Academic journal article Academy of Accounting and Financial Studies Journal

The Effect of Microfinance Institutions Activities on Economic Growth in Arab Countries

Academic journal article Academy of Accounting and Financial Studies Journal

The Effect of Microfinance Institutions Activities on Economic Growth in Arab Countries

Article excerpt

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

Since the 1970s, microfinance has played an important role in decreasing poverty and supporting economic growth (Maksudova, 2010). Over the past few decades, microfinance has grown from a few small, donor-driven programmes to a global, self-sustaining industry. 3,098 reported MFIs (State of the Campaign, 2014) bring access to financial services to more than 200 million clients worldwide. MFIs design optimal products that distribute funds over macro and micro levels, which in turn contribute to the growth of financial intermediaries. This growth increases households' access to finance, which in turn allows them to start small businesses that contribute to economic growth. Hermes et al. (2009) argue that, depending on the complement and the rival relationship of microfinance with mainstream banking, the degree and the maturity of the financial sector are shaped which is transferred to growth accordingly.

This paper analyses the impact of microfinance activities on the economic growth in Arab countries. It considers answering the questions " What is the impact of MFIs activities on economic growth in Arab Countries?". Section two presents problem statement, research objectives, importance and hypothesis. Section three presents theoretical background and a review of existing literature, section four describes study's methodology and data used, section five presents the model, section six presents the empirical results and discussion, and section seven concludes the paper.

Problem Statement

The idea of financial inclusion is best illustrated by the expansion of microfinance activities in developing countries. Formal financial institutions are generally hesitant to lend to low-income households with low income while households in Arab countries have reasonable access to banking services, they have limited access to loans (Tanmeyah, 2013).

In this context, it is worth studying the extent of the microfinance industry's contribution to financial inclusion and economic growth in Arab countries. The study explores the impact of MFIs on a major component of inclusive economic growth in Arab countries. It aims to show the place of Arab countries in terms of the existence and influence of MFIs if studied globally. The existing literature on MFIs in Arab countries is limited, and this study provides further insight into the impact of MFIs on economic growth of Arab countries. The results of this study along with a better understanding of the MFIs' influence on economic growth will provide policy makers with some enlightening insights, which they can follow when creating relevant policies.

Based on this, the study considers answering the question:

What impact do MFIs have on economic growth in Arab countries?

Research Objectives and Importance

The main goal of this study is to understand the effect of MFIs on economic growth in Arab countries. This paper's goal is to examine the role of MFIs in the Arab world, and to study their impact on GDP growth in hope of informing policies related to the microfinance sector. This study also serves as a reference for academics and researchers studying microfinance in the Arab world.

Study Hypothesis

The following null hypothesis is formulated:

H0: There is no statistically significant effect of MFIs activities on economic growth in Arab Countries over the period (1999-2016).

LITERATURE REVIEW

Microfinance has become an important and growing industry throughout the Arab world. The services of MFIs can facilitate economic growth through the channel of financial development in the market (Zhuang et al., 2009). Hermes et al. (2009), argue that financial markets and banks both influence MFI efficiency; the innovative financial markets represented by banks might contribute to the efficiency of MFIs as much as their deficiency.

(Maksudova, 2010) performed Granger-causality test on 1433 MFIs located in 102 countries. …

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