empirical literature review of microfinance

• Open access
• Published: 20 April 2022

Does microfinance foster the development of its clients? A bibliometric analysis and systematic literature review

• João Paulo Coelho Ribeiro 1 ,
• Fábio Duarte   ORCID: orcid.org/0000-0002-4919-0736 2 &
• Ana Paula Matias Gama 3  

Financial Innovation volume  8 , Article number:  34 ( 2022 ) Cite this article

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This paper conducts a scientometric analysis and systematic literature review to identify the trends in microfinance outcomes from the perspective of their recipients, specifically more vulnerable people, while also focusing on the demand side. Applying the keywords “co-occurrence networks” and “citation networks,” we examined 524 studies indexed on the ISI Web of Science database between 2012 and March 2021. The subsequent content analysis of bibliometric-coupled articles concerns the main research topics in this field: the socioeconomic outcomes of microfinance, the dichotomy between social performance and the mission drift of microfinance institutions, and how entrepreneurship and financial innovation, specifically through crowdfunding, mitigate poverty and empower the more vulnerable. The findings reinforce the idea that microfinance constitutes a distinct field of development thinking, and indicate that a more holistic approach should be adopted to boost microfinance outcomes through a better understanding of their beneficiaries. The trends in this field will help policymakers, regulators, and academics to examine the nuts and bolts of microfinance and identify the most relevant areas of intervention.

This study conducts a scientometric analysis and systematic literature review to identify the trends in microfinance outcomes from the perspective of their recipients

A Bibliometric analysis were conducted to examine 524 studies indexed on the ISI Web of Science database between 2012 and March 2021

A content analysis of 11 ABS ranked articles (rank 4 or 4*) were conducted to stablish trends of research

The findings suggest that a holistic approach should be adopted to boost microfinance outcomes through a better understanding of their beneficiaries

Introduction

Microcredit has emerged as an innovative tool for fighting poverty in underdeveloped countries (Mustafa et al. 2018 ). Positive experiences suggest that it constitutes an agile, flexible, and cost-effective financial instrument for entrepreneurship projects that otherwise suffer from bank credit rationing (Stiglitz 1990 ). Combining microcredit, microsavings, and microinsurance, microfinance “can help low-income people reduce risk, improve management, raise productivity, obtain higher returns on investments, increase their incomes, and improve the quality of their lives and those of their dependents” (Robinson 2001 : 9).

The promise of microcredit to eradicate global poverty has proven overly ambitious, as poverty results from a wide number of factors. Nevertheless, at least theoretically, providing poor people with financial resources to start their own businesses can help them increase their income and purchasing power, even if starting and running a successful business is not a simple task. Furthermore, if microcredit loans do not create financial wealth, they should then be classified simply as a “mechanism for transferring resources to the poor” (Khandker 1998 : 7).

The implementation of microfinance and its potential as a tool for fighting social and financial asymmetries is an expanding research topic. However, while microfinance may have grown into a worldwide industry, scholars have expressed doubt about its actual impact on the recipients (e.g., Morduch 1999 ). The lack of true profit-generating potential of financed ventures (Bradley et al. 2012 ), high interest rates (Webb et al. 2013 ), and the lack of management and entrepreneurial skills (Evers and Mehmet 1994 ) raise substantial doubts about the outcomes of microfinance for recipients. Furthermore, the current empirical literature casts doubt on the ability of microfinance to generate multidimensional outcomes such as empowerment, education, health, and nutrition (Khavul et al. 2013 ; Miller et al. 2012 ). Therefore, this study seeks to examine the trends in the outcomes of microfinance for its clients, particularly for more vulnerable people (e.g., women, self-employed, older adults, low-income, and refugees), by focusing on the demand dimension of microfinance. To present the prevailing state of research on microfinance and its benefits for clients, we apply a scientometric analysis, which enables us to trace the anatomy and analyze the knowledge of this research topic. Thus, we address three research goals: identifying the current trends in the outputs of the microfinance literature in terms of dates, journals, authors, affiliated countries, and institutions; examining the most influential studies and themes in this field; and discussing the intellectual structures of the outcomes of microfinance research and the underlying trends.

This approach identified five clusters using keyword analysis and knowledge maps: (1) the socioeconomic outcomes of microfinance, (2) the conflict between social performance and the mission drift of microfinance institutions; (3) group lending, social networks, and social capital; (4) poverty alleviation through entrepreneurial activities and the impact of innovative services, especially crowdfunding; and (5) gender and new thematic frontiers.

Muhammad Yunus argues that poor people possess natural abilities to run businesses, and that their own subsistence reflects the capacities of their survival skills (Yunus 1998 ). However, to set up new businesses, poor entrepreneurs need to find alternative financial resources due to their general exclusion from the traditional banking system because of their lack of collateral (Stiglitz 1990 ), limited property rights (Webb et al. 2013 ), and the high transaction costs incurred by small-scale bank loans (Chliova et al. 2015 ; Ghatak 1999 ; Weiss and Montgomery 2005 ). Ongoing and established relations between lenders and borrowers often generate trust and reduce the risk of credit rationing (Stiglitz 1990 ); however, this inherently does not apply to most potential microcredit beneficiaries, as they lack any credit history (Tang et al. 2017 , 2018 ). Hence, Yunus ( 1994 ) identifies the provision of credit as a key factor for overcoming poverty through innovative approaches to providing credit to the poor as encapsulating a potential solution. Therefore, as microfinance-related articles have been published, literature reviews have appeared on several microfinance-related themes. Table 1 summarizes these studies.

Brau and Woller ( 2004 ) surveyed 350 articles related to microfinance institutions (MFIs) sustainability, products and services, management practices, client targeting, regulations and policies, and impact assessment before calling for further research into microfinance practices as a means of combatting poverty around the world. Based on 71 research papers (peer-reviewed journals, university publications, reports by development organizations, and conference publications) on the performance of MFIs, Roy and Goswami ( 2013 ) propose that microfinance researchers, practitioners, and rating agencies consider other dimensions for assessing MFI performance besides the financial aspect, particularly considering measures for social performance, outreach, and sustainability. García-Pérez et al. ( 2017 ) carried out a systematic literature review of 475 articles on microfinance, resulting in their classification of sustainability research under four perspectives: economic, environmental, social, and governance. They report that the economic and social fields have received the most attention, with authors having researched the interrelationships and considered a broader variety of subjects in those areas than in the environmental or governance fields. Fall et al. ( 2018 ) performed a meta-regression analysis of the performance of 38 MFIs before demonstrating that the mean technical efficiency (MTE) of MFIs has increased over time. However, research estimating social efficiency generated lower MTE levels than that for financial efficiency, which may explain why the African microfinance sector has poor performance. Hermes and Hudon ( 2018 ) also studied MFIs while focusing on the determinants of social and financial performance. From a study including 169 articles, they concluded that the most important determinants of MFI performance addressed by the literature are their own respective characteristics (such as the size, age, and type of organization), their funding sources, the quality of their corporate governance policies, and the characteristics of their external environment (such as the prevailing macroeconomic, institutional, and political conditions). However, they report mixed empirical findings, which may stem from a multidimensional perspective of performance. They suggest that outreach, gender, and rural measures should be adopted to measure the social performance of MFIs more holistically. Akter et al. ( 2021 ) have also recently addressed this dual nature of MFI performance (i.e., spanning the financial and social dimensions). After applying bibliometric data to 1252 Scopus-indexed articles, the authors convey how the hot topic research themes related to microfinance cover poverty alleviation, group lending, and credit scoring, whereas the financial performance aspect has been gaining greater attention from recent research evaluating MFI performance.

Copestake et al. ( 2016 : 290) review three decades of microfinance doctoral research, referring to this as a “distinct field of development thinking,” describing the “mainstream narrative of progressive inclusion of poor people and their livelihoods into a globally integrated and regulated financial system, largely in the private sector but also strategically subsidised by government and aid agencies.” The authors identify a critical counterpoint to this narrative of development thinking by emphasizing the specific negative effects of financial integration on poverty and inequality. By compiling a series of studies, they suggest that the performance of microfinance depends on socio-cultural norms, regulation, and management practices, which might further explain the mixed empirical evidence on the impact of microfinance.

