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12 Nov 2014Working Paper Summaries

Finance and Social Responsibility in the Informal Economy: Institutional Voids, Globalization, and Microfinance Institutions

by Hao Liang, Christopher Marquis and Sunny Li Sun
Small- and medium-sized enterprises and entrepreneurs around the world frequently face "institutional voids" of credit: In many places there are systematic constraints to obtaining credit stemming from underdeveloped capital and intermediary markets, regulatory systems, contract-enforcing mechanisms, and so on. In many countries, microfinance institutions (MFIs) help overcome such gaps by providing small- and low-interest loans to low-income individuals for them to establish small businesses. However, even though a great deal is known about the effects of MFIs in facilitating the development of SMEs and small entrepreneurs, we still need to understand how variation in institutional contexts shapes the way in which MFIs are effective in bridging these gaps. In this paper, the authors examine the effect of globalization on MFI operations across developing and emerging economies, looking specifically at more than 2,000 MFIs from 119 emerging and developing countries around the world over the period 2002-2012. Overall, findings shed light on both the bright side and the dark side of globalization from the perspectives of how social organizations (MFIs) can serve the global poor. Key concepts include:
  • This paper contributes to understanding the dynamics of institutional voids in emerging economies.
  • Globalization processes can both ameliorate and exacerbate challenges of institutional voids in emerging and developing economies.
  • A key outcome to understand MFI operation and effectiveness is the interest rates they charge their customers.

Author Abstract

We examine the heterogeneous effects of globalization on the interest rate setting by microfinance institutions (MFIs) around the world. We consider MFIs as a mechanism to overcome the institutional void of credit for small entrepreneurs in developing and emerging economies. Using a large global panel of MFIs from 119 countries, we find that social globalization that embraces egalitarian institutions on average reduces MFIs' interest rates. In contrast, economic globalization that embraces neoliberal institutions on average increases MFIs' interest rates. Moreover, the proportions of female borrowers and of poorer borrowers negatively moderate the relationship between social globalization and MFI interest rate, and positively moderate the relationship between economic globalization and MFI interest rate. This paper contributes to understanding how globalization processes can both ameliorate and exacerbate challenges of institutional voids in emerging and developing economies.

Paper Information

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