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Microcredit contract design: A macroeconomic evaluation

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  • Islam, Khan
  • O’Gorman, Melanie

Abstract

There is now a vast literature investigating the impact of microcredit on poverty in the developing world. Such studies are by and large at the micro-level – investigating the impact of the provision of microcredit loans or a feature of microcredit contracts for a specific microfinance institution (MFI) on measures of well-being such as poverty or female empowerment. While these studies are crucial for understanding the effectiveness of microcredit in various contexts, very little analysis has been at the macroeconomic level with a view to understanding the general equilibrium effects of microfinance. This paper does this, by providing a comprehensive theory that allows the relative importance of the various factors influencing microcredit’s impact to be quantified. We build on Buera et al. (2012) and develop a model of financial intermediation which highlights the roles of credit market imperfections, MFI efficiency and occupational choice. We exploit the large cross-country variation in microcredit features to decipher the important features of microcredit contracts, calibrating the model to data for 21 countries in the early 2000s. We then use the calibrated model to investigate the impact of a number of counterfactual scenarios which may lend insight into microcredit policy, such as training for microcredit clients, credit information-sharing and microcredit itself. We investigate the impact of each policy experiment on poverty, income per capita and entrepreneurship. This paper highlights that the impact of credit policies differs significantly across countries, and therefore that no credit-based policy is a panacea for improving welfare.

Suggested Citation

  • Islam, Khan & O’Gorman, Melanie, 2019. "Microcredit contract design: A macroeconomic evaluation," World Development, Elsevier, vol. 124(C), pages 1-1.
    • Handle: RePEc:eee:wdevel:v:124:y:2019:i:c:13
    DOI: 10.1016/j.worlddev.2019.104634
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    1. Villalba, Roberto & Venus, Terese E. & Sauer, Johannes, 2023. "The ecosystem approach to agricultural value chain finance: A framework for rural credit," World Development, Elsevier, vol. 164(C).

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    More about this item

    Keywords

    Microcredit; Poverty reduction; Macroeconomics;
    All these keywords.

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
    • O57 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries

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