Deploying a scientometric analysis of 1874 papers on microfinance, Gutiérrez-Nieto and Serrano-Cinca ( 2019 ) focus on the most cited 5% in this pool and classify the resulting 94 papers as institutionalist (when more oriented toward MFIs), welfarist (when more oriented toward microfinance clients), and generalist (otherwise). Based on chronological analysis, these authors report that, having previously covered innovations in microcredit practices and their impacts (the first research stage), as well as the peculiarities of MFI (second stage), current research primarily targets certain concerns over MFI mission drift and the role of microfinance in fostering financial inclusion. Somewhat interrelated with Gutiérrez-Nieto and Serrano-Cinca ( 2019 ), Zaby ( 2019 ) sets out an overall picture of the state of the art in the microfinance literature coupled with the main schools of thought. This author adopts science mapping to examine 4,409 Scopus-index articles explicitly related to microfinance (Zaby 2019 : 1), and correspondingly identifies three thematic research clusters: (1) the institutional aspects of microfinance, (2) the application of sophisticated research methods to evaluate the impacts of microfinance, and (3) ground-breaking microfinance literature related more generally to social justice. Nogueira et al. ( 2020 ) also report how MFI performance-related issues represent one of the most commonly approached fields of research. Based on 2168 articles indexed in the Web of Science, these authors point out how financial inclusion and entrepreneurship are hot topics related to microfinance. The authors then conclude in favor of the relevance of studying entrepreneurship in order to better understand the beneficiaries of microfinance.

Duvendack et al. ( 2011 : 2) argue that “no study robustly shows any strong impact of microfinance” on the well-being of its beneficiaries. After analyzing 58 papers, these authors identified cases with both poor methodology and data and concluded that most studies advanced no reliable evidence regarding the impact of microfinance. Van Rooyen et al. ( 2012 ) also focus on the impact of microfinance on poor people in their systematic review of studies conducted in sub-Saharan Africa. They report that microfinance has a modestly positive impact, but also occasionally results in the deterioration of the situations faced by beneficiaries. This framework indicates that academics and practitioners should closely consider the beneficiaries of microfinance rather than the overall performance of MFIs. This research gap prevents us from reaching any conclusions about the value of microfinance, particularly microcredit, as a tool for mitigating poverty and financial and social exclusion, nor regarding whether their multidimensional outcomes extend beyond the creation of wealth.

Only a few studies have hitherto focused on the impact of microfinance on the poor and on their well-being (e.g., Duvendack et al. 2011 ; Van Rooyen et al. 2012 ). This gap led us to combine bibliometric and content analysis to compile current literature and provide a roadmap of trends for future research into the outcomes of microfinance for recipients with a particular demand-side focus.

Therefore, this study makes several contributions to the literature. In particular, the results of the knowledge maps convey how more traditional topics, such as the focus of microfinance institutions, may potentially shift gradually over time and with the move from social to financial performance, increasing the risk of mission drift, and the advantages of group lending for creating social networks to overcome access to capital-related problems still attracts research interest. Furthermore, emerging trends relate to strategies for overcoming poverty and enhancing socioeconomic development. Entrepreneurship is a powerful tool that strengthens the financial and non-financial outcomes of microfinance. In addition, the scope of microfinance outreach is changing due to the emergence of crowdfunding platforms, particularly prosocial platforms (e.g., KIVA: https://www.kiva.org/ ) that boost women empowerment and gender equalities, stimulating the liberalization of financial systems at a global level and potentially prompting a more financially and socially inclusive system.

The structure of this paper is as follows: Sect.  2 sets out the research methodology design, and Sect.  6 details the bibliometric analysis that systematizes the publication trends, the most prolific journals, authors, and affiliated institutions, as well as the most influential studies and subjects in the field. Section  12 provides the content analysis based on bibliometric coupling, and Sect.  18 outlines and discusses the new trends in the microfinance literature, before Sect.  23 presents our conclusions.

Research methodology

Data and research criteria.

This study applies bibliometric and content analytical procedures to the selected papers, focusing on the outcomes of microfinance for their recipients (demand side), based on information collected from the Web of Science (WoS), Footnote 1 a database that “contains thousands of academic publications along with bibliographic information on their authors, affiliations, and citations” (Ferreira et al. 2019 : 186). We limited our research to articles published after 2011, as that was the last year with systematic literature reviews of this field, following the studies by Duvendack et al. ( 2011 ) and Van Rooyen et al. ( 2012 ; see Table 1 ). Our search of the field adopted the keywords (“microfinance*” OR “micro finance” OR “micro-finance*” OR “microcredit*” OR “micro credit*” OR “micro-credit*”) AND NOT (“microbank*” OR “micro bank*” OR “micro-bank*” OR “microfinance institution*” OR “micro finance institution*” OR “micro-finance institution*” OR “mfi*”) AND (“performance*” OR “success*” OR “outreach*” OR “impact*” OR “impacts*”) as entered in the WoS database. We then screened the articles based on titles, keywords, and abstracts to establish a database of 796 articles with the data collected in April 2021 spanning the period between 01:2012 and 03:2021. Footnote 2 Table 2 provides a comprehensive summary of the criteria used to collect the WoS data.

In accordance with our objective of analyzing the literature on the outcomes of microfinance for recipients, the more vulnerable people (demand side), we carried out a screening process of these documents involving the reading of the abstracts and, in case of doubt, we examined the documents in full length, which led to the exclusion of 272 purely institutional articles, that is, those concentrating solely on the financial performance of MFIs (e.g., Gutiérrez-Nieto and Serrano-Cinca, 2019 ). Nevertheless, this screening process did not exclude studies focusing on the social performance of MFIs, as these usually reach out to women, rural, vulnerable, and marginalized populations. This process was undertaken independently by two of the authors before verification by the third author. Thus, the bibliometric analysis examined 524 articles with detailed content analysis and then applied more detailed analysis to 47 of them in keeping with their common linkage to other documents in the network, based on the bibliometric coupling methodology. Furthermore, we undertook an additional context analysis of the most recent articles published between January 2018 and March 2021, ranked by the Association of Business Schools (ABS). This analysis concentrated on 11 articles published in elite journals (ABS 4*) and top journals (ABS 4). These journals generally publish the greatest advances in their respective fields and generate the highest citation impact factors within their field of knowledge. Figure  1 provides a comprehensive summary of the data analysis process.

Data retrieval process

Therefore, this study combines bibliometric analysis and a systematic literature review. Based on quantitative literature analysis, bibliometrics represents a study method from the library and information sciences (Huang and Ho 2011 ) and, according to Sengupta ( 1992 : 76), “is a sort of measuring technique by which interconnected aspects of written communications can be qualified.” Narin et al. ( 1994 : 65) refer to “bibliometrics and, in particular, evaluative bibliometrics,” which “uses counts of publications, patents, and citations to develop science and technology performance indicators.” This type of analysis emerged in order to deal with constantly growing bodies of knowledge and incorporates three major dimensions: measuring a particular scientific activity, its impacts as conveyed by the total number of article citations, and the links among articles (Narin et al. 1994 ), thus tracing the anatomy of the knowledge existing in a research field with regard to a specific topic.

Our study applied VOSviewer Footnote 3 software version 1.6.8 to analyze the publishing trends and most prolific journals, disciplines, authors, institutions, countries, studies, and subjects. This analysis is mainly derived from the number of published articles, total citations, and occurrences. To complement the analysis of the most influential studies, we performed co-citation analysis to systematize the most fundamental articles published between 1:2012 and 3:2021. Introduced by Small ( 1973 ) and developed by White and Griffith ( 1981 ) and White and McCain ( 1998 ), co-citation analysis is one of the most common bibliometric methods for unveiling similarities among the cited articles (Small 1973 ). By applying this tool via VOSviewer, we were able to highlight the main studies guiding the research over the last decade. The fractional counting methodology was used to analyze the most influential subjects, correcting the number of occurrences of each keyword in accordance with the total number of (key)words used in the title, abstract, or keyword list for the same article (Xu et al. 2018 ). The fractional counting method is more suitable than the full counting method (Narin et al. 1994 ): “When full counting is used to construct a bibliometric network, each link resulting from an action has a full weight of one, which means that the overall weight of an action is equal to the number of links resulting from the action. On the other hand, when fractional counting is used, each link has a fractional weight such that the overall weight of an action equals one” (Perianes-Rodriguez et al. 2016 : 1180). In so doing, the relationship between two keywords becomes closer when articles provide fewer keywords. Thus, Van Eck and Waltman ( 2014 ) recommend the fractional counting method, as this overcomes the potential for bias created by highly cited articles with long reference lists or more keywords, leading to misinterpretations.

