Microfinance, entrepreneurship and institutional quality

Publication Date13 January 2020
Date13 January 2020
AuthorMalavika Nair,Martha Njolomole
SubjectStrategy,Entrepreneurship,Business climate/policy
Microfinance, entrepreneurship
and institutional quality
Malavika Nair and Martha Njolomole
Troy University, Troy, Alabama, USA
Purpose 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.
Design/methodology/approach It surveys the empirical literature on microfinance and finds that while
there has been smalland localized success in variouscountries in improving accessto credit, at the same time
therehas been a broader failure to generateeconomic growth. The authorsargue that this broader failureshould
be viewed from the viewpoint of institutional failure or the lack of supporting institutions such as private
property rights andstable rule of law within developingcountries.
Findings Using Baumols (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.
Originality/value 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.
Keywords Microfinance, Entrepreneurial action, Institutional quality
Paper type Research paper
1. Introduction
Microfinance was once perceived as the next big thingwithin policy and academic circles
to be an effective way of alleviating poverty through the introduction of small-size loans and
fostering entrepreneurship among the poor (Bateman, 2010). Built on the ideas of
neoclassical growth theory that advances the idea of capital accumulation as the driving
factor of growth (Glaeser et al., 2004; Sachs, 2003; Nag, 1954; Narasimhan, 1960; Banerjee
and Newman, 1993), microfinance was developed to transfer capital to developing countries
in order to spur the process of small-scale entrepreneurship. In its past 30-year history,
however, microfinance has achieved limited overall success, despite being widely
implemented in many countries.
The purpose of this paper is twofold: we survey the empirical literature (critical as well as
successes) on microfinance in its past 30 years and propose a dual criterion of evaluation.
While microfinance has indeed achieved localized successes (primarily through better
access to credit and consumption smoothing) in various locations, it has failed to achieve
long-term poverty alleviation through economic growth within the regions it was
implemented. We argue that this should be viewed as institutional failure caused by a lack
of supporting institutions such as secure property rights, stable legal environments and
protection from predation that would allow productive entrepreneurship to flourish.
Second, by viewingthe broader failure of microfinance as an institutional failure,the paper
provides a link between the literatureon microfinance and the literature onnew institutional
economics. Thisprovides the benefit of being able to borrow insights from that literaturethat
views povertyalleviation and long-run development as a complex economic problem unlikely
to be solved by top-downapproaches focusing on just one variablesuch as access to credit or
lack of capital.We specifically borrow from Baumol(1968) and apply the theory of productive
and unproductive entrepreneurship as a lens to view the broader institutional failure
Journal of Entrepreneurship and
Public Policy
Vol. 9 No. 1, 2020
pp. 137-148
© Emerald PublishingLimited
DOI 10.1108/JEPP-07-2019-0061
Received 29 July 2019
Revised 6 December 2019
Accepted 6 December 2019
The current issue and full text archive of this journal is available on Emerald Insight at:
JEL Classification E02, G21, O17, O43, P42
and institutional

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