Abstract
The law of diminishing marginal productivity dictates that scarce resources earn a high return. Why then, does capital not flow to the poor, its most productive users? This has been attributed in part to the failure of credit markets. The argument goes that the poor have so little to offer by way of collateral, and borrow such small amounts, that it is too risky and expensive to lend to them. The ramification is that they get caught in a credit-based poverty trap, wherein they are unable to undertake profitable investments due to credit constraints and hence, remain poor. The great promise of microcredit — making joint-liability loans to small groups of poor people possessing no collateral, enabling them to make productive investments — was to be the magic bullet against poverty. Yet, a mere five years after the Nobel Peace Prize was awarded to Muhammad Yunus and the Grameen Bank, claims about microcredit’s transformative power are being debated.
Aggarwal is at the University of California Santa Cruz; Klapper and Singer are at the World Bank. We thank David McKenzie, Douglas Randall and Asli Togan Egrican for comments. This paper’s findings, interpretations and conclusions are entirely those of the authors and do not necessarily represent the views of the World Bank, their executive directors or the countries they represent. Corresponding author: Leora Klapper, email: lklapper@worldbank.org; address: 1818 H St. NW, Washington, DC, 20035; tel: 1-202-473-8738; fax: 1-202-522-1155.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
References
Ardener, S. and Burman, S. (1995). Money-go-rounds: The Importance of Rotating Savings and Credit Associations for Women (Oxford, UK: Berg).
Ardic, O. P., Heimann, M. and Mylenko, N. (2011). ‘Access to Financial Services and the Financial Inclusion Agenda Around the World: A Cross-Country Analysis with a New Data Set’. World Bank Policy Research Working Paper No. 5537.
Ashraf, N., Karlan, D. S. and Yin, W. (2006). ‘Tying Odysseus to the Mast: Evidence from a Commitment Savings Product in the Philippines’. Quarterly Journal of Economics 121 (2), pp. 635–72.
Baland, J.-M., Guirkinger, C. and Mali, C. (2011). ‘Pretending to Be Poor: Borrowing to Escape Forced Solidarity in Credit Cooperatives in Cameroon’. Economic Development and Cultural Change 60 (1), pp. 1–16.
Banerjee, A. and Duflo, E. (2007). ‘The Economic Lives of the Poor’. Journal of Economic Perspectives 21 (1), pp. 141–67.
Banerjee, A. and Duflo, E. (2008). ‘Do Firms Want to Borrow More? Testing Credit Constraints Using a Directed Lending Program’. Mimeo.
Banerjee, A., Duflo, E., Glennerster, R. and Kinnan C. (2009). ‘The Miracle of Microfinance? Evidence from a Randomized Evaluation’. Mimeo.
Beck, T. and Demirgüç-Kunt, A. (2009). ‘Financial Institutions and Markets Across Countries and Over Time: Data and Analysis’. World Bank Policy Research Working Paper No. 4943.
Beck, T., Demirgüç-Kunt, A. and Levine R. (2000). ‘A New Database on Financial Development and Structure’. World Bank Economic Review 14, pp. 597–605.
Beck, T., Demirgüç-Kunt, A. and Maksimovic, V. (2007). ‘Financial and Legal Constraints to Growth: Does Firm Size Matter?’ Journal of Finance LX (1), pp. 137–77.
Beck, T., Munzele Maimbo, S., Faye, I. and Triki, T. (2011). Financing Africa: Through the Crisis and Beyond (Tunis: African Development Bank).
Besley, T. (1995). ‘Savings, Credit and Insurance’. In J. Behrman and T. N. Srinivasan (eds). Handbook of Development Economics, Edition 1 (3), pp. 2123–207 (Elsevier).
Bruhn, M. and Love, I. (2009). ‘The Economic Impact of Banking the Unbanked: Evidence from Mexico’. World Bank Policy Research Working Paper No. 4981.
Brune, L., Giné, X., Goldberg, J. and Yang, D. (2011). ‘Commitments to Save: A Field Experiment in Rural Malawi’. World Bank Policy Research Working Paper No. 5748.
Burgess, R. and Pande, R. (2005). ‘Do Rural Banks Matter? Evidence from the Indian Social Banking Experiment’. American Economic Review 95 (3), pp. 780–95.