Following the bibliometric analysis, we performed a systematic literature review to systematize the state of the art and to determine trends and possible research gaps based on the content analysis of clusters. Detailed content analysis was performed in the cases of bibliographically coupled articles—articles sharing a common link to other documents in the network. Bibliographic coupling establishes relationships between articles based on citation similarities and deems two articles to be bibliographically coupled whenever there is a third article cited by both these articles (Kessler 1963 ). Based on a dataset of 524 articles, we deployed VOSviewer to generate bibliometric maps based on the visualization of similarities technique. Of the 524 published articles in our refined dataset, this software reports that only 47 articles were coupled by the same item of reference, with at least 25 citations.

• Bibliometric analysis

Annual publication trends

Figure  2 illustrates the trends displayed by the 524 WoS-indexed articles in the field of microfinance outcomes (i.e., demand side) since 2012.

Publication trend of 524 published articles, indexed to WoS, between 1:2012 and 3:2021

The figure indicates an upsurge in publications from 27 papers in 2012 to 84 in 2020. Footnote 4 This trend in publications stems from the increasing number of scholars challenging the proposed benefits of microcredit as a salient tool for addressing credit constraints and poverty (e.g., Angelucci et al. 2015 ; Banerjee et al. 2015a ; Bocher et al. 2017 ; Tarozzi et al. 2015 ), especially when based on entrepreneurial activities (e.g., Alvarez and Barney 2014 ). The Nobel Prize awarded to Banarjee, Duflo, and Kremer in 2019 for their work on different strategies to mitigate poverty also justifies the rise in research related to the ability of microfinance/microcredit to generate positive outcomes, such as empowerment and education, beyond mere wealth creation.

Prolific journals and subjects

Table 3 depicts the list of the most prominent journals publishing on issues related to the demand side of microfinance, and hence the microfinance recipients. A total of 252 journals were included in the 524 articles analyzed. The most prolific journals (two of them ex aequo with nine published articles, three with six published articles, and five with five published articles) have published 179 of the articles studied (34.2% of the total). Almost all of these 179 articles appear in ABS-ranked journals, mainly in ABS 3 (according to the ranking published in 2018) by the Chartered Association of Business Schools. Footnote 5 These findings illustrate how research on the microfinance field primarily engages quality journals of business and management. The Journal of Development Studies represents the most productive journal, having published 31 articles, followed closely by World Development with 30 articles. Together, both journals published 11.4% of the articles analyzed.

Figure  3 displays the 10 main fields of journals publishing microfinance research since 2012. The most representative areas are economics , business , and management (which includes business finance), with 379 articles (i.e., 72.32% of the total articles). This figure indicates how the analysis of the outcomes of microfinance (on the demand side) has especially adopted an economic perspective. Despite the prominent position of Development Studies in publishing research on this topic (80 articles), the journal still only represented 15.27% of the total articles. The relevance of microcredit for society as a whole remains only a marginal issue and is scarcely addressed in the literature. More studies from the fields of health, business ethics, sociology, and psychology would be worthwhile to generate a better understanding of the effectiveness of microfinance in promoting the Sustainable Development Goals (SDG) of the United Nations 2030 Agenda, specifically eradicating poverty (SDG 1), promoting health and well-being (SDG 3), gender equality (SDG 5), and reducing inequalities (SDG 10), in addition to the economic objective of decent work and growth (SDG8).

Top 10 subject areas in microfinance (demand side) research in the 524 published articles, indexed to WoS between 1:2012 and 3:2021

Prolific authors, affiliated institutions, and countries

Tables 4 and 5 display the top 10 authors, institutions, and countries publishing on microfinance (demand side) outcomes since 2012 in WoS-indexed journals by number of publications and citations. Abdullah Al Mamum provides the list detailed in Table 4 , with nine published articles. His research mainly targets the effectiveness of microcredit and training programs to combat poverty and promote the sustainable growth of micro-enterprises in rural areas in Malaysia. However, Ester Duflo stands out as the most prolific author based on total citations—412 citations (Table 5 ) with three published articles. Ester Duflo and her research team, Michael Kremer and Abhijit Banarjee, won the Nobel Prize for Economics in 2019 for research on fighting global poverty over the preceding two decades, contributing to transforming development economics into a flourishing field of research. In the field of microfinance, Duflo conducted experimental research in less developed countries to evaluate the impact of training programs on microfinance outreach, especially on health and empowering women. Dean Karlan emerged as the second most prolific author based on both the total number of published articles (Table 4 ) and the total number of citations (Table 5 ), with six published articles (equal to Ariana Szafarz) and 381 citations, 32 more than Johnathan Zinman, with four articles published with Karlan. The expansion of microcredit, the use of loans, and repayment incentives constitute the main topics in the experimental research undertaken by Dean Karlan and Johnathan Zinman. Erica Field and Rohini Pande attained three publications with a total of 179 citations. Based on randomized experiments in India, these authors have been working on the default risk of microborrowers and the repayment requirements that best suit the needs of the poor. Ariana Szafarz represents one of the six authors with over 100 citations divided across six published articles, mainly approaching the topics of social and financial performance, gender, and empowerment. This evidence suggests that, despite the prevalence of articles from the fields of economics, business, and management (as pointed out in Fig.  3 ), the most prolific authors focus on topics within the scope of development studies. Experimental researchers seem to capture the enthusiasm of their target communities, mainly in less developed countries such as Bangladesh, India, Morocco, and Malaysia.

The institution with the most articles published on this aspect of microfinance (Table 4 ) is the University of Groningen (Netherlands) with 11 published articles, followed by the World Bank (United States) with 10, and MIT (United States) and Yale University (United States) with 9 each. MIT is the most prolific institution, based on total citations (968 citations). Yale University and Harvard University (United States) are among the top three with 440 and 300 total citations, respectively. Together, the articles published by members of these institutions received 1,708 citations, accounting for over 57% of the total citations generated by our dataset of WoS-indexed articles. The most prolific institutions all have locations in the United States and are responsible for the highest number of published articles (145) and total citations (2,990).

Citation analysis

Citation analysis is the best method for mapping the influence of a research paper. Citation counts encompass the number of citations that a paper received over a period of time. Thus, a more influential and productive paper is cited most frequently. We use VOSviewer to determine the most influential papers on microfinance outcomes. Table 6 displays the 10 most cited articles locally and globally. The local citations reflect the number of times a paper is cited by others within a sample size of 524 papers, whereas global citations measure the number of times a paper is cited by other works across all databases, including other areas and research fields.

According to global citations (local citations), Banerjee et al. ( 2015b ) are at the top of the list with 295(72) citations, followed by Banerjee et al. ( 2015a ) and Bruton et al. ( 2013 ) with 226(53) and 157(8) citations, respectively. Banerjee et al. ( 2015a , b ) are the most prominent papers paving the way for further research on microfinance outcomes. These studies provide theoretical support for the use of a randomized experimental methodology to measure the causal effects of microcredit on community development, namely on the livelihood of microentrepreneurs.

The number of citations reflects the popularity of a paper. To measure this prestige, we use the total link strength based on the fractional counting method, which indicates the number of times a paper is cited by highly cited papers. Thus, a highly cited paper could not also be a prestige paper. The total link strength is a composite measure that encompasses both popularity and prestige. Table 7 lists the top 15 papers based on the total link strength. The results differed from those of the citation count. When the top 10 papers were compared based on citations (global and local) with the total link strength (co-citations), only 5 papers (Angelucci et al. 2015 ; Attanasio et al. 2015 ; Banerjee et al. 2015a , b ; Crépon et al. 2015 ) are among the top 15 papers based on total strength links (co-citations). Co-citation refers to the number of times two articles are co-cited by an article in the database. The more often articles are co-cited, the greater the link strength (i.e., the more similar the domains under study).

