Abstract:
This paper tests the hypothesis that microfinance reduces poverty at macro level
using the cross-country data in 2007. The results of econometric estimation for
poverty head count ratio show, taking account of the endogeneity associated with
loans from microfinance institutions (MFIs), that microfinance loans significantly
reduce poverty. Thus, a country with higher MFI’s gross loan portfolio tends to have
lower poverty incidence after controlling the other factors influencing poverty. We
also found that poverty reducing effect tends to be larger in Sub Saharan Africa
(SSA) as suggested by the negative and significant coefficient estimate of the SSA
dummy and gross loan portfolio. From a policy perspective, our results would justify
increase in investment from development finance institutions and governments of
developing countries into microfinance loans as a means of poverty reduction.
