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Financial Inclusion and Poverty The case of Peru

Financial Inclusion and Poverty The case of Peru. Ana Marr, University of Greenwich, London, UK Julian Schmied , Potsdam University, Germany Third European Research Conference on Microfinance, Norway, June 2013. Content. 1. The importance of the study 2. Poverty: definition and measurement

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Financial Inclusion and Poverty The case of Peru

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  1. Financial Inclusion and PovertyThe case of Peru Ana Marr, University of Greenwich, London, UK Julian Schmied, Potsdam University, Germany Third European Research Conference on Microfinance, Norway, June 2013

  2. Content • 1. The importance of the study • 2. Poverty: definition and measurement • 3. Financial Inclusion: concept and indicator • 4. Impact of Financial Inclusion on Poverty • 5. Major MFI’s drivers of Financial Inclusion • 6. Conclusions

  3. The importance of the study • One 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.

  4. POVERTY: definition and measurement • Poverty 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

  5. FINANCIAL INCLUSION: concept & indicator • Various 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.

  6. IMPACT OF FINANCIAL INCLUSION ON POVERTY - Theories How 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 ?

  7. PERU: Incidence of poverty by department, 2010

  8. IMPACT OF FINANCIAL INCLUSION ON POVERTY - Methodology • Panel 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.

  9. 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 department • Result: Effect of FI on poverty almost disappears!

  10. 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.

  11. 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

  12. Conclusions • We 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.

  13. 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?

  14. THANK YOU Email: a.marr@gre.ac.uk

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