Table 7 shows the studies that mostly guide the research in the last decade, which includes several articles published before 2012. Pitt and Khandker ( 1998 ), with the highest number of co-citations(total link strength) 76(546), is the most influential study in the recent literature. This study provides an evaluation of the group lending program of the Grameen Bank (and similar ones) in Bangladesh, showing that these programs have a significant effect on the well-being of poor households; their effect on education, health, labor supply, and consumption is greater when targeting women. Khandker ( 2005 ) is the third most influential study in this ranking, with 63(411) co-citations (total link strength) in our dataset. This study examines the effects of microfinance on poverty reduction in Bangladesh, at both the individual and aggregate levels, finding that microfinance contributed to poverty reduction, especially for female participants, in line with Pitt and Khandker ( 1998 ), concluding that microfinance boosts local economic growth at the village level. Morduch ( 1999 ) is the fourth most co-cited author in our sample statistics articles with 524 articles and 55(417) total link strengths. The author promotes an evaluation of innovative mechanisms beyond group-lending contracts, raising doubts about the effectiveness of microcredit programs in fighting poverty compared to traditional credit programs. Armendáriz and Morduch ( 2010 ) is the seventh most influential study according to this ranking, with 49(394) co-citations and total link strength.

These authors conducted extensive research on general topics that question the economic problems of microfinance, why such programs are needed, and why financial resources do not flow naturally to the poor. Karlan and Zinman ( 2011 ), with 46(437) co-citations(total link strength), and Karlan and Zinman ( 2010 ) and Stiglitz ( 1990 ), both with 44 co-citations and 325 and 437 total link strengths, respectively, are the ninth and tenth ( ex aequo ) most influential studies. Karlan and Zinman ( 2011 , 2010 ) adopted experimental research methodologies to analyze microcredit programs in the Philippines and South Africa, respectively. Karlan and Zinman ( 2011 ) found that microcredit may serve to increase the ability to cope with risk, strengthen community ties, and increase access to informal credit, but under channels different from those often proposed. The results of Karlan and Zinman ( 2010 ) corroborate the presence of binding liquidity constraints in South Africa and suggest that expanding the credit supply improves welfare. Stiglitz ( 1990 ) also analyzed the success of the Grameen Bank, suggesting that peer monitoring is largely responsible for the financial performance of the microcredit program in Bangladesh. Banerjee et al. ( 2015a ), with 70(605), Crépon et al. ( 2015 ) with 52(517), and Banerjee et al. ( 2015b ) with 51(398), Attanasio et al. ( 2015 ) with 48(517), and Angelucci et al. ( 2015 ) with 43(409) co-citations(total link strength), all published after 2012, also assume a prominent place in this ranking.

Keyword analysis

Table 8 reports the top 15 keywords in the 524 articles selected by the study methodology and published between 1:2012 and 3:2021 that attain at least 20 occurrences. This table’s right column reports the number of links a given keyword obtains with another keyword based on the total link strength. “Microfinance” is the most frequent keyword, with 320 occurrences (281 total link strength), indicating that this word acts as a termed concept in the literature. The words “microcredit,” “impact,” and “poverty” are also three of the most frequently cited words with 199(187), 154(148) and 138(136) occurrences (total link strength), respectively, suggesting that scholars are focusing on microfinance/microcredit outcomes, especially approaching these as tools for development and intervention with the potential to lift people out of poverty. The emerging topics of “gender/women,” “entrepreneurship,” and “empowerment” emphasize how the literature is increasingly evaluating the effects of microfinance/microcredit across various dimensions beyond the financing facet.

Figure 4 displays the most influential subjects based on the keyword occurrence networks. Footnote 6 These keywords are either extracted from the title and abstract of each article or sourced directly from the article keyword lists (Van Eck and Waltman 2014 ). To establish this network, we applied VOSviewer software and the fractional counting method, which considers the number of keywords (key), to explore the most relevant themes in microfinance outcomes. This figure also confirms that “microfinance” is widely interconnected with “microcredit,” “poverty,” and “impact.” These results again corroborate how researchers examine microfinance/microcredit as a tool to eradicate poverty in greater depth, especially through entrepreneurial activities.

Network of keyword occurrences in the 524 articles selected from the study sample, covering the period between1:2012 and 03:2021 according to the fractional counting method

Content analysis

We deploy bibliometric analysis to explore the most relevant documents in this field of research. To identify the most influential publications, we applied VOSviewer to perform bibliometric coupling with a threshold of 25 citations for our analysis, yielding 47 articles out of a total of 524 with at least 25 citations, coupled into five clusters. Figure 5 depicts the knowledge map of the most-cited microfinance articles resulting from the fractional counting method. In a network, these nodes may be aggregated into clusters in which the weighting of edges is higher between the nodes within one cluster than those with another cluster. Thus, the VOSviewer algorithm returned five distinct clusters, with 11 documents in Cluster 1, 10 documents in Cluster 2, 9 documents in Cluster 3, 9 documents in Cluster 4, and 8 documents in Cluster 5. Footnote 7 Table 9 portrays the 48 papers in the five clusters. We subsequently carried out a content analysis with careful examination of the papers in each cluster to determine their common theme.

Knowledge map of the top articles cited by cluster according to the fractional counting method, based on 524 studies selected between 1:2012 and 3:2021

Cluster 1: socioeconomic outcomes of microfinance

This cluster comprised 11 studies focusing on the impacts of microfinance programs on socioeconomic outcomes with randomized experimental evaluations, questioning the influential role of microcredit on poor households. Banerjee et al. ( 2015b ) report that group lending programs in India increase the take-up of microcredit with a positive impact on small business investment and profits as well as on the expenditure of durable goods, but only over a short period. They also did not encounter any significant effects of group microcredit lending on health, education, or women’s empowerment. Banerjee et al. ( 2015a ), Angelucci et al. ( 2015 ), and Tarozzi et al. ( 2015 ) raised doubts about the transformative impacts of microcredit as a development tool. Angelucci et al. ( 2015 ) and Tarozzi et al. ( 2015 ) provide evidence that the effectiveness of microfinance is modest, with little or no evidence of any effectiveness in promoting micro-entrepreneurship, income, the labor market, consumption, social status, subjective well-being, schooling, or empowerment, despite affording a substantial increase in access to credit. Microcredit increases borrowing, which is mainly used for investment and risk management. However, this increased access to credit leads to only modest increases in female decision making, trust, and business size, with little effect on overcoming debt traps (Angelucci et al., 2015 ).

Crépon et al. ( 2015 ) suggest that the effects of microcredit are mainly derived from borrower characteristics rather than from externalities. Microcredit access leads to a significant rise in investment in the assets applied to self-employment activities and an increase in profits among households with higher abilities to borrow. Ngo and Wahhaj ( 2012 ) also demonstrate how access to microloans can lead to positive outcomes for intra-household decision-making and the welfare of women depending on their starting point conditions. They convey how women only benefit from microcredit when they are able to use the credit to invest in profitable joint activities, and when a large proportion of the household budget goes to the consumption of public goods. Otherwise, women borrowers may experience a decline in welfare.

Bruhn and Love ( 2014 ) document the remarkable effects of microcredit on labor markets and income levels, especially among individuals located in areas with lower pre-existing bank penetration and those with low incomes. Arouri et al. ( 2015 ) also provide evidence that access to microcredit, internal remittances, and social allowances can help households strengthen their resilience to natural disasters. Kaboski and Townsend ( 2012 ) indicate that microcredit lines might increase total short-term credit, consumption, agricultural investment, income growth (from business and labor), and wages, but decrease overall asset growth. Schicks ( 2014 ) provides measures for policymakers to address the over-indebtedness potentially arising from microcredit. Analyzing the loan-related sacrifices that borrowers report, the author identifies how male microborrowers are more likely to be over-indebted than women and that over-indebtedness is lower for borrowers with good levels of debt literacy. Based on a case study of microfinance trials, Allcott ( 2015 ) suggested that default rates may depend on the size of the trial samples. This study of program evaluations based on randomized control trials draws attention to the systematically biased out-of-sample predictions of program evaluations, even after many replications.

Microcredit has been referenced as a relevant tool for addressing credit constraints and promoting entrepreneurial activities. However, empirical studies have returned conflicting results, casting doubt on the strength of microcredit not only in financial outcomes but also in its actual ability to enhance several dimensions of human development. Stressing the research findings that indicate the need to consider the context of microcredit program deployment, we suggest paying particular attention to the development setting, as some studies demonstrate how microcredit programs are more effective in contexts where the credit markets have failed (i.e., poor settings), while others propose that microcredit intervention is boosted by environments with higher levels of social, economic, and institutional development. Research on this domain constitutes a fruitful field of research.

Cluster 2: Social performance or mission drift?

