Does microfinance help to reduce poverty in Ethiopia? Propensity score matching impact analysis.

Abstract

Microfinance has broadened rapidly since its inception in the late 1970s. However, scholars have divergent views on whether and how much it helps to lift the poor from the economic quagmire. This research investigates the assessment of the impact of participation in microfinance. It is difficult to disentangle the impact on poverty reduction of microfinance as an anti-poverty intervention scheme and establish a causal relationship between participation and poverty indicators, because of unobserved heterogeneity and reverse causality problems. Using the 2009 data set, first, we estimated propensity scores for participation on several pre-treatment variables. We then matched clients and non-clients on the basis of these variables. Next, we estimated the average treatment effect, considering participation as a treatment, and participants as the treated group. Finally, we employed different matching methods to establish the robustness of the utilized methods. In addition, for the year (2007 and 2009) panel data sets, we used the fixed effect (FE) and random effect (RE) panel data analysis techniques to fully address the two major problems stated above. Although we found significant impact of microfinance on household productive assets, its impact on fixed assets and monthly expenditure is insignificant. The propensity score matching and the panel data analyses identified microfinance as having direct temporary effects on household productive assets but limited (no) effect on households’ fixed assets and monthly expenditures.