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 3. Financial Inclusion: concept and indicator 4. Impact of Financial Inclusion on Poverty 5. Major MFIs drivers of Financial Inclusion 6. Conclusions 2

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 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. 3

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 4

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. 5

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 ? 6

PERU: Incidence of poverty by department,

IMPACT OF FINANCIAL INCLUSION ON POVERTY - Methodology Panel data 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.) Poverty it = α t + β1Financial Inclusion it + β2GDP perCapita it + β3 technology it +β5 Internet Access it + β4DevelopementAid it + β5 DominantIndustry it + β6Rurality it +β7EducationalLevel it + e it Applied model: panel data random effect model. 8

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! 9

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MFI DETERMINANTS OF FINANCIAL INCLUSION Methodology 12 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.

MFI DETERMINANTS OF FINANCIAL INCLUSION Results 13 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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Conclusions 15 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.

Future research 16 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?

THANK YOU 17