Microfinance in Latin America: Sustainability, Growth, and Efficiency

Global Tides Volume 19 Article 3 April 2025 Microfinance in Latin America: Sustainability, Growth, and Efficiency Katelyn M. Hoidal Pepperdine University, Follow this and additional works at: https://digitalcommons.pepperdine.edu/globaltides Part of the Econometrics Commons, Economic Theory Commons, Growth and Development Commons, International Economics Commons, and the Macroeconomics Commons Recommended Citation Hoidal, Katelyn M. (2025) "Microfinance in Latin America: Sustainability, Growth, and Efficiency," Global Tides: Vol. 19, Article 3. Available at: https://digitalcommons.pepperdine.edu/globaltides/vol19/iss1/3 This Social Sciences is brought to you for free and open access by the Seaver College at Pepperdine Digital Commons. It has been accepted for inclusion in Global Tides by an authorized editor of Pepperdine Digital Commons. For more information, please contact . Hoidal: Microfinance in Latin America 1 1. Introduction: Background, Research Aim, Objectives, and Questions Microfinance institutes (MFIs) are social enterprises that seek to balance economic institutions' social and financial goals (Banto, 2021). MFIs meet these goals through the provision of microfinance loans (MFLs), which are “given to the poor without collateral to generate income” (Campbell, 2010). Funneled into developing economies to spur economic growth, MFLs offer freedom and autonomy to the recipient (Sophat & Phany, 2022). This form of micro-crediting presents little risk for lenders, allowing them to engage in a sustainable form of philanthropy through continued investments in small increments. MFIs were first introduced by Muhhamad Yumas in 1976 to communities in Bangladesh (Campbell, 2010). Originally a nonprofit, this micro-crediting structure has now been adopted by for-profit businesses and banks (Campbell, 2010). Given this, the following questions will be answered: Within populous Latin American countries (Ecuador, Mexico, Panama, Argentina, Chile, and Peru), do microfinance institutions possess correlated with GDP and household consumption equally between 2010 and 2018? Which do they have more correlation with? This study aimed to analyze and compare the correlation of microfinance institutions and loans with consumption at an individual and national level in Latin America from 2010 to 2018. This study had two main objectives: 1) determining the correlation of variables such as the number of loans borrowed, loan size, and percentage of female borrowers concerning GDP and household consumption and 2) comparing the explanatory power of these variables while controlling for country and years. These goals were accomplished through the analysis of data through four regression models based on OLS and FE. Results point to the correlation of MFIs and positive GDP and Household consumption and the positive explanatory power of the number of loans given and the percentage of female borrowers. To establish hypotheses, methodology, and variables regarding these objectives, past literature concerning MFIs in South Asia, Africa, and Latin America has been examined. 2. Literature Review 2.1 Theory of Micro Finance Loans While theory deviates on the level of effectiveness of microloans, most theory and literature demonstrate that Microloans are influential in sustainable economic growth, financial development, and extension of capital. As Sachs has stated, temporary aid (provided through Published by Pepperdine Digital Commons, 2024 1 Global Tides, Vol. 19 [2024], Art. 3 2 MFLs) boosts productivity, spurring a rise in savings and investment and promoting sustainable growth (Sachs, 2008, p. 229). When debtors are allowed to evaluate their needs, it enables them to acquire effective assets that can significantly enhance their output and income. (Sophat & Phany, 2022). This structure lays out the goals of MFIs while also serving as a lens through which the effectiveness and productivity of MFIs can be determined. While MFLs can boost income at an individual level, theory also points to MFLs economically lifting communities as a whole. Theoretically, a loan given to one person can exponentially impact the surrounding community. This research shows the importance of MFIS in increasing job opportunities, purchasable assets, and disposable income. While this exponential effect is possible, the likelihood of its limitations has informed the first hypothesis: microfinance institutions have a more significant impact on household consumption than GDP, yet still positively affect GDP. While microfinance loans demonstrate a cumulative effect on surrounding communities, their impact on individuals will likely be more significant. To analyze this theory more deeply, regional specific research must be analyzed. 2.2 MFIs in South Asia Beyond questions about their effectiveness at a community-wide scale, within South Asian countries, past studies point to the varying efficiencies of MFIs at an individual level. A study by Abdelkader, analyzing 72 different Arab MFIs, reaffirms this claim and demonstrates that country and time create variability between the efficiency scores of MFIs (Abdelkader, 2018). Additionally, there appears to be a decrease in the efficiency of MFIs in the last eleven years within many of the countries Ines reviewed (Abdelkader, 2018). This brings to question if the same trend is occurring in Latin American countries, which is why this study focused on the most recent data. Contradicting studies do exist. While studies like Abdelkader’s seem to suggest that a high percentage of MFIs are inefficient, other research establishes the resounding productivity of MFIs. A study focusing on MFIs in Pakistan found that MFLs’ financial and social benefits span beyond direct recipients, benefiting families, people offered employment through these loans, and even other enterprises (Naveeda, 2021). This study also emphasizes the larger impact of MFLs issued to women and how this can contribute to women's financial and, in many cases, social freedom (Naveeda, 2021). Naveeda’s findings affirm the first hypothesis. Sophat’s study corroborates this, determining that MFLs increase family income, education levels, healthcare expenditure, and the https://digitalcommons.pepperdine.edu/globaltides/vol19/iss1/3 2 Hoidal: Microfinance in Latin America 3 value of assets (Sophat & Phany, 2022). This dichotomy between studies renders the need for further research to definitively confirm MFIs' effectiveness. 2.3 MFIs in Africa Existing literature establishes that multiple aspects of African MFI operations set them apart. African MFIs often focus on women in rural areas, encourage a group borrowing model, and have enough interest rates to cover the MFIs' operation (United Nations). Additionally, research conducted by Campbell has indicated that having more female borrowers within an MFI can lead to an increase in group borrowing and the productivity and efficiency of the MFI (Campbell, 2010) (...truncated)