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Procedia - Social and Behavioral Sciences 195 (2015) 705 – 712


World Conference on Technology, Innovation and Entrepreneurship

Microfinance and Poverty Reduction: A Review and Synthesis of

Empirical Evidence
Kamel Bel Hadj Miled a, , Jalel-Eddine Ben Rejeba
a
Higher Institute of Management of Sousse, University of Sousse, TUNISIA

Abstract

This article examines the relationship between microfinance and poverty reduction at the
macro-level, using cross-sectional data covering 596 microfinance institutions (MFIS) for 2011. The cross-sectional data are
supplemented by a two-period (2005 and 2011) panel data of 1132 microfinance institutions in 57 developing countries.
Taking, account of the endogeneity associated with MFIs’ loan. We show that a country with higher MFIs’ gross loan
portfolio per capita tends to have lower levels of Poverty Head Count Ratio and higher level of per capita, confirming the
role of microfinance in poverty reduction at the macro level and that poorer countries need to focus more on the equalizing
effects of microfinance.

©
© 2015
2015 The
The Authors.
Authors.Published
Publishedby
byElsevier
ElsevierLtd.
Ltd.This is an open access article under the CC BY-NC-ND license
(http://creativecommons.org/licenses/by-nc-nd/4.0/).
Peer-review under responsibility of Istanbul University.
Peer-review under responsibility of Istanbul Univeristy.
Keywords: microfinance; poverty; gross loan portfolio

1. Introduction

Many existing studies empirically analyse the close relationship between microfinance and poverty. Most of
these studies conclude that microfinance‘s potential in reducing poverty (Armendariz & Morduch, 2005;
Bakhtiari, 2011; Gibbons & Meehan, 2002; Johnson & Rogaly, 1997 ; Imai, Arun, & Annim, 2010), is high on
the public agenda nowadays, especially after the UN year of Microcredit in 2005 and the awarding of the Nobel
Peace Prize to Mohammad Yunus and the Grameen Bank in 2006. Based on this close relationship between
microfinance and poverty, several studies have postulated a positive correlate between microfinance and
consumption expenditure, especially if loans are taken by women (Pitt & Khandkar,1998 and khandkar, 2005).
Indeed, microfinance financial services provide a range of financial products and substantial flow of finance,
often to very low-income groups or households, who would normally be excluded by conventional financial
institutions ((Kurmanalieva, Montgomery and Weiss, 2003). Microfinance has brought positive impact to the life
of clients, boost the ability of poor individuals to improve their conditions and others have indicated that poor
people have taken advantage of increased earnings to improve their consumption level, health and build assets
(Appah & al (2012)). Today, increasingly microfinance is becoming an important investment opportunity,
mainly in developing regions such as Latin America and African, and all major international institution like the
European Union, the United Nations, the World Bank, the Asian Bank, and the American Development Bank
dedicate funding and research to microfinance. The relationship between microfinance and poverty is still in
question and this paper provides some new empirical evidence on the poverty-reducing effects of microfinance
institutions. Specifically, by using the cross-country data—including a pane data, we estimate models in which
the poverty headcount ratio and Household final consumption expenditure are explained by MFIs’ gross loan


Corresponding author. Tel.: 00216 22214871
E-mail address: kamelbenmiled@gmail.com

1877-0428 © 2015 The Authors. Published by Elsevier Ltd. This is an open access article under the CC BY-NC-ND license
(http://creativecommons.org/licenses/by-nc-nd/4.0/).
Peer-review under responsibility of Istanbul Univeristy.
doi:10.1016/j.sbspro.2015.06.339
706 Kamel Bel Hadj Miled and Jalel-Eddine Ben Rejeb / Procedia - Social and Behavioral Sciences 195 (2015) 705 – 712

portfolio per capita and certain control variables, namely the Gross domestic product (GDP), international
openness, inflation rate, domestic credit and a regional dummy. we find consistently that a country with higher
MFIs’ gross loan portfolio per capita tends to have lower levels of poverty headcount ratio and higher level of
expenditure of consumption which corroborates the poverty reducing role of microfinance. The rest of the paper
is organized as follows. The next section provides reviews the relevant literature on microfinance, especially its
effect on poverty reduction at the macro level. Methodology specifications are discussed in Section 3. Section 4
shows the analyses and empirical results. The final section offers concluding observations.

