Advanced

Does Microcredit Reduce Poverty?

Nilsson, Hanna LU (2010) NEKM01 20102
Department of Economics
Abstract
Despite efforts to end it, poverty still persists in the world today. Lately, microcredit has received much attention as a possible remedy. Even though there are many studies investigating the effects of microcredit there is a lack of research on the impact of microcredit on national poverty. Therefore the purpose of this study is to investigate that particular aspect by analyzing the impact so far of microcredit on national poverty in over a hundred, primarily developing, countries.
The empirical analysis consists of an OLS regression where GDP per capita is used as a proxy for poverty. The microcredit variables that are tested are portfolio (the sum obtained when dividing the total gross loan with total population) and borrowers (the... (More)
Despite efforts to end it, poverty still persists in the world today. Lately, microcredit has received much attention as a possible remedy. Even though there are many studies investigating the effects of microcredit there is a lack of research on the impact of microcredit on national poverty. Therefore the purpose of this study is to investigate that particular aspect by analyzing the impact so far of microcredit on national poverty in over a hundred, primarily developing, countries.
The empirical analysis consists of an OLS regression where GDP per capita is used as a proxy for poverty. The microcredit variables that are tested are portfolio (the sum obtained when dividing the total gross loan with total population) and borrowers (the share of borrowers in the population). To get an estimation of the appropriateness of the proxy, the same regressions were run with poverty as the dependent variable.
The results show no significant effect of the portfolio variable and only a negative correlation between borrower and GDP per capita. This correlation is intuitive, since it is likely that a poor country is more involved in microcredit than a rich one.
Limitations within the data call for caution when interpreting the results. This reservation aside, the outcome indicates that the impact of microcredit on national poverty has not been great. There can be several reasons for this:
Studies have found that microcredit has problems reaching the poorest segment of the population. This might prohibit the MFIs from reducing poverty. It is also possible that any positive effect of microcredit on an individual or household level is not big enough to impact national poverty.
For the credit to have a significant macroeconomic impact there most likely needs to be well functioning institutions and a favorable macroeconomic environment. As long as these are flawed, any positive effect of microcredit might well be severely dampened.
Even if microcredit has been around for quite some time it is first recently that it has really picked up speed. Thus it might be necessary to wait a while before being able to accurately capture the effect of microfinance on a macroeconomic level. (Less)
Please use this url to cite or link to this publication:
author
Nilsson, Hanna LU
supervisor
organization
course
NEKM01 20102
year
type
H1 - Master's Degree (One Year)
subject
keywords
financial market failures, Microcredit, poverty, panel data
language
English
id
1698660
date added to LUP
2010-11-09 12:37:47
date last changed
2011-04-27 13:15:13
@misc{1698660,
  abstract     = {Despite efforts to end it, poverty still persists in the world today. Lately, microcredit has received much attention as a possible remedy. Even though there are many studies investigating the effects of microcredit there is a lack of research on the impact of microcredit on national poverty. Therefore the purpose of this study is to investigate that particular aspect by analyzing the impact so far of microcredit on national poverty in over a hundred, primarily developing, countries.
The empirical analysis consists of an OLS regression where GDP per capita is used as a proxy for poverty. The microcredit variables that are tested are portfolio (the sum obtained when dividing the total gross loan with total population) and borrowers (the share of borrowers in the population). To get an estimation of the appropriateness of the proxy, the same regressions were run with poverty as the dependent variable.
The results show no significant effect of the portfolio variable and only a negative correlation between borrower and GDP per capita. This correlation is intuitive, since it is likely that a poor country is more involved in microcredit than a rich one.
Limitations within the data call for caution when interpreting the results. This reservation aside, the outcome indicates that the impact of microcredit on national poverty has not been great. There can be several reasons for this:
Studies have found that microcredit has problems reaching the poorest segment of the population. This might prohibit the MFIs from reducing poverty. It is also possible that any positive effect of microcredit on an individual or household level is not big enough to impact national poverty.
For the credit to have a significant macroeconomic impact there most likely needs to be well functioning institutions and a favorable macroeconomic environment. As long as these are flawed, any positive effect of microcredit might well be severely dampened.
Even if microcredit has been around for quite some time it is first recently that it has really picked up speed. Thus it might be necessary to wait a while before being able to accurately capture the effect of microfinance on a macroeconomic level.},
  author       = {Nilsson, Hanna},
  keyword      = {financial market failures,Microcredit,poverty,panel data},
  language     = {eng},
  note         = {Student Paper},
  title        = {Does Microcredit Reduce Poverty?},
  year         = {2010},
}