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Microfinance and Financial Sector Development

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Author Info
Annabel Vanroose () (Centre Emile Bernheim, CERMi, Solvay Brussels School of Economics and Management, Université Libre de Bruxelles, Brussels and Section for Economic, Monetary and Financial Policy, Vrije Universiteit Brussel.)
Bert D’Espallier (Lessius Hogeschool Centre Emile Bernheim, CERMi, Solvay Brussels School of Economics and Management, Université Libre de Bruxelles, Brussels)

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Abstract

This paper analyzes the relationship between performance of microfinance institutions (MFIs) and the development of the formal financial sector of the country in which the MFI is active. We find that MFIs reach more clients and are more profitable where access to the formal financial system is low. This finding is in line with the market-failure hypothesis: MFIs respond to a need that banks do not fulfill and flourish where the formal banking sector fails. However, we also find indications of interdependencies between MFI-performance and formal financial sector development. First, MFIs are less profitable where interest rates are higher reflecting the fact that MFIs depend upon the domestic banking system for additional funding. Secondly, MFIs are less profitable where inflation is high, suggesting that MFIs benefit from stability of the formal financial system. Overall, the results show that the macro-economic environment is crucial to fully understand MFI-performance and that outreach and accordingly impact of MFIs are contingent on financial sector development.

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File URL: http://www.solvay.edu/EN/Research/Bernheim/documents/wp09040.pdf
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File Function: First version, 2009
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Publisher Info
Paper provided by Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB) in its series Working Papers CEB with number 09-040.RS.

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Length: 41 pages
Date of creation: Sep 2009
Date of revision:
Handle: RePEc:sol:wpaper:09-040

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Keywords: O16; O50; G21;

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  1. Alain de CROMBRUGGHE & Michel TENIKUE & Julie SUREDA, 2008. "Performance Analysis For A Sample Of Microfinance Institutions In India," Annals of Public and Cooperative Economics, Blackwell Publishing, vol. 79(2), pages 269-299, 06. [Downloadable!] (restricted)
  2. Navajas, Sergio & Schreiner, Mark & Meyer, Richard L. & Gonzalez-vega, Claudio & Rodriguez-meza, Jorge, 2000. "Microcredit and the Poorest of the Poor: Theory and Evidence from Bolivia," World Development, Elsevier, vol. 28(2), pages 333-346, February. [Downloadable!] (restricted)
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  3. Hartarska, Valentina, 2005. "Governance and performance of microfinance institutions in Central and Eastern Europe and the Newly Independent States," World Development, Elsevier, vol. 33(10), pages 1627-1643, October. [Downloadable!] (restricted)
  4. Ross Levine, 2004. "Finance and Growth: Theory and Evidence," NBER Working Papers 10766, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Roy Mersland & Reidar Øystein Strøm, 2008. "Performance and trade-offs in Microfinance Organisations-does ownership matter?," Journal of International Development, John Wiley & Sons, Ltd., vol. 20(5), pages 598-612. [Downloadable!]
  6. McIntosh, Craig & Wydick, Bruce, 2005. "Competition and microfinance," Journal of Development Economics, Elsevier, vol. 78(2), pages 271-298, December. [Downloadable!] (restricted)
  7. Barham, Bradford L. & Boucher, Stephen & Carter, Michael R., 1996. "Credit constraints, credit unions, and small-scale producers in Guatemala," World Development, Elsevier, vol. 24(5), pages 793-806, May. [Downloadable!] (restricted)
  8. Hartarska, Valentina, 2005. "Governance and Performance of Microfinance Institutions in Central and Eastern Europe and the Newly Independent States," 2005 International Congress, August 23-27, 2005, Copenhagen, Denmark 24568, European Association of Agricultural Economists. [Downloadable!]
  9. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June. [Downloadable!] (restricted)
  10. Annabel Vanroose, 2008. "What macro factors make microfinance institutions reach out?," Working Papers CEB 08-036.RS, Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB). [Downloadable!]
  11. Beck, Thorsten & Demirguc-Kunt, Asli & Martinez Peria, Maria Soledad, 2007. "Reaching out: Access to and use of banking services across countries," Journal of Financial Economics, Elsevier, vol. 85(1), pages 234-266, July. [Downloadable!] (restricted)
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  12. Hossein Jalilian & Colin Kirkpatrick, 2005. "Does Financial Development Contribute to Poverty Reduction?," The Journal of Development Studies, Taylor and Francis Journals, vol. 41(4), pages 636-656, May. [Downloadable!] (restricted)
  13. Robert Cull & Asli Demirguç-Kunt & Jonathan Morduch, 2007. "Financial performance and outreach: a global analysis of leading microbanks," Economic Journal, Royal Economic Society, vol. 117(517), pages F107-F133, 02. [Downloadable!] (restricted)
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