Journal of Business & Economic Policy

ISSN 2375-0766 (Print), 2375-0774 (Online) DOI: 10.30845/jbep

Microfinance Institutions, Productivity and Growth

Does the relative size of microfinance sector expand or contract with economic growth? Our results show that the impact of microfinance on factor productivity growth is more important than the effect on capital growth. Specifically, it explains why the growth effects of microfinance revolution appear to be largely permanent, not temporary. This permanent microfinance expansion effect can be attributed to the role microfinance sector plays in capital market and banking sector development, and to the change in the quality of institution environment. There is also some indirect evidence of higher investment efficiency post-liberalization. But we find the fragility of microfinance business by documenting threshold effects: countries that are more micro financial developed or have higher quality of institutions experience larger productivity growth responses. Finally, we show that the growth boost from micro financial inclusion outweighs the detrimental loss in growth from global or regional poverty.

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