This cluster encompasses 10 studies. The focus of this cluster is access to microfinance, usually addressed in the literature as an indicator of MFI social performance (mission locked-in versus mission drift). Vanroose and D’Espallier ( 2013 ) report that MFIs reach more poor clients and prove more profitable in countries where access to the traditional financial system remains low. The results suggest that MFIs offset market failures in the traditional banking sector and flourish best when the formal financial sector is absent. However, MFIs have also shown remarkable social performance in countries with well-developed financial systems, as this pushes MFIs down the market and makes mission drift less likely. Cornée and Szafarz ( 2014 ) also provide evidence that banks offer advantageous credit terms for social projects. In turn, borrowers are motivated to repay loans, thus reducing the probability of default. Louis et al. ( 2013 ) and Lebovics et al. ( 2016 ) provide evidence that these dimensions of performance, and thus the social and financial aspects, are not mutually exclusive. Over a short time frame, there are positive relationships between social efficiency and financial performance (Lebovics et al. 2016 ; Louis et al. 2013 ). However, D’Espallier et al. ( 2013 ) adduce evidence pointing in the opposite direction and propose that microfinance faces a mission drift with the lack of subsidies, worsening the social performance of MFIs. Dealing with this trade-off has involved the implementation of several strategies, including charging higher interest rates, targeting less poor individuals, or reducing the proportion of female borrowers in order to compensate for public non-subsidization.

Bocher et al. ( 2017 ) demonstrate that individuals owning land and with larger households and/or savings experience a greater probability of getting microcredit. These results may indicate that some MFIs do not target the poorest of the poor. Canales ( 2014 ) examines how MFIs balance the pressures to pursue financial efficiency with the need to remain responsive to local needs. The authors document how MFI branches allowed discretionary diversity and decentralized flexibility through relational embeddedness to cater to local needs tend to achieve better performance. Thus, microcredit committees may yield substantial benefits for organizations and unbackable local individuals, for example, when dealing with missed repayments. Augustine ( 2012 ) proposes that the transparency of MFIs’ corporate governance policies is more important than their orientation, concluding that transparent declarations of their social orientation increase their performance. This may occur because public statements about MFI orientation generate commitments to the target community.

Among these clusters, the studies conducted by Al-Azzam et al. ( 2012 ) and Van Gool et al. ( 2012 ) are somewhat collateral to the main topic of MFI social performance. Van Gool et al. ( 2012 ) analyze whether the credit scoring system adopted in retail banking is appropriate for the microfinance industry, especially with regard to its social concerns, and reported that all the benefits of credit scoring models are commercially related. However, they also suggest that credit scoring may serve social concerns, for instance, by modelling information about indebtedness in order to avoid debt traps. Al-Azzam et al. ( 2012 ) focus on the effects of screening, peer monitoring, group pressure, and social ties on borrowing group repayment behaviors. The authors provide evidence that social ties built on religious attitudes and beliefs improve repayment performance. Thus, this study straddles the frontier with Cluster 3.

The trade-off between MFI outreach and profitability remains controversial. Several studies report that MFI shifts over time from social to financial performance as a result of both the costs of microfinance market contracts and the high fixed costs associated with small loans. Recent studies also reinforce that the national context also has a relevant impact on MFI performance. Consequently, several strategies have emerged to improve profitability, including increasing loan amounts, charging high-interest rates, public subsidization, and gaining efficiency through new technologies. Hence, the trade-off between outreach and sustainability continues to attract the research community studying governance and new organizational strategies, such as legal status, to improve MFI social and financial performance.

Cluster 3: group lending, social networks, and social capital

The third cluster involves nine studies focusing on group lending, social networks, and social capital, and how these relate to credit access and loan repayment. Group lending has the ability to build up social networks outside of the family (Attanasio et al. 2015 ), promoting social interactions that increase repayment rates (de Quidt et al. 2016 ), even in the absence of any collateral (Feigenberg and Pande 2013 ). One concern here is that the grace period might restrict social networks among group members, thus increasing default rates by lowering the effectiveness of informal insurance (Field et al. 2013 ).

Social capital is based on a “pre-existing connection between group members” (Banerjee 2013 : 496). Group members hold better information about each other than the respective MFI; they are therefore not only in a better position to screen and monitor the actions of each group member but also to punish those who default, for example, by withdrawing social capital from them (Banerjee 2013 ). Thus, group meetings increase social capital and networks and reduce the monitoring costs of lenders, which may encourage recourse to formal insurance, reducing the bail-in costs in case of default (de Quidt et al. 2016 ). According to the authors, by also functioning on an individual liability basis, group lending might facilitate increases in repayment rates depending on the social capital and networks developed within those groups. Group lending also displays the ability to increase both borrowing and entrepreneurship, as such an approach reduces the discouragement experienced by some individuals who are uncomfortable with borrowing on an individual basis but are willing to borrow in groups and share the liabilities, especially women with lower levels of education (Attanasio et al. 2015 ).

Wei et al. ( 2016 ) indicate how credit scoring models encapsulating client social networks—their social score—might provide a means of raising access to microcredit as an alternative to group lending. However, Yuan and Xu ( 2015 : 232) drew attention to how poorer households “are limited by social networks and they have no financial means to invest in their social capital to expand their social network.” Donou-Adonsou and Sylwester ( 2016 ) examine the relationships between financial development and poverty reduction, a topic on the frontier with Cluster 1. Gabor and Brooks ( 2017 ) seem to approach the frontier with Cluster 4, as they analyze the growing importance of digital-based programs for fostering financial inclusion in the fintech era.

Group-lending mechanisms are still attracting the attention of scholars. The social cohesion characterizing borrowing groups explains the effectiveness of the screening and monitoring stages that reflect in the repayment rates as well as in the outcomes of loans made for business purposes. Furthermore, this requires a deeper understanding of where group lending contexts generate advantages over individual contracts, for example, in developing countries where social capital often implies investments that poor people are not able to attain.

Cluster 4: poverty alleviation, entrepreneurial activities, and financial service innovations

Cluster 4 includes nine studies that focus on the contribution of entrepreneurial activities and financial service innovations to poverty alleviation. The literature posits that entrepreneurship represents a crucial pathway for alleviating poverty (Bruton et al. 2013 ) arising from socioeconomic and technological growth and development (Zahra and Wright 2016 ), which requires an industrialized approach to offset the multiple market failures prevailing in developing economies (Alvarez et al. 2015 ). This might explain why microcredit generally has stronger socioeconomic impacts (especially for the empowerment of women) in more challenging contexts and when targeting client entrepreneurs (Chliova et al. 2015 ). However, not all entrepreneurial activities lead to sustainable economic growth. For example, self-employment opportunities in sectors requiring low levels of human capital tend to perpetuate abject poverty (Alvarez and Barney 2014 ). Significant economic growth and poverty alleviation depend on the ability to discover and create new business opportunities based on more effective utilization of human capital, property rights, and financial capital (Alvarez and Barney 2014 ; Alvarez et al. 2015 ). In fact, local development (Diniz et al. 2012 ) and entrepreneurial success (Josefy et al. 2017 ) depend on the ability to mobilize resources, including financial capital. However, to be effective, an increase in financial resources requires accompanying financial education.

Formal credit markets and even traditional microfinance sources for encouraging investment, innovation, and launching new ventures may no longer be sufficient to overcome the persistent societal challenges of poor countries (Zahra and Wright 2016 ). According to these authors, peer-to-peer lending and crowdfunding may provide a solution for financial, social, and environmental wealth. “Crowdfunding refers to the practice of raising funds for a venture or project from dispersed funders typically using the Internet as a channel of operation” (Josefy et al. 2017 : 163). The availability of funds for promoting microenterprises is expanding rapidly through crowdfunding platforms, such as Kiva, which provides a greater audience of lenders for microenterprises’ signaling autonomy, competitive aggressiveness, and risk-taking (Moss et al. 2015 ). The success of loan campaigns on crowdfunding platforms also depends on contextual community attributes, such as the cultural values of the target audience that shape the level of interest the projects generate in the crowd (Josefy et al. 2017 ).

Information and communication technology (ICT) seems to be an alternative for supporting financial inclusion and fostering social inclusion (Diniz et al. 2012 ). By examining an ICT-based platform, Berger and Nakata ( 2013 ) analyze the socio-technical characteristics that technological solutions may have to successfully implement financial service innovations in the field of microfinance. According to these authors, these innovations tend to produce better results when they are congruent with the unique surrounding socio-human, regulatory, and market conditions.

