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Microfinance and Financial Sector Development

  • Annabel Vanroose
  • Bert D’Espallier

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: https://dipot.ulb.ac.be/dspace/bitstream/2013/54326/1/RePEc_sol_wpaper_09-040.pdf
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Paper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers CEB with number 09-040.RS.

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Length: 41 p.
Date of creation: 2009
Date of revision:
Publication status: Published by:
Handle: RePEc:sol:wpaper:09-040
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  1. Hossein Jalilian & Colin Kirkpatrick, 2005. "Does Financial Development Contribute to Poverty Reduction?," Journal of Development Studies, Taylor & Francis Journals, vol. 41(4), pages 636-656.
  2. Beatriz Armendáriz de Aghion & Annabel Vanroose, 2009. "Uncovering Microfinance Myths: Does Country-Wide Age Matter?," Reflets et perspectives de la vie économique, De Boeck Université, vol. 0(3), pages 7-17.
  3. Hartarska, Valentina M., 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.
  4. Cull, Robert & Demirguc-Kunt, Asli & Morduch, Jonathan, 2006. "Financial performance and outreach : a global analysis of leading microbanks," Policy Research Working Paper Series 3827, The World Bank.
  5. Annabel Vanroose, 2006. "The uneven development of microfinance: a Latin-American perspective," Working Papers CEB 06-021.RS, ULB -- Universite Libre de Bruxelles.
  6. 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.
  7. 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.
  8. Levine, Ross, 2005. "Finance and Growth: Theory and Evidence," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 12, pages 865-934 Elsevier.
  9. Yongfu Huang, 2005. "What determines financial development?," Bristol Economics Discussion Papers 05/580, Department of Economics, University of Bristol, UK.
  10. Mersland, Roy & Øystein Strøm, R., 2009. "Performance and governance in microfinance institutions," Journal of Banking & Finance, Elsevier, vol. 33(4), pages 662-669, April.
  11. Roy Mersland & Reidar Øystein Str�m, 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.
  12. Alain de CROMBRUGGHE & Michel TENIKUE & Julie SUREDA, 2008. "Performance Analysis For A Sample Of Microfinance Institutions In India," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 79(2), pages 269-299, 06.
  13. Navajas, Sergio & Schreiner, Mark & Meyer, Richard L. & Gonzalez-Vega, Claudio & Rodriguez-Meza, Jorge, 1998. "Microcredit And The Poorest Of The Poor: Theory And Evidence From Bolivia," Economics and Sociology Occasional Papers 28334, Ohio State University, Department of Agricultural, Environmental and Development Economics.
  14. Marc Labie & Anaïs Périlleux, 2008. "Corporate governance in microfinance: credit unions," Working Papers CEB 08-003.RS, ULB -- Universite Libre de Bruxelles.
  15. Beatriz Armendariz & Jonathan Morduch, 2007. "The Economics of Microfinance," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262512017, June.
  16. Annabel Vanroose, 2008. "What macro factors make microfinance institutions reach out?," Working Papers CEB 08-036.RS, ULB -- Universite Libre de Bruxelles.
  17. 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.
  18. 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.
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  20. McIntosh, Craig & Wydick, Bruce, 2005. "Competition and microfinance," Journal of Development Economics, Elsevier, vol. 78(2), pages 271-298, December.
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