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Microfinance and Financial Sector Development

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  • Annabel Vanroose
  • Bert D’Espallier

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.

Suggested Citation

  • Annabel Vanroose & Bert D’Espallier, 2009. "Microfinance and Financial Sector Development," Working Papers CEB 09-040.RS, ULB -- Universite Libre de Bruxelles.
    • Handle: RePEc:sol:wpaper:09-040
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Janda, Karel & Zetek, Pavel, 2013. "Macroeconomic factors influencing interest rates of microfinance institutions in Latin America," MPRA Paper 49973, University Library of Munich, Germany.
    2. Cull, Robert & Navajas, Sergio & Nishida, Ippei & Zeiler, Renate, 2015. "A New Index of the Business Environment for Microfinance," World Development, Elsevier, vol. 70(C), pages 357-388.
    3. Kristen Hudak, 2012. "What Next For Microfinance? How The Broader Financial Context Matters For Effective Microfinance Outreach," Journal of Developmental Entrepreneurship (JDE), World Scientific Publishing Co. Pte. Ltd., vol. 17(04), pages 1-18.
    4. Kamel Bel hadj Miled & Jalel-Eddine Ben Rejeb, 2018. "Can Microfinance Help to Reduce Poverty? A Review of Evidence for Developing Countries," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 9(2), pages 613-635, June.
    5. Fahana Ferdousi, 2013. "Determinants of Performance of Microfinance Institutions: Cross Country Analysis," International Journal of Financial Economics, Research Academy of Social Sciences, vol. 1(4), pages 143-151.
    6. Nargiza Maksudova, 2010. "Macroeconomics of Microfinance: How Do the Channels Work?," CERGE-EI Working Papers wp423, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    7. Donou-Adonsou, Ficawoyi & Sylwester, Kevin, 2017. "Growth effect of banks and microfinance: Evidence from developing countries," The Quarterly Review of Economics and Finance, Elsevier, vol. 64(C), pages 44-56.
    8. Nargiza Alimukhamedova, 2014. "Microfinance Environment in Uzbekistan: Analysis of Supply and Demand," Working Papers 344, Leibniz Institut für Ost- und Südosteuropaforschung (Institute for East and Southeast European Studies).
    9. repec:dau:papers:123456789/7858 is not listed on IDEAS
    10. Marie Briere & Ariane Szafarz, 2011. "Investment in Microfinance Equity: Risk, Return, and Diversification Benefits," Working Papers CEB 11-050, ULB -- Universite Libre de Bruxelles.
    11. Inoue, Takeshi & Hamori, Shigeyuki, 2011. "Financial permeation as a role of microfinance : has microfinance actually been helpful to the poor?," IDE Discussion Papers 299, Institute of Developing Economies, Japan External Trade Organization(JETRO).

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    More about this item

    Keywords

    O16; O50; G21;
    All these keywords.

    JEL classification:

    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O50 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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