Role of Microfinance in Financial Inclusion and Economic Development in the Backward Regions of West Bengal: Theories and Empirics

Financial Inclusion (FI), in the modern world, has become an important aspect for ensuring inclusivity in developmental process and achieving sustainable development goals. It, not only connects the unbanked; underserved population with the formal financial activities, but generates enough opportunities to overcome economic struggles and improve financial conditions by livelihood diversification and earning opportunities. In developing economies, Microfinance has become an important tool for ensuring this financial inclusion and serving the unserved and underserved. Over 250 million people, worldwide, avail the facilities of Microfinance Institutions (MFI) and for economies like India the numbers are really impressive and rising. MFIs not only have a microeconomic effect on the livelihood earnings of the borrowers or members but it has a huge macroeconomic effect as well. Given proper government support and policy initiatives, MFIs can have a long-run positive effect on the GDP of the economy along with significantly influencing investment function, saving function and upgradation of technology. The present paper looks to capture both these aspects by developing a microeconomic model. The study also has an empirical flavour where it conducts primary survey based probit and tobit analysis regarding impact on MFIs. The study is conducted over primary survey of 360 households in three backward regions of Indian Sundarbans—where MFIs have been operational, therefore, giving a real-world flavour about the effectiveness of MFIs in achieving financial inclusion. Our theory-based analysis ensures the effectiveness of MFIs and our empirical study finds that several socio-economic factors do affect the functioning of MFIs with women benefitting more from it and poor communication facilities hinder the process of financial inclusion. Thus, the study recommends improvements in different policy variables for sustaining the development in the long-run.