The literature references entrepreneurship, particularly in deprived environments, as the only option to earn money due to the absence of any other market participation. In such contexts, microcredit enhances entrepreneurial activities through the issuance of small and unsecured loans. Scholars still raise concerns about the effectiveness of such programs, mainly due to the lack of profits generated by the financed ventures to pay the costs of loans and ensure loan repayment. The lack of management skills is an additional issue pointed out by researchers. Recently, new finance alternatives have emerged, especially crowdfunding, which deploys online platforms to allow entrepreneurs to connect with prospective crowd funders—the crowd—who finance new entrepreneurial ventures by lending small amounts. Empirical studies in this area are still in their infancy, but strengthen the perspective that crowdfunding may democratize entrepreneurial finance, particularly among the more vulnerable, and help break the poverty cycle.

Cluster 5: gender and thematic frontiers

The final cluster included eight studies. This cluster covers the impacts of microcredit targeting the vulnerable, with some articles focusing specifically on women. Thus, in this cluster, we encounter several studies bordering on the frontier with other clusters, such as Cluster 1 (e.g., Duvendack and Palmer-Jones 2012 ; Roodman and Morduch 2014 ), Cluster 3 (e.g., Willy and Holm-Müller 2013 ; Mallick 2013 ; Mendes-Da-Silva et al. 2016 ), and Cluster 4 (Deininger and Liu 2013 ; Barasinska and Schäfer 2014 ; Mendes-Da-Silva et al. 2016 ; Gleasure and Feller 2016 ).

Duvendack and Palmer-Jones ( 2012 ) and Roodman and Morduch ( 2014 ) re-examined previous studies, specifically those developed by Pitt and Khandker ( 1998 ), questioning the evidence they reported after studying Bangladesh microcredit programs. Both studies raise doubts about the microcredit outcomes identified by Pitt and Kandker. However, Duvendack and Palmer-Jones ( 2012 ) corroborate the positive effects of microcredit for vulnerable women. Gleasure and Feller ( 2016 : 110) conducted a meta-triangulation analysis of crowdfunding research. Their results suggest that crowdfunding generates new opportunities and describing how these “present genuinely new ideas and behaviours” and not “simply a migration of established practices into a new domain.” For example, crowdfunding may solve some of the discrimination problems faced by women in traditional credit markets, as the study found no gender effects on the likelihood of receiving funds. Deininger and Liu ( 2013 ) report that a combination of microcredit and self-help group initiatives (including training and capacity-building programs) produces positive pro-poor effects, especially by promoting the empowerment of women and health and improving consumption and income diversification in the short term.

Mallick ( 2013 : 179) examines whether continued support for poor individuals, which includes “management assistance, a subsistence allowance, health care facilities, and support for building social networks,” plays a crucial role in borrowing decisions. The authors indeed conclude that this “big push” affords the extremely poor access to microfinance. This effect is higher for larger households and for households with male heads, and increases with the average levels of education and income in the household. Social capital also plays an important role in borrowing decisions, in keeping with several of the findings systematized in Cluster 3. Mendes-Da-Silva et al. ( 2016 ) also support the notion that entrepreneurs’ social networks might play a central role in funding, especially on crowdfunding platforms. Willy and Holm-Müller ( 2013 ) examined the effects of social influence, social capital, and credit access in the agricultural sector and demonstrated how they represent significantly positive predictors of farm soil conservation.

Scholars have identified how entrepreneurship represents one path to the empowerment of women, particularly in developing countries, although empirical evidence indicates a mixed range of outcomes. Some studies stress that microcredits/microfinance endows women with great control over the operations of their ventures and household resources, thus fostering their empowerment. Others argue that microfinance programs do not take into account the cultural and social context of their deployment and thus, in some ways, sustain the existing hierarchy of classes, increasing tensions among household members and providing new forms of dominance over women. Recent research posits that new technologies extending basic financial services have a large effect at a relatively low cost and are susceptible to deepening through knowledge transfers in the form of financial literacy.

Mapping the trends

This section discusses the most recent and influential articles on microfinance topics published in the last three years (2018–3:2021) and ranked on ABS with a classification of 4 or 4*, yielding a total of 11 articles. Footnote 8 As they are more recent, these articles have been cited less often and therefore excluded from the bibliographic coupling analysis carried out in Sect. 4 . We also identified the most relevant emerging topics in the field.

Emerging trends

Table 10 systematizes the scope and main findings of all the articles published in ABS (4 or 4*)-ranked journals in the field of microfinance. Recent studies have promoted new approaches to examining the socioeconomic impacts of microfinance at both the macro (Buera et al. 2021 ; Duflo 2020 ) and micro (Burke et al. 2019 ; Singh et al. 2021 ) levels. The theme of MFI mission drift or mission lock-in is still at the fore in most recent literature (Alon et al. 2020 ), as well as the benefits to the group and joint lending (Attanasio et al. 2019 ), and reputation, social capital, and network (Li and Martin 2019 ). ABS (4 and 4*)-ranked journals have also published papers on somewhat underexplored topics on the frontiers of some clusters, such as alternative programs for promoting social changes (Kim et al. 2019 ), the impact of microcredits on subjective well-being (Bhuiyan and Ivlevs 2019 ), and the roles of cultural institutions (Drori et al. 2018 ) and government regulation (Tantri 2018 ) in the microfinance performance returns.

After analyzing the keywords of the most influential studies published between 1:2018 and 3:2021 (whether or not ABS ranked), Table 11 presents the most recent trends on microfinance literature, with “microfinance,” “microcredit,” “impact,” and “poverty” still representing the keywords with the most occurrences. Comparing Tables 8 with 11 , we observe that roughly half of the occurrences of these keywords relate to articles published since 2018. “Gender/women,” “entrepreneurship,” “performance,” and “empowerment” are trending topics, gaining in importance in the microfinance literature over the last three years.

Entrepreneurship and performance

Microfinance appears as an instrument that promotes access to capital for impoverished individuals otherwise excluded from financial systems and gaining popularity as a means of enhancing entrepreneurial activities (Yunus 1998 ), enabling vulnerable people to engage in market transactions and end subsistence-based livelihoods. Consequently, entrepreneurship among individuals living in poverty settings represents a more important outcome than much traditional entrepreneurship research in developed countries.

However, the empirical literature is inconclusive about the ability of microfinance to enhance the financial standing of vulnerable people (Khavul et al. 2013 ). This ambiguity is strengthened when coupled with other development outcomes, specifically the capabilities of the poor across several facets of human development (e.g., empowerment, education, health). Thus, researchers perceive that a key aspect for continuing scrutiny derives from the effectiveness or otherwise of microfinance, justifying the emergence of an increasing number of papers on this domain. Furthermore, some authors maintain that the context of microfinance deployment, hence the national context and specific features, impact the outcomes of such tools (Crépon et al. 2015 ; Weiss and Montgomery 2005 ), particularly in environments where credit markets have failed. Hence, the performance effect of microfinance is greater in developing countries (Chliova et al. 2015 ). Meanwhile, other authors emphasize the synergetic relationships between institutional and socioeconomic developments as outcomes that microfinance can achieve. However, it remains unclear whether microfinance aligns with supplementary or complementary outcomes.

Our bibliometric analysis demonstrates that when designing programs, microfinance institutions should focus on borrower characteristics instead of standard credit contracts; otherwise, credit only worsens problems of over-indebtedness. To achieve win–win propositions, in addition to credit, microfinance interventions should also involve education and training programs to boost the capabilities of less advantaged citizens to start, maintain, and grow their own ventures. This seems particularly relevant in less developed entrepreneurial ecosystems as well as in regions where the economic development model is based on intensive (low-educated) human capital that is more exposed to persistent poverty traps and anemic economic growth. By achieving successful entrepreneurial outcomes, educated and trained entrepreneurs increase their financial and non-financial outcomes. In sum, our findings shed light on the powerful interwoven effects of knowledge, credit, and entrepreneurship in lifting poor entrepreneurs out of poverty, particularly in deprived settings.

Empowerment and gender

Gender inequalities constitute one of the greatest barriers to human development (Conceição 2019 ), especially in developing countries (Ojong et al. 2021 ). In these countries, women may face additional challenges in obtaining education and a well-paid job, in addition to working an average of three times more often in unpaid and domestic activities than men (UN Women 2020 ). Scholars have emphasized how entrepreneurship provides a pathway to empower women, stressing that microfinance is a reliable tool that leverages its effects primarily through business activities.

