Microfinance, entrepreneurship and institutional quality

Abstract

The purpose of this paper is to consider the success and failure of microfinance institutions in generating economic growth over the past 30 years and propose a dual criterion of evaluation.,It surveys the empirical literature on microfinance and finds that while there has been small and localized success in various countries in improving access to credit, at the same time there has been a broader failure to generate economic growth. The authors argue that this broader failure should be viewed from the viewpoint of institutional failure or the lack of supporting institutions such as private property rights and stable rule of law within developing countries.,Using Baumol’s (1968) theory of entrepreneurship, the authors argue that the broader failure of microfinance is a case of poor institutional quality leading to unproductive or even destructive entrepreneurship rather than productive entrepreneurship. The paper also suggests a link between the literature criticizing foreign aid and this view on microfinance.,The paper provides a survey of the empirical literature on micro finance as well as a novel framework that aids in understanding both the localized small-scale success as well as broader failure to generate economic growth.