Growth effect of banks and microfinance: Evidence from developing countries

We compare lending from microfinance institutions to that from traditional banks and examine their respective effects upon economic growth. Using a panel of 85 developing countries over the period 2002-2013 and the system-GMM estimator, we find that microfinance loans raise growth. We do not find strong evidence that bank loans raise growth. There is, however, some evidence that bank loans do increase investment, whereas microfinance loans do not appear to do so. These results suggest that microfinance loans are not primarily invested as physical capital, but could still augment total factor productivity, whereas banks may have been financing non-productive investments.