Globalization and Affordability of Microfinance
Research Paper Title:
“Globalization and affordability of microfinance”
Authors:
Sunny Li Sun (Manning School of Business, University of Massachusetts Lowell)
Hao Liang (Lee Kong Chian School of Business, Singapore Management University)
Background:
Microfinance is a way for the poor to access affordable finance, relative to the traditional banking, and is the main source of financing for the world's un- and underbanked population, with $124B loans served to 140M global customers currently. It is not intended to fund personal consumption but rather to spark a self-perpetuating cycle of business growth. This study explores how globalization can differentially affect financial inclusion through the lens of microfinance.
Methodology:
Sample: A dataset that includes both country-level and organizational-level data. Organizational data on MFIs were obtained from the Microfinance Information Exchange Inc. (MIX). Data on country-level globalization is from the Eidgenössische Technische Hochschule (ETH) Zürich's KOF Index of Globalization.
Sample Size: 2030 MFI-year observations across 50 emerging countries over the 2002–2012 period
Analytical Approach: A multilevel analysis approach in all regressions. The multilevel models control for variation at different levels and intragroup correlations and have been widely applied in cross-country studies.
Hypotheses:
A higher degree of social globalization in a country is associated with greater affordability of financial services for the poor
Economic globalization has a U-shaped relationship with the affordability of microfinance
The density of nonprofit organizations in a country's microfinance industry amplifies the effect of Hypothesis 1
Results:
Social globalization increases the affordability of microfinance
Economic globalization has a U-shaped relationship with the affordability of microfinance.
Stronger presence of non-profit organizations in the microfinance industry accelerates effect of social globalization.
Conclusion:
This study aimed to illuminate the relation between globalization and inclusive growth through the lens of microfinance The results support the authors’ hypotheses and suggest a more nuanced view on how globalization affects affordability of microfinance. Social globalization helps reduce information asymmetry between borrowers and lenders by removing cultural barriers and facilitating communication and spreads globally accepted development principles and lending practices. These forces reduce the poor's cost of borrowing. In contrast, economic globalization promotes profit-maximization, which increases the barriers for the poor to access finance, but also competition, which reduces the barriers. The study found that the average portfolio loan interest rate of an MFI is negatively associated with its country's social globalization and has an inverted U-shaped relationship with its economic globalization. In addition, NPO density positively moderates the effect of social globalization on lowering MFI interest rates. Finally, the study also shows that the results are not entirely explained by other country-level factors, such as institutional fragility, economic development, and cultures.