The strength of microfinance as a development intervention tool to transform social and economic structures relies on its potential ability to lift people out of poverty (Yunus 1998 ) by running small ventures that generate financial resources to increase entrepreneurs’ financial well-being (Mckernan 2002 ). However, beyond wealth creation, this approach forecasts a capacity for microfinance to boost the livelihood of recipients across several dimensions (Buckley 1997 ; Miller et al. 2012 ). Hence, this places great emphasis on non-financial human development outcomes, specifically women empowerment (Hermes and Lensink 2011 ), which is particularly relevant in poor settings, as the constraints women face regarding market participation constitute a form of dominance and control over women. Women empowerment emerges as a multidimensional concept (Weber and Ahmad 2014 ) that, besides access to credit, also includes income, contribution to household expenditure, health, education, control over resources, participation in community and household decision-making, social mobility and freedom of movement, and self-worth (Kabeer 2001 ; Noponen 2003 ). Therefore, when considering these dimensions, any substantial increase in access to credit certainly does not automatically promote subjective well-being or empowerment (Angelucci et al. 2015 ; Tarozzi et al. 2015 ). Nevertheless, studies suggest that the provision of small loans to women enables them to more effectively mitigate gender barriers by running their own businesses, increasing their mobility outside the household, and achieving the ability to make decisions (Todd 1996 ). In addition, through economic activities, household income increases, improving their standard of living, and consequently enhancing the education of their children and leading them to adopt more preventive health practices (Yunus 1998 ).

The mission to promote the empowerment of women through the provision of small loans also depends on training programs and the ability of MFIs to understand the characteristics of female borrowers (Hunt and Kasynathan 2001 ). Thus, MFIs must design and implement internal policies to mitigate gender biases based on the conditions of female borrowers at the outset. Promoting the participation of women in decision-making processes in higher loan cycles, for example, will spread women’s empowerment (Swain and Wallentin 2009 ) and positively increase the abilities of female borrowers to decide how to use their loans (Weber and Ahmad 2014 ). Hence, recent research suggests a more holistic approach to answering the extent to which microfinance meets sustainable development goals, for example, eradicating poverty, reducing inequalities, and boosting sustainable development.

In fact, the outreach of microfinance itself is changing with the emergence of fintech, namely prosocial crowdfunding platforms. Fintech has had a noteworthy impact on the financial system by reducing operating costs, providing higher quality services, and increasing user satisfaction (Kou et al. 2021 ). In the context of microcredit, prosocial crowdfunding platforms act as socially oriented digital marketplaces, particularly targeting poor settings (Meyskens and Bird 2015 ), where lenders provide credit access to impoverished people underserved by the banking industry, facilitating the liberalization of the financial sector at a global level. In turn, this boosts more inclusive financial and social systems (Dupas and Robinson 2013 ) that generate large effects at relatively low costs.

To be fruitful, the crowdfunding platform design cannot ignore the decision dynamics underlying not only traditional e-commerce platforms but also fintech. Commercial digital platform users base their judgments and decisions on trustworthy reviews. Likewise, we posit that prosocial lenders will increasingly drive digital funding decisions on systematized crowd reviews on borrowers and MFI. Thus, as in many financial applications (see Li et al. 2021 ), detecting clusters of financial and social-environment data (such as borrowers’ social capital and MFIs’ financial and social performance) will be critical for inferring lenders’ behavior and maximizing the performance of crowdfunding platforms and their outcomes. This might constitute a new application case for the so-called data-driven opinion dynamics model (see Zha et al. 2020 ), because financial technologies provide important advantages in processing big data into more meaningful, cheaper, worldwide, and more secure data than conventional methods (Lee and Shin 2018 ).

Thus, we might expect these topics to guide future research, providing a starting point for returning practical implications for policymakers, academics, players in crowdfunding markets, and microentrepreneurs.

Conclusions and implications

Poverty remains a key global challenge. According to the World Bank forecast, the total number in poverty is due to rise for the first time in over two decades, from 119 to 124 million by the end of 2021. In this context, microfinance has emerged as an innovative and sustainable poverty alleviation tool to serve more vulnerable people, particularly in developing countries. However, some scholars have challenged its proposed benefits (e.g., Chliova et al. 2015 ; Morduch 1999 ). Through the application of bibliometric methods, this paper reviews the most recent literature on the trends in the outcomes for microfinance recipients, thus focusing on the demand side. The study examines 524 articles collected from the Web of Science database published between 1:2012 and 3:2021.

Based on keywords, co-occurrences, and links between citations to obtain knowledge maps, the findings demonstrate that in both the theoretical domain and the empirical, research still casts doubt on the capacity of microfinance to generate positive outcomes beyond wealth creation, particularly in terms of empowerment, education, and health (Cluster 1). Further studies in this domain should consider the macro-context when undertaking empirical research; otherwise, policies designed based on such limited evidence may yield unexpected outcomes contrary to the forecast socioeconomic goals. Furthermore, entrepreneurship, through granting small loans (microcredits), represents a precondition for individuals living in poverty starting small businesses and the most efficient strategy for leaving behind subsistence-based lives. However, as lack of management skills may hamper the survival of these businesses, providing finance literacy training has a positive impact on the performance of such small ventures (Cluster 4). Nowadays, the reach of microfinance is changing due to the emergence of crowdfunding, as the crowd of lenders provides prompt credit access to start-ups launched by impoverished microentrepreneurs and empowering women (Cluster 5). This research is still in its infancy, but by sharing risks worldwide, informal lenders can extend credit through small loans, thus democratizing entrepreneurial finance to boost new ventures. The group lending methodology remains an efficient instrument for overcoming the lack of access to financial resources by building up social networks in the community (Cluster 3). Therefore, research in this field should examine how new screening models and credit social models, along with soft information, leverage the financial performance of new ventures and enhance financial inclusion and foster the social inclusion of such individuals. This study also identifies the role of MFIs in addressing market failures in the traditional banking sector, stressing the idea that MFIs gradually shift over time from social performance (outreach to the poor) to financial performance (Cluster 2). Thus, taking into account the recognized role played by microfinance and MFIs in the process of socio-economic transformation, public policy must consider the need to compensate for the market’s financial performance gap in the poorest economies by subsidizing credit activities to avoid mission drift effects. This needs to be accompanied by a transformation of MFI corporate governance policies to ensure transparency in their operations and selection of microfinance recipients. Overall, this study corroborates that microfinance is a distinct field of development thinking that requires a more holistic approach to overcome poverty and boost economic and human development at the global level.

As with any bibliometric analysis, this study has some limitations. As we gathered bibliometric data from the WoS database, we may have missed studies listed only in other databases (e.g., Scopus). Furthermore, some research domains within microfinance and microcredit may rely more on citations than others, which may reduce the scope of the outputs within clusters. Finally, early career researchers may not fare well in citation and co-citation studies even when producing seminal research, which may reduce the impact of their studies as measured using tools deployed to gather bibliometric data.

One of the greatest advantages of the Web of Science database, compared with PubMed, Scopus or Google Scholar, is its timeline coverage in terms of quality research production (Falagas et al., 2008 ). This aggregates research information from five indexed databases: Science Citation Index Expanded (SCI Exp.), Social Sciences Citation Index (SSCI), Arts and Humanities Citation Index (A&HCI), and the index of Chemistry and Current Chemical Reactions (Goodman 2005 ). The SCI Exp. includes articles published since 1900; and with SSCI and A&HCI dating back to 1956 and 1975, respectively (Meho and Yang 2007 ).

We would acknowledge how searches based on a set of keywords include certain limitations (e.g., Costa et al, 2016 ). One way of improving the selection process in a systematic literature review involves adopting a Preferred Reporting Item for Systematic Review and Meta-Analysis – PRISMA (Moher 2009 ).

VOSviewer is a program developed for constructing and viewing bibliometric maps based on the visualization of similarities (VOS) technique (Van Eck and Waltman, 2009 ).

The year 2021 reflects only the publications until March.

https://charteredabs.org/academic-journal-guide-2018-view/ (accessed in April 2021).

The following similar keywords were merged: “programs” and “credit programs” (to “credit programs”); and, “gender” and “women” (to “gender/women”).

