Essays on microfinance

This thesis is a collection of three individual but related papers on microfinance. The first paper (Chapter 2) examines the impact of microfinance interventions using meta-analysis. Specifically, this chapter uses meta-analysis to review 25 empirical studies with a total of 595 estimates of the impact of microcredit on poverty reduction and microenterprise performance. The chapter considers four proxies for poverty and three for microenterprise performance in order to examine the impact of microcredit on poverty and microenterprise performance, while addressing issues of within- and between-study variations. The proxies for poverty include consumption/expenditure, assets, income, and income growth while those for microenterprise performance include labour supply, business profits, and revenue. Overall, results show no robust evidence of any significant impact on the performance of microenterprises. With regards to impact on poverty, there is no evidence of any strong positive impact, especially on consumption/expenditure. I do find evidence of a significant impact of microcredit on assets, which is positive; however, it is weak and thus of no practical economic relevance. Evidence also indicates a negative impact on income growth. The second paper (Chapter 3) contributes to the discourse regarding trade-offs between microfinance financial sustainability and outreach. Given that sustainability of microfinance institutions (MFIs) is crucial for the continual existence of the microfinance industry, emphasis has been placed on the sustainability of MFIs over the past few years. However, with the primary goal of the industry being the attainment of social outreach, the emphasis on sustainability has raised concerns about a potential adverse effect on outreach. Using data on 1595 MFIs in 109 countries and measurement indices created for sustainability and outreach, this chapter examines if there is a trade-off between sustainability and outreach. The evidence shows that there is a trade-off between sustainability and outreach depth but complementarity between sustainability and outreach breadth. Finally, the third paper (Chapter 4) hypothesizes a relationship between ethnic diversity and microfinance institution performance. I measure ethnic diversity using indices of ethnic, linguistic, and religious fractionalization. I find that fractionalization is associated with poorer MFI financial performance and leads to MFI mission drift. Trust and strong social networks are important mechanisms of influence; they are lower in more fractionalized countries. Other important channels include discrimination, ease of credit allocation and business start-up, and various MFI-specific mechanisms. Results are robust to several sensitivity checks.