Government Policies and Micro Lending in Emerging Markets

Although microfinance institutions have expanded rapidly since their inception in 1983, their growth has varied substantially among countries. This study examines the impact of government expenditures, taxes and regulations on the volume of microcredit for 92 emerging market countries for the period 2000-2011. The Index of Economic Freedom data is used as a proxy for government intervention while microcredit is represented alternatively by either the Gross Loan Portfolio Per-Capita or Penetration Index variables. While excessive government intervention could potentially encourage more lending in the informal microfinance markets, our findings suggest that, for both credit variables, the net impact is to reduce microcredit. The variables appearing to be most responsible are business regulations, taxes, and corruption. Tests using subperiods and also with a dynamic version suggest that our model is quite robust.