Financial Inclusion and Microfinance: On the Cases of ODA and Analysis of the Poverty Reduction Effect

This paper analyzes the microfinance official development assistance (ODA) projects of Germany and Australia. It presents key characteristics from each country that Korea can use for its own microfinance ODA projects. It also conducts an empirical analysis of the effect of microfinance on poverty reduction. In particular, the paper highlights two aspects overlooked by earlier research: suitability tests for instrumental variables using a variety of methods, and estimation of poverty reduction effect by using two explanatory variables. The explanatory variables used in the study include the average amount of microfinance loan per person, and microfinance market size per country measured by the ratio of the total microfinance loan amount to GDP. The paper finds evidence that the poverty rate decreases by 0.46% as the average microfinance loan amount per person increases by 10%. It covers the following sections in detail:

• Overview of financial inclusion in developing countries and the functions of MFIs;
• Analysis of German ODA to microfinance;
• Analysis of Australian ODA to microfinance;
• Discussion on the poverty reduction effect of microfinance;
• Recommendations for development of microfinance ODA projects in Korea.