Calderon, C. A., Chong, A. and Galindo A. J. (2002). ‘Development and Efficiency of the Financial Sector and Links with Trust: Cross-Country Evidence’. Economic Development and Cultural Change 51 (1), pp. 189–204.
Caprio, G. and Klingebiel, D. (2003). Episodes of Systemic and Borderline Financial Crises (Washington, DC: World Bank).
Cassar, A. and Wydick, B. (2010). ‘Does Social Capital Matter? Evidence from a Five-Country Group Lending Experiment’. Oxford Economic Papers 62, pp. 715–39.
CGAP and MIX. (2010). Sub-Saharan Africa 2009: Microfinance Analysis and Benchmarking Report (Washington, DC: Consultative Group to Assist the Poor; Microfinance Information Exchange).
CGAP and MIX. (2011). MIX Microfinance World: Sub-Saharan Africa Microfinance Analysis and Benchmarking Report 2010 (Washington, DC: Consultative Group to Assist the Poor; Microfinance Information Exchange).
Chaia, A., Dalal, A., Goland, T., Gonzalez, M. J., Morduch, J. and Schiff R. (2009). ‘Half the World is Unbanked’. Financial Access Initiative Framing Note, http://financialaccess.org/sites/default/files/110109%20HalfUnbanked_0.pdf, date accessed 6 December 2011.
Collins, D., Morduch, J., Rutherford, S. and Ruthven, O. (2009). Portfolios of the Poor: How the World’s Poor Live on $2 a Day (Princeton, NJ: Princeton University Press).
Counts, A. and Meriweather, P. (2008). New Frontiers in Micro-Savings
Crépon, B., Devoto, F., Duflo, E. and Pariente, W. (2011). ‘Poverty, Access to Credit and the Determinants of Participation in a New Micro-credit Program in Rural Areas of Morocco’. Mimeo.
De Mel, S., McKenzie, D. and Woodruff, C. (2008). ‘Returns to Capital in Microenterprises: Evidence from a Field Experiment’. Quarterly Journal of Economics 123 (4), pp. 1329–72.
De Mel, S., McKenzie, D. and Woodruff, C. (2011). ‘Getting Credit to High Return Microentrepreneurs: The Results of an Information Intervention’. World Bank Economic Review 25 (3), pp. 456–85.
Demirgüç-Kunt, A., Karacaovali, B. and Laeven, L. (2005). ‘Deposit Insurance Around the World: A Comprehensive Database’. World Bank Policy Research Working Paper No. 3628.
Duflo, E., Kremer, M. and Robinson, J. (2011). ‘Nudging Farmers to Use Fertilizer: Theory and Experimental Evidence from Kenya.’ American Economic Review 101 (6), pp. 2350–90.
Dupas, P., Green, S., Keats, A. and Robinson, J. (2011). ‘Challenges in Banking the Rural Poor: Evidence from Kenya’s Western Province’ (Prepared for NBER Africa Project Conference Volume).
Dupas, P. and Robinson, J. (2011a). ‘Savings Constraints and Microenterprise Development: Evidence from a Field Experiment in Kenya’. NBER Working Paper No. 14693.
Dupas, P. and Robinson, J. (2011b). ‘Why Don’t the Poor Save More? Evidence from Health Savings Experiments’. NBER Working Paper No. 17255.
El-Zaghbi, M., Gähweiler, B. and Lauer, K. (2011). ‘Cross-border Funding of Microfinance’. CGAP Focus Note No. 70 (Washington, DC: Consultative Group to Assist the Poor).
Fafchamps, M., McKenzie, D., Quinn, S. and Woodruff, C. (2011). ‘When is Capital Enough to Get Female Microenterprises Rowing?’ World Bank Policy Research Working Paper No. 5706.
Gaul, S. (2011). Mapping Africa Financial Inclusion – Overview (Washington, DC: Microfinance Information Exchange).
Guiso, L., Sapienza, P. and Zingales, L. (2004). ‘The Role of Social Capital in Financial Development’. American Economic Review 94 (3), pp. 526–56.
ILO. (2002). ‘Women and Men in the Informal Economy: A Statistical Picture’ (Geneva: International Labour Organization).
IMF (2011). IMF-IFS Statistics (Washington, DC: The International Monetary Fund).
