How do microfinance and economic development mutually support each other? A Panel VAR approach in developing economies

Mehdi Mahmoudi () and Nicolae-Bogdan Ianc ()
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Mehdi Mahmoudi: University of Orleans
Nicolae-Bogdan Ianc: University of Orleans & West University of Timisoara

No 2025.1, Working Papers from International Network for Economic Research - INFER

Abstract: This paper explores the relationship between microfinance and economic development using a cross-country dataset of 60 developing countries from 2000-2018. We employ the Panel VAR model, estimated by the generalised method of moments (GMM). Microfinance institutions (MFIs) indicators are categorised into social and financial performance variables. Social performance variables include the number of clients served (NOB) and the percentage of women borrowers (PFB), while financial performance indicators consist of the portfolio at risk (PAR), operational self-sufficiency (OSS), and operating expenses (OPX). Economic development is assessed using the Human Development Index (HDI), which integrates economic indicators like Gross National Income per capita (GNI) with social indicators such as educational attainment (EDI) and life expectancy at birth (LE). We perform a Granger causality test confirming a Granger causal relationship between microfinance and economic development. Our findings indicate that shocks to social performance variables positively influence economic development, and shocks to financial performance variables significantly impact the human development index.

Keywords: Microfinance; economic development; Granger causality; panel VAR; HDI (search for similar items in EconPapers)
JEL-codes: F (search for similar items in EconPapers)
Pages: 48 pages
Date: 2025
New Economics Papers: this item is included in nep-fdg
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