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The Income Augmenting and Budget Tightening Impacts of Microfinance: Theory and Evidence from Pakistan

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  • Wajid Khan
  • Ikram Ullah
  • Sun Shaorong

Abstract

Since the institutionalization of microcredit as the flagship poverty alleviation program, its potential has been under constant scrutiny by practitioners and researchers. This article extends previous work by analyzing two issues: (a) whether microcredit has the potential to alleviate poverty and (b) whether the conclusion drawn from the first issue is sensitive to interest rate variations. We first theoretically show that there is reason to believe that microcredit has the potential to change the fortunes of poor communities. However, the direction of the change in fortunes is uncertain and depends on how costly microfinance institutions’ financial services are perceived by the poor. We then test these theoretical assertions against data collected from 568 individuals from Northern Pakistan. By comparing various sub-groups using Ordinary Least Square and Binary Logistic regression analysis, our results reveal that higher interest rates more than offset the positive effects of microcredit on clients’ income. We also discuss policy implications of the findings. JEL Classification : I30, G21, C61, E64.

Suggested Citation

  • Wajid Khan & Ikram Ullah & Sun Shaorong, 2024. "The Income Augmenting and Budget Tightening Impacts of Microfinance: Theory and Evidence from Pakistan," SAGE Open, , vol. 14(3), pages 21582440241, August.
  • Handle: RePEc:sae:sagope:v:14:y:2024:i:3:p:21582440241267368
    DOI: 10.1177/21582440241267368
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    More about this item

    Keywords

    poverty; microfinance institutions; optimization; income/price policy;
    All these keywords.

    JEL classification:

    • I30 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • E64 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Incomes Policy; Price Policy

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