2. Literature Review and Hypotheses


The existing literature on the impact of microfinance can be broadly divided into three categories. The first
category examines the impact of microfinance on poverty (Hulme & Mosley, 1996; Pitt & Khandker, 1998;
Copestake & James, 2002; Khandker, 2005; Tedeschi, 2010). The second strand of literature deals with the
impact of microfinance on women's empowerment (Hashemi & al, 1996; Steele & al, 1998; Rahman & al, 2009;
Pitt & al, 2006; Garikipati, 2012). The third series of studies highlight other effects of microfinance, such as the
impact on education, health, nutrition , consumption level and build assets (Deloach & Lamanna, 2011; Gertler
& al, 2006; Jacobsen, 2009; Kouassi,2008; Leatherman & Dunford, 2010; Hazarika & Sarangi, 2008). However,
most of the evidence of the impact of microfinance interventions around the world remains highly controversial
and limited on micro-economic foundations (household or business data). Recent work macroeconomic levels as
Imai Gaiha, Thapa and Annim, 2010; Ahlin & al, 2011 concluded that microfinance is a powerful tool against
poverty.These studies redirect on macro-economy studies given the mixed results of the impact studies of
microfinance at the micro level. They showed that the number of poor people is inferior in countries, where the
number of micro-finance institutions is higher compared with countries, where the number of MFIs is lower.
(Imai & al, 2010). There are a few recent works that investigate the relationship between the macroeconomics
and microfinance activities and/or performance. This acts as a catalyst for development economists to conduct
thorough empirical studies to determine the impact of microfinance. (Imai & al (2012)). This research differs
from the cited studies in the following two ways. First, we use the poverty ratio as the dependent variable, which
is defined herein as the percentage of people below the poverty line in each country and Household final
consumption expenditure as a proxy to measure poverty. Finally, we use panel data on 57 developing countries
for 1132 microfinance institutions which has the advantage of incorporating individual dimension by a two-
period (2005 & 2011) and apply the instrumental variable estimation in order to overcome potential
endogeneity in the equation. Our objective is to further examine the hypothesis that a country with higher MFIs’
gross loan portfolio per capita tends to have lower levels of poverty indices and higher level of expenditure of
consumption per capita.

3. Methodology

3.1. Research Goal

The present study analyzes the role of microfinance (gross loan portfolio per capita) and economic growth to
poverty reduction at macro level, using cross-country and panel data.

3.2. Sample and Data Collection

Our analysis is based on cross-sectional data covering 596 microfinance institutions in 40 developing
countries for 2011. The cross-sectional data are supplemented by a two-period (2000-2005 & 2006-2011)1 panel
data of 57 developing countries in 1132 microfinance institutions with high levels of informational
transparency, so we focused exclusively on those 3-5 diamonds levels which is the highest level of disclosure to
its outreach, impact and financial data, audited financial statements and rating/evaluations. This is based on the
data generated by Microfinance Information Exchange (2011) or MIX and the World Development Indicators
2011 (World Bank, 2011). These poverty estimates are based on the poverty line of US$1.25 (based on PPP—
Purchasing Power Parity) per day in 2005.

This estimation method is based on the principle of application of Ordinary Least Squares (OLS) and of
instrumental variable (IV) or 2SLS (least squares in two stages), to estimate the effect of gross loan portfolio per

1
Poverty data for the panel were constructed by taking averages for 2000–05 and 2006–011.
 Kamel Bel Hadj Miled and Jalel-Eddine Ben Rejeb / Procedia - Social and Behavioral Sciences 195 (2015) 705 – 712 707

capita of microfinance institutions on poverty. 2SLS involves two stages: gross loan portfolio per capita of MFIs
is estimated by instrumental variable and other covariates in the first stage and in the second poverty (poverty
head count ratio or expenditure of consumption per capita) is estimated by the predicted gross loan portfolio per
capita and other covariates, a technique for solving endogeneity problems associated with the bi-casual
relationship between gross loan portfolio per capita and poverty levels in a country. This reverse causality from
poverty to gross loan portfolio per capita may arise, for example, if poverty- oriented development partners and
governments provide more funds to MFIs located in poorer countries ( Imai & al, 2012). However, treatment
with the STATA 12 allows a resolution using the method “OLS and “2 SLS”. In order to do so, a series of
econometric analyses will be conducted on the usual set of equations and variables in the model estimated.

