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THE RELATIONSHIPS BETWEEN MICROFINANCE, CAPITAL FLOWS, GROWTH, AND POVERTY ALLEVIATION

BY Pierre Raymond A. BOSSALE

Masters in Economics, Kinshasa University
The recent history of economic development, especially in East Asian countries, showed that
microfirms represent the heart of any successful economic process and are having very positive
and diverse impacts at a beneficiary level. The access to the microfinance facilitates this goal and
alleviates poverty by providing cash for investment to poor households or very small
entrepreneurs to increase income-generating assets and improve their income levels. Access to
microcredit programs do have an economic impact in short-run, as stated studies from Hulme
and Mosley 1996, Sebstad and Che 1996, Kevan and Wydick and recently Armendariz and
Morduch 2005, as well as Mosley and Rock (2004, p.467) through products, employment creation,
economic growth, increasing income revenue, and profit, as well as a crucial social role played.
But none of various studies and finding is focused in long run perspective. As underlined so well
by Morduchs question on the real impact of microcredit is far from being answered. Morduch
remarks that even though there are real positive impacts on millions of microcredit clients, there
is still a need for more convincing evidence that microcredit is actually the main cause of these
improvements in welfare.
To our knowledge, even though many studies have either recognized or acknowledged the
existence of weak long-term impacts of these programs (Hulme, 1996; Sebstab and Loza, 1993), no
study has specifically addressed the four following issues: long-run impacts of participating in
microcredit programs as well as its implications, the failure of micro firms accessing
microfinance in long run, the why of both only a few of African micro firms manage to reach
mature level(meaning stay in business in long run), and households poverty after accessing
credit. Is the involvement of capital flows, ex ante insurance in microfinance analysis guarantees
long run staying in business activities, growth and poverty alleviation? This is to affirm that in
the literature they are a few publications on the long run economic impact of microfinance and its
implications on micro firms after accessing micro credit program. It is our purpose to address this
gap in the literature and provide a framework to evaluate long-run impacts of participation in
micro credit programs, as well as to identify the causes of micro firm long run failures in general
and Congoleses in particular. This study aims also to identify the reasons of very high failure of
the micro credit. The third purpose or objective of this research is to seal this problem.
To accomplish these goals this research proposal intends to develop three essays linked to three
hypotheses: The first essay will present conceptual considerations on long period performance of
microfinances at household and community level. Microfinances have positive impact at
household and community level as well as macroeconomic level in long run. More accent will be
put on impact analysis at two stages- economic, and social using income, household assets,
housing, and access to food as economic variables; education, health, confidence, skills,
empowerment as Human capital variables; and finally social networks, and social mobility as
social capital variable to catch economic and social impacts of microfinance at distinctively
household and community level and macroeconomic level.
The second will diagnose the behaviour of microfirms in order to identify the causes of their
failures and then demonstrate how important the involvement of the government to insure their
viability is. (this is not a call for a permanent government involvement in the business.) Small
size enterprizes fail not only by lacking supports and crucial skills but also after being under
microfinance programs. The third will estimate the models with data from some sub Saharan
microfirms as well as Congolese households to measure the long-term effects of credits after being

