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Does microfinance affect economic growth? Evidence from Bangladesh based on ARDL approach

Sultan, Yousuf and Masih, Mansur (2016): Does microfinance affect economic growth? Evidence from Bangladesh based on ARDL approach.

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Abstract

Microfinance, a tool for providing improved access to finance (i.e. deposits, loans, payment services, money transfers and insurance etc.) to the unbanked population of a country, may have impact on domestic economic growth according to some literature. However, according to others, microcredits are just means to exploit the poor, by charging higher interest rates and cost of loans, thus making the poor poorer and the rich richer. The present study intends to empirically test the theoretical relationship between microfinance and the economic growth. It examines whether there is any cointegration among microfinance, growth and other macroeconomic variables. And if there is any, whether there is a lead-lag relationship between microfinance and growth, and which leads the other. The study is carried out using a time series technique ‘Auto-Regressive Distributive Lag (ARDL)’, based on annual data from years 1983-2013. It is the first attempt, in our knowledge, to test micromacro relationship based on annual time series data from Bangladesh, the founding country of microfinance. Our findings tend to indicate that: (i) There is significant impact of microfinance on domestic growth (GDP). (ii) Growth also has strong relationship with microfinance. This implies that there is bi-directional relationship between microfinance and growth and that microfinance is an important “ingredient” in promoting growth through various channels. The results suggest that microfinance institutions should be supported and promoted by ensuring proper legal and regulatory policies, frameworks and institutions. Islamic microfinance should be allowed to flourish, incorporating qard al-hasan, sadaqah, zakah and waqf models along with others to alleviate poverty.

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