3.3. Analyses and Results

The empirical analysis includes the following items: the measure of the logarithms of gross loan portfolio,
the measure of openness, inflation rate, the logarithms gross domestic product per capita (at 2000 constant USD
prices); domestic credit of banks as a proportion of GDP and the regional dummy.

We use the following two types of models for empirical analysis:

Pvi = Į0 + Į1 GLFi + Į2 GDPi + Į3 DCi+ Į4 opness1i + Į5 opness2i + Į6 infi + Į7DMi+μi (1)

GLFi = ȕ0 + ȕ1 CEi+ ȕ2 Ln6LaGLFi + ȕ3Yi+ Ÿ i (2)

Where PVi is t poverty head count ratio (or expenditure of consumption per capita); GLF” represents gross
loan portfolio; GDP denotes gross domestic product per capita (at 2000 constant USD prices); DC indicates
domestic credit of banks as a proportion of GDP; OPENESS denotes international openness ; INFi indicates
the inflation rate; “REG” is a vector of regional dummies with Latin America and Caribbean being the reference
region. We, thus, empirically analyse how a change in gross loan portfolio MFIs affects the poverty ratio. In
order to address the problem of endogeneity, we use the instrumental variable method to estimate each
parameter.

Fig. 1. Trends and Patterns of Real Gross Loan Portfolio Source: Authors’ compilation from MIX Data.

Eqn. (2) is the reduced form which tests the presence of endogeneity and suitability of our instruments. W
use enforcing contracts at the country level (CE) and the weighted 6 year average lag of gross loan portfolio,
which is weighted by the number of MFIs for each country (Ln6LaGLF) and X is the vector of all the other
explanatory variables considered in Eqn. (1). Error terms for the two equations are denoted by “u” and “t.”

4. Results

Figure 1 describes the variation of median gross loan portfolio for different regions. Generally speaking,
the median gross loan portfolio increases for all regions over the period 2005–2011, especially the variation for
two periods: 2007–08 and 2011-2012. An interpretation of the trend over these periods will need to take into
consideration the potential effect of the global financial crisis on the microfinance industry. In addition to that,
Eastern Europe and central Asia and Middle East and Nord African regions have experienced a sharper increase
708 Kamel Bel Hadj Miled and Jalel-Eddine Ben Rejeb / Procedia - Social and Behavioral Sciences 195 (2015) 705 – 712

