Microfinance as a tool for international economic growth

This executive summary and research paper were written by 2016-17 Values & Capitalism Young Scholar Award recipient, Sydney Parker (Class of 2018), during her junior year at Seattle Pacific University.

Over the last few decades, microfinance has gained international attention as a useful tool for economic development. In general, the microfinance industry provides financial tools and services to low-income individuals who would otherwise find themselves excluded from the formal banking system. Microfinance is often associated with microcredit, small-sum credit loans for entrepreneurs and small-business owners. However, the microfinance industry has expanded to incorporate a broad range of services, including savings and deposit accounts, life insurance, healthcare, and much more.

“ Infrastructure opens up the market, allowing producers and consumers to interact in ways they could not previously afford. ”

Professor Muhammad Yunus of the University of Chittagong pioneered the microfinance movement in 1976 by making 42 personal loans of $27 to a small village in Bangladesh. Fast forward to 2009 and, according to the Microfinance Information Exchange, $38 billion of outstanding microfinance loans existed with 1,084 microfinance industries (and these are only the ‘formal’ microfinance organizations).  Microfinance institutions are becoming increasingly prevalent and continue to be incorporated into international aid programs and governmental agendas across the world. Due to the industry’s large-scale impact and continued growth, it has the potential to play a large role in international macroeconomics.

Microfinance has clearly grown to global prominence and warrants further research to better understand its current impact on the international economy. So far, most macroeconomic research on microfinance has been conducted primarily through case studies. Due to the differing conditions and environments which affect the success of microfinance services, it generally can be difficult to compare and analyze the industry’s performance and global impact. Focusing on the international economy as a whole, and by controlling various factors such as human capital, political stability, and infrastructure, this study hopes to contribute more to the understanding of the role that microfinance can have on international economic growth.

A cross-sectional multiple linear regression analysis is employed to establish the relationship between the dependent variable, prevalence of microfinance services, and the independent variables, GDP, GNI per capita, and unemployment, in 111 different countries. Within the dataset analyzed, the linear regressions indicate a statistically significant relationship between microfinance and GDP and the correlation between microfinance and GNI per capita. The study concludes that the relationships observed between variables within this dataset confirm current microfinance theory – that microfinance is more prevalent in poorer countries and that poorer borrowers tend to borrow smaller amounts. The study also finds a negative relationship between unemployment and microfinance.

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