involved in a microfinance or micro credit program. Credits still having long run positive
incidences on microfirms, and households after being involved either in microfinance or micro
credit programs.
METHODOLOGY
Three methodological aspects will be developed as skilful comparisons to attest the impact
heard like changes produced at the customers level and who would not be produced without the
IMF. To do so, the choice of following comparative methods appears practically essential.
Comparisons between customers and no customers, including various alternatives such as
the villages with or without IMF. In case of difficulty to capture no-customers
immediately for investigations, the easy and acceptable alternative would be to analyse
by rank (old customers-new customers) within a sample of customers.
Comparisons between geographical spaces, by comparing several IMF or by making the
synthesis of several assessments. In this case, the assortment of the comparison is however
limited, by the diversity of the methods employed in the primary sources and by the
absence of comparable bench-mark (standard) data (data from surveys statistic) on the
areas of establishment of the various IMF.
Comparisons before and comparisons after, whose convincing examples, when they were
carried out completely, are rare. This last methodology interests us because it uses the
same sample whose size is statistically significant, investigation before impetus at the
time when the IMF settles, stability of the object of the investigations and it makes it
possible to inquire of the thousands of the people or households.
The collection of quantitative information on the impact will be led with a detailed attention by
making an adapted questionnaire with the mechanisms of impact functioning in the company
under study, a sufficient sample finally to control bias and especially avoiding giving privilege to
satisfied customers or customers present before a given period and always present.
This methodology will be haloed of two methodologies of follow-up of impact, one combining
individual talks (at the end of each cycle of credit) and group talks (twice a year), and the other
resting on a device of follow-up of reduced impact, partly externalized with three
investigation(survey campaigns), spaced of 4 months during three years.
However, tools of follow-up of impact will create a constraint of analysis related to the
individual material living conditions of customers in particular women on more general
indicators of poverty/ease (education, health, degrees of freedom ")
For that, this study will rest on four model-types whose each one of them seeks the impact in a
given direction " and is thus more powerful on certain types of indicators.
These four models are:
1. Profile of the entering customers: at the time of the entry of new adherent customers, or at the
time of the subscription for a new product on behalf of existing customers, IMF agents can collect
and record profile information. Those information can be compared to a constant base (survey,
investigation asking similar questions into a sample of no-customers) and making possible the
identification of particular characteristics of the existing customers according to the whole
population. This tool makes possible to expand towards before-IMF, internal information to
IMF, therefore in substance to answer the question: who is impacted?
2. The study of socio-economic interactions: studying how IMF offer interacts with existing
social and economic framework (structure), in order to establish by which mechanisms impacts
aims have a chance to be achieved, and to identify the perverse effects which the IMF can produce.

It answers the question: which impacts are produced. It is the most traditional way to
conceive an impact study.
3. The follow-up of the former customers: to question the former customers, in particular shortly
after their exit of the program, is a practice much developed in the Nineties in marketing of the
services. It has the merit to easily be able to be systematized, therefore integrated in the regular
management tools. The exit of customers from the program is a significant subject for the
managers who pay attention to information from this subject. Carried out in a no directing way,
these talks often result to qualitative information that have strategic value concerning the
upstream, the downstream and the contents of the program.
4. Financial analysis oriented towards the uses: it is an analysis of the financial data relating to
the customers and cross them by characteristics and takes into consideration assumption
(hypothesis) on impacts mechanisms. So, it results to information relating to the upstream who
is impacted and on the downstream which impact unless to possess a data base at customers
level.
In addition to that, we will rest our analysis on the following general econometric model:
M.R.P. = a0+a1*M.FIN +an* Xn + bn*I +
Where M.R.P. represents the manifestation of relative poverty calculated from four principal
economic variables (income, household asset, housing, and accesses to food); five human
investment variables or Human Capital Variable (education, health, confidence, skills,
empowerment), and two social variables (social networks, and social mobility).
M.FIN is the variable of interest representing microfinance. It represents either the micro credit or
the micro saving, taken individually or it (microfinance) and it is estimated by making the
summation of the micro credit and the micro saving. Microfin= log [2/3 microcredit+1/3 micro
saving].
Xn symbolizes entire control variables such as: variation of the individual income, the
expenditure in favour of the household, area of leaving, children schooling, the status/position of
households principal decision maker.
represent errors term, the difference between the actual values and the computed values.
However, whatever the variable of interest and of control is, if the coefficient 1 is negative and
significant, then the data do not reject the assumption of a positive effect of the microfinance on
poverty. However, the level of the total impact, necessarily results in estimating the indirect
impact which passes by the variables of control. I represent ex ante Insurance. It is crucial to
underline that the main particularity of this proposal lay on the inclusion of insurance to cover
micro firms and households production before risks realisation to avoid micro firms or small
size enterprises and households collapsing.
3. Variable Specifications
As specified above, the dependent variable is an indication of relative poverty (IRP). Contrary to
monetary indicator type or of income, this index is sensitive to any improvement or deterioration
of individual well being. The model comprises an explanatory variable of interest according to
whether the microfinance is used (Microfin), the microcredit (Microcre) or the micro saving
(Micro save). These variables, according to cases, and through their coefficients of regression,
allow the estimation of the degree of influence of the microfinance on poverty.
However, the identification of other explanatory variables able to influence relative poverty
(IRP) is feasible. The literature about the impact of the microfinance on the poverty and
especially the nature of the variables of our future data file will make possible to choose various
dimensions likely to have an effect (positive or negative) on poverty.