Jakiela, P. and Ozier, O. (2011). ‘Does Africa Need a Rotten Kin Theorem? Experimental Evidence from Village Economies’. Mimeo.
Kaboski, J. and Townsend, R. (2011). ‘A Structural Evaluation of a Large Scale Quasi-Experimental Microfinance Initiative’. Econometrica 79, pp. 1357–406.
Karlan, D. and Zinman, J. (2010a). ‘Expanding Credit Access: Using Randomized Supply Decisions to Estimate the Impacts’. Review of Financial Studies 23 (1), pp. 433–46.
Karlan, D. and Zinman, J. (2010b). ‘Expanding Microenterprise Credit Access: Using Randomized Supply Decisions to Estimate the Impacts in Manila’. Mimeo.
Kendall, J. (2010). ‘A Penny Saved: How Do Savings Accounts Help the Poor?’ FAI Focus Note (New York, NY: Financial Access Initiative).
Kristoff, N. D. (2009). ‘Sparking a Savings Revolution’. Op-Ed on 30 December 2009 (New York, NY: New York Times).
Mas, I. and Radcliffe, D. (2010). ‘Mobile Payments Go Viral: M-PESA in Kenya’. From: Yes Africa Can: Success Stories from a Dynamic Continent (Washington, DC: World Bank).
Mauro, P. (1995). Corruption and Growth. The Quarterly Journal of Economics 110 (3), pp. 681–712.
McKenzie, D. and Woodruff, C. (2008). ‘Experimental Evidence on Returns to Capital and Access to Finance in Mexico’. World Bank Economic Review 22 (3), pp. 457–82.
McKinsey & Company. (2010). Global Financial Inclusion (Washington, DC: McKinsey Publishing).
Microfinancefocus. (2011). http://www.microfinancefocus.com/m-pesa-mobile-money, date accessed 6 December 2011.
Morduch, J. (1999). ‘The Microfinance Promise’. Journal of Economic Literature 37 (4), pp. 1569–614.
Pitt, M. and Khandker, S. R. (1998). ‘The Impact of Group-Based Credit Programs on Poor Households in Bangladesh: Does the Gender of Participants Matter?’ Journal of Political Economy 106 (5), pp. 958–96.
Reserve Bank of India. (2006). Financial Inclusion by Extension of Banking Services – Use of Business Facilitators and Correspondents. RBI Circular No. RBI/2005–06/288 DBOD.No.BL.BC. 58/22.01.001/2005–2006 (New Delhi: RBI).
Sabarwal, S. and Terrell, K. (2009). ‘Access to Credit and Performance of Female Entrepreneurs in Latin America (Summary)’. Frontiers of Entrepreneurship Research 29 (18), Article 6.
Schneider, F. (2002). ‘Size and Measurement of the Informal Economy in 110 Countries Around the World’. Paper presented at the Workshop of Australian National Tax Centre, ANU. Canberra, Australia. 17 July 2002.
Thyagarajan, S. and Venkatesan, J. (2008). ‘Cost-Benefit and Usage Behaviour Analysis of No Frills Accounts: A Study Report on Cuddalore District’. Working Paper, Centre for Micro Finance.
Udry, C. and Anagol, S. (2006). ‘The Return to Capital in Ghana’. American Economic Review 96 (2), pp. 388–93.
World Bank (2004). World Bank Development Report 2005: A Better Investment Climate for Everyone (New York, NY: World Bank and Oxford University Press).
World Bank (2011). World Development Indicators (Washington DC: The World Bank).
Editor information
Editors and Affiliations
Copyright information
© 2013 Shilpa Aggarwal, Leora Klapper and Dorothe Singer
About this chapter
Cite this chapter
Aggarwal, S., Klapper, L., Singer, D. (2013). Financing Businesses in Africa: The Role of Microfinance. In: Gueyie, JP., Manos, R., Yaron, J. (eds) Microfinance in Developing Countries. Palgrave Macmillan, London. https://doi.org/10.1057/9781137301925_9
Download citation
DOI: https://doi.org/10.1057/9781137301925_9
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-1-349-34563-2
Online ISBN: 978-1-137-30192-5
eBook Packages: Palgrave Economics & Finance CollectionEconomics and Finance (R0)