in the gross loan portfolio than other zones. Table 1 displays a summary statistics of the variables used in the
regression analyses. We report the median and the mean of each variable for the regions concerned. Numbers of
microfinance institution in East Asia and Pacific countries are more intense than in the other regions. On the
other hand, microfinance activities in Sub-Saharan African (SSA) countries tend to show the lowest values for
the gross loan portfolio (as a proxy for MFI operations). In terms of the macro indicators, SSA is the poorest
region in the two periods irrespective of the measure (Poverty head count) in question. However, East Asia and
the pacific tend to show the lowest values for expenditure of consumption. Over the period 2005–2011, the
poverty headcount showed a decline in all regions. Besides, MENA recorded the lowest poverty headcount ratio
and the highest domestic credit while Latin America and the Caribbean countries showed the greatest output per
head (GDPPC). Tables 2-5 indicate the empirical results of the poverty ratio and expenditure of consumption
respectively, using cross-sectional data for 2011 in Tables 2 and 4. The other two cases are given in Tables 3 and
5, using two-period (2005 and 2011) panel data With a view to examining the hypothesis of a relationship
between gross loan portfolio per capita and poverty. Thus, Tables 2 and 3 contain all the estimations (OLS, IV,
Fixed Effects (FE), and Random Effects (RE)) for the poverty headcount ratio; Tables 4 and 5 examine the case
for the expenditure of consumption. In column (1) and (2) of Table 2 and 4, all specifications using the cross-
sectional and panel data show that GLP per capita is negatively and significantly associated with the poverty
headcount ratio, and which is consistent with our hypothesis that micro loans reduce poverty. The coefficient
estimation of log of gross loan portfolio per capita of MFI is negative and significant at the 1% level with
poverty head count ratio in column (1) of Table 2 and positively and significantly associated with the
expenditure of consumption at the 5% level in column (2) table 4. In some cases of the instrumental variable
(IV) estimation (in column (3) of Table 4). The present IV estimation with the aim of resolving the potential
endogeneity of microfinance variables in the poverty headcount equation (or the expenditure of
consumption).With regard to the control variables, GDP per capita is statistically significant in almost all
estimations. Furthermore, as the finance-poverty literature indicates, we find that the coefficient estimate of
share of domestic credit to GDP is significant in some cases (columns (1) (3) and (4) of Table 2, 4 and 5 ). As
expected in literature, the coefficients of international openness (opness 2) are statistical significance in most
result sets of our estimate but they are statistically insignificant for the trade to GDP ratio (opness1). Although
Hamori and Hashiguchi (2012) report that an increase in openness leads to an increase in inequality, our
empirical results indicate that such a rise may not lead to a change in the poverty ratio. (Takeshi and Hamori
(2013)). Furthermore, we examine the effects of inflation on the poverty ratio. The coefficient of the inflation
rate (INF) is statistically significant at the 10% level in four cases ( in column (2) for table 3 , column (3) for
table 4 and column 1 for table (5)). Thus, an increase in the inflation rate may increase and, at the same time,
worsen the poverty ratio. Appendices 1 show the correlation matrix and the first stage IV estimation which offer
a justification for the validity of our instruments. We use two kinds of instrument, that is, cost of enforcing
contract and weighted 6-year lag of average GLP. In summary, it is clear from all estimation, that microfinance
institution and economic growth improve the poverty ratio. This hypothesis is further corroborated by the
pooled OLS and random effects model in columns (1) and (3) of Table 3 and 5.

5. Conclusion

The role played by the microfinance sector in economy has received much attention. This perspective has
been analyzed in the literature from both theoretical and empirical viewpoints, in its potential for poverty
reduction. From this reason, we focused on the hypothesis that microfinance reduces poverty by using cross-
country data for 2011 and a panel data for 2005 and 2011. Our econometric results consistently confirm that
microfinance loans per capita are significantly and negatively associated with poverty head count ratio and
positively and significantly associated with the expenditure of consumption. In fact, a country with a higher
MFIs’ gross loan portfolio per capita tends to have lower poverty head count ratio and higher expenditure of
consumption after controlling for the effects of other factors influencing. Other factors which contribute to
poverty reduction include the following items: GDP per capita, share of credit in GDP (as a measure of financial
development of an economy), international openness and inflation rate USD prices)
 Kamel Bel Hadj Miled and Jalel-Eddine Ben Rejeb / Procedia - Social and Behavioral Sciences 195 (2015) 705 – 712 709

Table 1. Descriptive statistics of poverty correlates

Table 2. Results based on cross-sectional regressions (dependent variable: poverty headcount ratio) 
710 Kamel Bel Hadj Miled and Jalel-Eddine Ben Rejeb / Procedia - Social and Behavioral Sciences 195 (2015) 705 – 712

Table 3. Results based on panel data regressions (dependent variable Poverty Headcount Ratio »)

Table 4. Results based on cross-sectional regressions (dependent variable: expenditure of consumption)

 Kamel Bel Hadj Miled and Jalel-Eddine Ben Rejeb / Procedia - Social and Behavioral Sciences 195 (2015) 705 – 712 711

Table 5. Results based on panel data regressions (dependent variable: expenditure of consumption)

T values are in parenthesis.

* Significant at 1%.
** Significant at 5%.
***Significant at 10%.

Appendix 1 : First Stage Regression (Dependent Variable: Log Of Glf Per Capita)

Variable Coefficients

lnw6lagglf 0.75 (5.83)*

CE -0.04 (-2.25)*

lnGDP -0.00013 (-1.46)

DC 0.006 (0.68)

Opness1 0.011 (1.46)

Opness2 -0.014 (-0.44)

Inf 0.034 (0.92)

N 40

_cons -.087 (0.913)

712 Kamel Bel Hadj Miled and Jalel-Eddine Ben Rejeb / Procedia - Social and Behavioral Sciences 195 (2015) 705 – 712

T values en parenthèses
*significative à 1%
** significative à 5%
*** significative à 10%

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