The Effects of Microfinance on Economic Growth – A Study of Bosnia and Herzegovina

Microfinance is often considered to have a positive impact on the economic growth of a country. A new study by Dr Edib Smolo of Effat University aims to challenge this belief through a brand-new case study. 

The study is focused on the economy of Bosnia and Herzegovina, in which it was found that contrary to the popular consensus, microfinance loans had a negative impact on GDP. It brings into question how microfinance affects economic prosperity, and what more can be done to aid those who rely on microfinance resources.

The role of Microfinance in Bosnia and Herzegovina

Bosnia and Herzegovina has a well-established microfinance sector that aims to support small businesses and individuals and reduce poverty. The finance is provided by Microfinance Institutions, or MFIs.

These institutions provicde financial services to poor households and micro-enterprises, who might not have access to traditional banking options. This includes small loans, savings products, and other financial services tailored to the needs of low-income clients.

This study gives some evidence that policymakers should consider a broader spectrum of alternative measures to promote sustainable economic growth and reduce poverty.

Findings of microfinance research from Effat University

The study sets itself apart in a few ways:

1. It is the first attempt to scrutinise the influence of microfinance loans on macroeconomic growth in Bosnia.
2. It utilises aggregate data from the microfinance sector in the Federation of Bosnia and Herzegovina (FBIH), departing from previous studies that relied on household-level data.
3. The analysis considers the economic growth affected by the Bosnian microfinance model, as well as the downsides.
4. The research employs the nonlinear Auto-Regressive Distributed Lag (NARDL) technique, exploring the non-linear aspects of the microfinance-economic growth relationship.

There is a need for further study to understand the relationship between microfinance and economic growth. Though microfinance may have had a negative impact on overall GDP in this example, that doesn’t mean it is a failure overall. Microfinance may still have contributed to poverty reduction and created employment opportunities.

Also, the success of a country’s microfinance initiatives are affected by economic instability, regulatory changes, and financial education.

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.