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In: Finance

What are the positive sides of Micro Finance impacts on economic growth

  • What are the positive sides of Micro Finance impacts on economic growth

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Expert Solution

Microfinance is generally defined as financial institutions that provide financial services to the poor unbanked population. Three-quarters of the world’s poor lack a bank account because of poverty, costs, etc., and are denied credit by formal financial and banking institutions as constrained by formal rules which they have to follow to get a credit from these institutions. Microfinance institutions provide most of the basic services of banks to those people.

  • Microfinance promotes well-functioning financial sector, which is critical for efficient resource allocation, leading to increased productivity, greater investment and higher overall levels of economic growth.
  • The microfinance industry has tremendously increased its intermediation activities over the last decade, particularly in developing countries. Their total assets have increased by more than 2000$ from 2002 to 2015.
  • Improved access to finance is needed to ensure sustainable economic growth, so that low-income households, that still constitute a majority, have chances to escape from poverty. Microfinance aids in access to finance measured by its depth and outreach.
  • Microfinance envisages the integration of the financial needs of households into a country’s financial system and hence is expected to positively affect the growth.
  • This implies that microfinance is an important ingredient in shaping financial inclusion, thus promoting financial development and growth through various channel.
  • A world bank research indicated that a high level of financial development is a powerful tool to reduce poverty. This implies that as the financial sector deepens it also increases its reach, providing financial services directly to the poor.

Microfinance holds the first leading variable to create a significant impact on growth (GDP). This can be interpreted based on findings of various literature that microfinance facilitates improved access to finance, which leads to financial inclusion and improves the financial sector, therefore effects positively on economic growth.


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