What Drives Financial Inclusion at the Bottom of the Pyramid? Empirical Evidence from Microfinance Panel Data

This paper uses microfinance data to assess the determinants of financial inclusion among the poorer segments of the population or the bottom of the pyramid. It uses a quantile regression approach that allows the study to go beyond correlations and enables the identification of causal relationships. The approach also helps account for the dynamic and heterogeneous impacts that key drivers may have across different stages of market development. The paper also calculates an index of microfinance market penetration for 109 countries from around the world using MIX data. The findings of the paper can be used by policymakers and investors to better understand and influence financial inclusion at the bottom of the pyramid across different stages of market development. Some of the key findings include:

• Microfinance markets are more responsive to the needs of the bottom of the pyramid than to potential growth opportunities;
• Enabling institutions that provide credit information become increasingly important with higher market complexity;
• Formal financial development is a complement of microfinance development;
• Technology can help to overcome market entry barriers, and to enable a higher inclusion in markets with a high degree of complexity.