Microfinance Horizon

Author(s): Salim Rashid (University of Illinois), Youngeun Yoon (Ministry of Finance, Govt of South Korea) and Shakil Bin Kashem (University of Illinois)

Abstract:

Recent empirical results have cast doubt on the value of Microfinance as a tool for reducing poverty. The difficulty lies in evaluating the impact of Microfinance in a world where the Microfinance institutions, their borrowers, and government policy are constantly changing. In this environment, policymakers are particularly challenged. They must usually act before full information arrives, and before econometric results can unambiguously assess the data. This can lead to poorly targeted policies, such as inappropriate or ineffective Microfinance regulation, and can also create a poor environment for assessing the impact, positive or negative, of Microfinance in practice.

There is a need for a comprehensive and transparent framework to develop the theoretical grounds for believing in (or against) the efficacy of Microfinance, which can at the same time be used as a testing ground for policymakers. This study is a first attempt to develop an agent-based modeling (ABM) framework for pre-policy-implementation testing of the effects of Microfinance. Under the ABM paradigm, a set of behaviors for individual agents in the economy is used to construct a simulation whereby random interaction allows agents to self-organize into various groups (borrowers, consumers, moneylenders, etc). Once the basic principles are accepted, at the policy stage, the underlying economic interactions between agents can be tightly built upon supporting empirical data e.g. profit rates of small enterprises, default rates on loans, etc.

Using ABM, the effectiveness of alternative Microfinance policies can be analyzed prior to implementation. Thus, policy tools for Microfinance can be first tested within a simulation framework ‘sandbox’, and can then be more effectively targeted for implementation in the real world.

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