Microfinance in a macroeconomic context - An impact analysis

Abstract: The purpose of the thesis is to investigate a possible link between financial sector development through microfinance and economic growth in low income countries. The microfinance sector has been able to reach poor clients, earlier considered “unbankable” and is now increasing the financial services in these countries by including the poor. The hypothesis of the paper is that this leads to an expansion and a further development of the financial system, which in turn leads to economic growth. First, the theoretical link between the financial system and economic growth is investigated and established. Second, a theoretical framework linking the microfinance sector and the financial system is built. Last, the hypothesis is empirically tested in a regression analysis. Included in the regression is a set of control variables considered to be robust when testing economic growth. The independent variable is total microfinance portfolio holdings, MFI, drawn from the webpage MixMarket.org. The result was rather discouraging, since the MFI variable did not have any significance on economic growth. Of the control variables, only inflation did not turn out significant as expected. The result does however support the common belief that the MFI sector might be too small to have a visible impact on economic growth.