Financial Inclusion and PovertyThe case of Peru

Ana Marr, University of Greenwich, London, UKJulian Schmied, Potsdam University, Germany

Third European Research Conference on Microfinance, Norway, June 2013

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Content1. The importance of the study2. Poverty: definition and measurement3. Financial Inclusion: concept and

indicator4. Impact of Financial Inclusion on Poverty5. Major MFI’s drivers of Financial

Inclusion6. Conclusions

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The importance of the studyOne of the first studies on financial inclusion –

taken as a specific subject of research. Applied to one of the most dynamic microfinance

markets in the world, i.e. Peru. Obtained exclusive information about financial

inclusion of all regulated MFIs in Peru. 2008-2010 We employ the simplest concept of financial

inclusion, i.e. access to micro-credit. Panel data analysis of impact of financial inclusion

on poverty and the determinants of financial inclusion.

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POVERTY: definition and measurementPoverty is ostensibly a multi-dimensional issue. From

income/expenditure to social exclusion approaches, including issues of vulnerability and risk.

Applied Indicators: Incidence of poverty share of population below a

pre-defined poverty line.Poverty Gap the distance between the poverty

level and the poverty line. Severity of Poverty the squared distance

between the income and the poverty line, i.e. inequality.

Source: World Bank/ INEI Peru

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FINANCIAL INCLUSION: concept & indicatorVarious concepts which seems similar:

Financial…. … Development, Integrity, Depth ???Financial Inclusion: To provide access to

financial services to formerly-excluded or “unbanked” people who demand those services.

Our definition focuses on one of the major financial service: Access to Credit. Applied Indicator: The number of people who

received a micro-loan for the VERY first time.

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IMPACT OF FINANCIAL INCLUSION ON POVERTY - TheoriesHow can financial inclusion alleviate poverty ?

Investment theory: Financial inclusion disproportionally benefits the poor population, via the lowering of collateral requirements and borrowing costs.

Human Capital theory: People need access to credit in order to invest in human capital; e.g. via schooling, university, etc. to find eventually well-paid jobs.

Firm-behavior theory: Financial inclusion has positive external effects that the cost of capital is reduced. This can lead to a rise of production and hence generate employment opportunities.

others ?

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PERU: Incidence of poverty by department, 2010

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IMPACT OF FINANCIAL INCLUSION ON POVERTY - MethodologyPanel data 2008-2009-2010 on department level: own data merged with information from the national institute of statistics of Peru.

Measure the correlation between (1) the number of financially included people and (2) different measures of poverty

…taking into account factors (ceteris paribus) which influence poverty: (economic growth, unemployment, development aid, education, rurality etc.)

Povertyit = αt + β1Financial Inclusionit + β2GDP perCapitait + β3 technologyit+β5 Internet Accessit + β4DevelopementAidit + β5 DominantIndustryit + β6Ruralityit

+β7EducationalLevelit + eit

Applied model: panel data random effect model.

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IMPACT OF FINANCIAL INCLUSION ON POVERTY - Results

Significant poverty-alleviating effects , i.e. negative correlation with poverty indicators, of: Financial inclusion Internet access Average loan size per client

Significant poverty-worsening effect, i.e. positive correlation with poverty indicators, of: Rurality

Estimation problems: Endogeneity through reversal causality.

Instrumental variable: Population by departmentResult: Effect of FI on poverty almost disappears!

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MFI DETERMINANTS OF FINANCIAL INCLUSIONMethodology

Own MFI level panel data (2008, 2009, 2010) merged with MixMarket data.

The model measures the effect of MFIs’ characteristics such as: Size, Returns, Risk disposition, Interest etc…

…on the number of financially included people.Holding constant: profit status and age of the

institution.Applied estimation model: Panel data random

effect model.

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MFI DETERMINANTS OF FINANCIAL INCLUSIONResults

Significant inclusion-fostering influence, i.e. positive correlation between MFI size and financial inclusion, of: The size of the MFI (measured by its total assets)

Significant inclusion-reducing influence, i.e. negative correlation between loan size and financial inclusion, of: The average loan size of the clients

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ConclusionsWe found alleviating effects of financial

inclusion, internet access and development aid on poverty but a worsening effect of rurality.

Empirically, larger MFIs (in terms of their total assets) and MFIs that serve smaller-size micro-loans, i.e. proxy for poor clients, are including more people.

Unresolved research questions: Possible effects of the provision of other

financial services such as saving accounts, micro-insurance, remittances, etc.

The effect of financial inclusion on MFIs’ financial performance.

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Future research How exactly does financial inclusion

help alleviate poverty? What are the mechanisms / channels / processes?

What other factors are influencing poverty in this process?

New instrumental variables? Why MFIs that extend small-scale loan

sizes financially-include more people? What theories can help explain this?

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THANK YOU

Email: a.marr@gre.ac.uk