Can the expansion of microfinance add up to macro impacts?

High quality evidence on the state of financial access around the world is advancing rapidly. A happy consequence of increasing knowledge is the ability to better recognize what we don’t yet know. That's why FAI launched a series on the ten questions, some micro, some macro, that need answers if we are to make informed decisions on how to improve financial access.This is the seventh installment of the 10 Research Questions on Improving Financial Access series.

Question 7Can the expansion of microfinance add up to macro impacts?

The most basic question is the micro one: whether microfinance typically yields notable impacts on the lives of low-income families. The logical follow-on is, to the extent that micro impacts emerge, how do those impacts add up?  Is there a reasonable case that expanding microfinance can make a dent in regional or national economic growth rates? In national-level poverty rates?

There are two complementary research strategies. One is cross-country research, which tends to show positive correlations between financial expansion and the reduction of inequality (Demirgüç-Kunt and Levine 2009 provide an overview). The work doesn’t connect the dots from microfinance explicitly, but it does help frame issues. The second approach connects the dots by imposing structure on the relationships. A good example is the general equilibrium analysis of Buera, Kaboski, and Shin (2011). They find that increasing financial access leads to macro impacts, but the magnitudes are small.

The work will be more meaningful as the penetration of finance expands to include more of today’s unbanked population.  As that happens, it will become more pressing to begin sorting out what this all adds up to.