Does Microfinance Help The Economy? New Case Study Looks at Bosnia and Herzegovina
A groundbreaking new study from Effat University challenges long-standing beliefs about the positive impact of microfinance on economic growth.
The study conducted by Dr. Edib Smolo stands is comprehensive in its analysis of the Bosnian microfinance sector, and utilises data from a broader range of sources than previous studies.
Although microfinance serves a key role in making loans available to individuals and businesses that might not otherwise be table to take advantages of them, this study found that in Bosnia and Herzegovina, microfinance loans had an adverse impact on GDP.
Microfinance in Bosnia and Herzegovina
In Bosnia and Herzegovina, microfinance plays a crucial role in providing financial services to underserved populations. These include small businesses, and individuals who lack access to traditional banking institutions.
The growth of Microfinance Institutions has been substantial, with the intent to empower low-income individuals and stimulate economic development. However, Effat University’s research suggests a more nuanced understanding of the relationship between microfinance and macroeconomic growth is necessary.
Effat’s microfinance lending research
Unlike previous studies that primarily relied on household-level data, this research employs aggregate data from the Federation of Bosnia and Herzegovina, which allows for a much deeper look into the effects of Microfinance.
Moreover, the study uses the nonlinear Auto-Regressive Distributed Lag (NARDL) technique, which allows for exploring the less linear aspects of the relationship between microfinance and economic growth. These dynamics remain largely unexplored, and as such, further research using NARDL is recommended to truly understand them.
It suggests that there is a need to reevaluate how Bosnia and Herzegovina approaches alleviating poverty issues while allowing individuals and small businesses to thrive.
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Microfinance Definition
Microfinance means providing financial services to poor households and micro-enterprises, who might not have access to traditional banking options. Elements of microfinance lending might include small loans, savings products, and other financial services tailored to the needs of low-income clients.
Institutions engaging in microfinance most frequently offer microloans. These loans can range from anywhere between $50 to $50000, but many institutions will also offer checking and savings accounts alongside micro-insurance.
The ultimate goal of microfinance is to provide a method for poverty-stricken individuals and communities to become financially self-sufficient. Microfinance institutions also play another important role in some countries, though. Not only do they allow access to money, but they also provide a broader range of options that may help individuals avoid more predatory moneylenders like loan sharks, who are likely to charge exorbitant interest rates.
Where small business is concerned microfinance institutions also deal in ethical lending practices, and are willing to take on the risk of loaning to a small business. This, in theory, allows developing countries an opportunity to grow their economies sustainably.
Bosnia and Herzegovina has a well-established microfinance sector that aims to support small businesses and individuals as well as reduce poverty. The finance is provided by Microfinance Institutions, also known as MFIs.
Considerations
The study from Dr Smolo and Effat University suggests that further research and policy discussions are required to truly understand the role of microfinance in reducing poverty and managing sustainable economic growth.
While microfinance remains a valuable tool in reducing the reliance on loan sharks and other more predatory players, its limitations and potential drawbacks must be carefully weighed against the benefits it may offer. In the future, policymakers may wish to consider a broader spectrum of alternative microfinance measures with further empirical research to understand how they have affected Bosnia and Herzegovina.
It is also worth considering that just because microfinance initiatives may have had a negative impact overall on GDP, it does not mean they are a failure. An even broader spectrum of research needs to be performed that takes into account economic instability, regulatory changes and financial education.
Only then can we gain a true understanding of whether microfinance sparks economic growth, or dampens it.
This study was carried out by Dr. Edib Smolo. The full study can be accessed at the Effat University repository: Asymmetric Impact of Microfinance on Economic Growth: Evidence from Bosnia and Herzegovina.
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