. We utilize prevalent microfinance institutions’ (MFI) performance indicators as measures of microfinance as well as relevant economic development indicators that not only measure economic and capital growth but also poverty, income inequality and labor participation. We find bidirectional causal interactions between both MFIs’ social and financial performance and economic development. Based on our results important implications for microfinance theory, research and practice can be derived. Future empirical research should account for the statistical causality between microfinance and economic development. In practice, purposeful and progressive action that considers the directions of causality between microfinance and economic development verified within our study should be taken to promote economic growth and poverty alleviation.
Highlights
Microfinance promises poverty alleviation, financial systems and economic development through serving people who are usually excluded from the formal banking sector (Morduch, 1999)
We add to current literature and research as, to the best of our knowledge, we are the first to present generalizable empirical evidence on the Granger causality between economic development and microfinance despite of practitioners’ and researchers’ missing common denominator with regard to the size of effects the microfinance concept has on economic development and poverty alleviation (Rajbanshi et al, 2015)
Within this study we have explored an underexamined though highly relevant research field - the causality between microfinance and economic development
Summary
Microfinance promises poverty alleviation, financial systems and economic development through serving people who are usually excluded from the formal banking sector (Morduch, 1999). They establish and improve the quality of (developing) financial sectors by offering access to credit for those at the bottom of the pyramid (Kamath, 2009). Current microfinance research and practice, distinguish between MFIs’ social and financial performance and proxy social performance by their outreach to poor clients. The latter is quantified by indicators such as average loan balances, number of borrowers as well as percentage of female clients (Rosenberg, 2009). In theory, MFIs should operate self-sufficiently, i.e. they have to cover their expenses through interest revenues and independent of subsidies (Prior & Argandoña, 2009; Rosenberg, 2009)
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
