Contribution of Microfinance to Financial Sector Development and Growth

Despite global recognition and sufficient history of microfinance there is mixed evidence of its net benefits and very limited empirical work on its contribution to financial intermediation and economic growth. Addressing this gap we aim to reveal whether and how microfinance is transferred to growth. Our conceptual approach is based on a broader finance-and-growth nexus where microfinance is seen as a new pillar capturing informal intermediation and directly contributing to financial sector development. First we define transmission channels for microfinance and second, perform the test on panel of 103 countries for 1995-2008 period using ArellanoBond (1991) instrumental technique thus ensuring the robustness of the results. There is evidence of microfinance to Granger-cause economic growth and it is positive only in less developed countries through lagged values where formal financial intermediation is immature leaving significant space for alternative means such as microfinance. However with further economic development this contribution has risk to be negative as middle income countries already face it through current values. JEL Classifications: G15, G21, O16, O57