VOSviewer software only reports the name of the first author.

Paul et al. ( 2017 ) examine the most influential papers in the last four year. Spasojevic et al. ( 2018 ) also examine the papers ranked as class ABDC. Furthermore, Gutiérrez-Nieto and Serrano-Cinca ( 2019 ) select the top 5% articles for analysis as the excellent highly cited papers.

Abbreviations

Arts and Humanities Citation Index

Association of business schools

Information and communication technology

Microfinance institutions

Mean technical efficiency

Preferred reporting item for systematic review and meta-analysis

Science citation index expanded

Social enterprises

Social Sciences Citation Index

Sustainable development goal

Visualization of similarities

Web of science

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We acknowledge the financial support of Fundação para a Ciência e a Tecnologia (UBI PTDC/EGE/OGE/31246/2017; UIDB/ 04630/2020; UIDB/04728/2020; UIDB/04105/2020).

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Ribeiro, J.P.C., Duarte, F. & Gama, A.P.M. Does microfinance foster the development of its clients? A bibliometric analysis and systematic literature review. Financ Innov 8 , 34 (2022). https://doi.org/10.1186/s40854-022-00340-x

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The trade-off debate in microfinance: a review of the theoretical and empirical literature

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Competition and microfinance institutions’ performance: evidence from India

• Hailu Abebe Wondirad 1  

International Journal of Corporate Social Responsibility volume  5 , Article number:  6 ( 2020 ) Cite this article

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This paper empirically examines whether competition (measured by using the new measure of competition, the Boone Indicator) moderates the relationship between Microfinance Institutions’ (MFIs) social and financial performances using data from 183 Indian MFIs over the period 2005–2014.

The findings indicate that MFIs’ social and financial performances have a positive significant relationship. Moreover, the form of the relationship is both lead-lag and cotemporal. The Indian microfinance market was very competitive over the period 2005–2014. The empirical findings show that competition positively moderates the relationship between MFIs’ social and financial performances. More precisely, the empirical analysis provides evidence that the association between MFIs’ depth of outreach and operational self-sufficiency is conditional upon competition. These results suggest that in a competitive market, the more MFI deepen their depth of outreach, the higher contribution it has to their operational self-sufficiency.

Introduction

Microfinance is the provision of financial service to the poor and low-income people (Mersland, 2011 ). These financial services include savings, credit, insurance, and payment services (Ledgerwood, 1999 ). Microfinance Institutions (henceforth, MFIs) have unique features (i.e. in the form of product or service types, and lending methodologies) that distinguish them from formal banking institutions (Quayes, 2012 ). MFIs are created to fill the market segment that has long been unveiled by the conventional banking sector (Vanroose & D’Espallier, 2013 ).

In the recent decade, the Microfinance industry has been growing rapidly in developing countries (Assefa, Hermes, & Meesters, 2013 ; Kar, 2016 ), and has gotten high recognitions from international actors, donors, and governments (Olsen, 2010 ). The assets of the industry increased from 4 billion to 7 billion from 2006 to 2008 (Littlefield & Kneiding, 2009 ) and demonstrated a growth rate of 25% per year from 2004 to 2008 (Servet, 2011 ). The total clients served by the sector were also reached over 205.3 million in 2012 (Maes & Reed, 2012 ).

The increasing inflow of investment into microfinance is partly because the international community believes MFIs have an institutional foundation that fosters local economic development, creates jobs and empowers women (Gutierrez-Nieto, Serrano-Cinca, & Molinero, 2007 ). Commercialization, accompanied by a huge flow of investment, is the main drivers of microfinance’s evolution and makes it the hub of the potential business opportunity that spurring many institutions to change their ownership from not-for-profit to for-profit (eg. Bancosol Bolivia, Equity in Kenya, ACLEDA in Cambodia, SKS Microfinance in India, and Compartamos in Mexico) (Servet, 2011 ). But studies have been presented that microfinance is not drifted from their mission of serving the low-income people (Mersland & Strøm, 2010 ).

Although MFIs are propagating as banks for the poor, some MFIs address wealthier clients and profitable business segments. MFIs business model is different in terms of ownership, lending methodology, portfolio size, goals, and target market. The impact of the growing trend of commercialization has recently been part of microfinance study (for example Assefa et al., 2013 ; Cull, Demirgüç-Kunt, & Morduch, 2011 ; Fombrun, Gardberg, & Barnett, 2000 ; Freeman, 2010 ; Woller, 2002 ) Most of these studies have documented both positive and negative effects of competition on MFI’s performance or operation in general. The claim of mission drift is also emanating from the exigent debate of commercialization and MFIs’ mission. The root of the debate is that when competition increased, MFIs may shrink from their social mission and then starts striving for financial returns. Altogether, in line with mission drift claims, competition may moderate the association between social and financial performance. Therefore, to prove the existence of this fact, this paper examines the effect of competition on the relationship between social and financial performance by focusing on Indian MFIs.

This paper is organized as follows: In Section 2, the statement of the problem is discussed. Section 3 highlights the microfinance practices of India. Section 4 presents a literature review of the study. In section 5, the methodology and data of the paper are discussed. Section 6 describes the analysis of the results. Section 7 presents conclusions along with some recommendations. Finally, in section 8 of this paper, the practical implication(s) for MFIsare discussed.

Statement of the problem

Because of the lack of infrastructure and smaller portfolio sizes, providing financial services to the unbanked poor people, are very expensive and challenging. As a result, the financial institution serving this segment of the population is considered as socially motivated MFI and has defined social goals. However, whether MFIs emphasize on social aspects or financial aspects has been part of a continuing debate (Conning, 1999 ). In a competitive environment, being a socially responsible institution has a financial cost which in turn impends financial performance (Fombrun et al., 2000 ; Freeman, 2010 ). Firms participating in social development activities faced lower stock value as compared to the average (Vance, 2011 ), and then experienced lower financial performance relative to competitors in the industry (Klein & Dawar, 2004 ). In line with this, Cull, Demirgüç-Kunt, and Morduch ( 2008 ) and Hermes, Lensink, and Meesters ( 2011 ) find a trade-off relationship between financial sustainability and outreach.

On the contrary, the firm’s participation in social development activities helps to retain customers and increases sales volume where positively contributed to financial performance (Ruf, Muralidhar, Brown, Janney, & Paul, 2001 ). In microfinance, Montgomery and Weiss ( 2011 ), and Quayes ( 2012 ) find evidence that supports this theory; in such a way that outreach has a positive significant relationship with financial performance.

Recently, a double bottom line approach Footnote 1 has become popular in microfinance. MFIs have also been started pursuing a balance between social and financial performance (Ngo, 2015 ). Rating organizations have already started rating MFIs based on the ability to pursue their double bottom line objectives (Gutiérrez-Nieto, Serrano-Cinca, & Molinero, 2009 ). On top of that, the rapid evolution of Microfinance and its commercialization induced intense competition (Assefa et al., 2013 ; Woller, 2002 ). As competition increased, dealing with double bottom line objectives and achieving it simultaneously requires a strategic decision that reconciles the defined mission, and also be challenging. Consequently, increasing competition creates frustration that may compromise the MFIs’ social mission. It has been witnessed that commercialized MFIs provide four times larger loans, then non-commercialized MFIs (Cull et al., 2011 ), which shows that they might have abandoned their marginalized borrowers. Through increasing clients’ loan burden and deteriorating repayment performance, the competition also threatens MFIs’ financial performance (Assefa et al., 2013 ).

Theoretically, there are two different views. On the one hand, the competition-fragility theory that states, lack of competition in the market develop rent-seeking behaviors among firms (Boyd & De Nicolo, 2005 ). In such a market, MFIs are price setter rather than price takers. Although this theory points out that clients became a victim of the rent-seeking behavior of MFIs, the state of mission drift could not be determined. On the other hand, the competition-stability theory views firms as price takers (Beck, 2008 ). The market is offering an affordable price to customers. According to this theory, the competition allows clients to have strong barraging power on the price of a loan and to get a required loan amount. However, the sustainability of MFIs doesn’t exactly define. Competition-fragility theory has a profit motive, whereas, competition-stability theory recognized financial accesses at an affordable price. Thus, theories are not rationalized the impacts of competition on the relationship between MFIs’ social and financial performance. Altogether, in the financial market where there is a high competition, the relationship between social and financial performances of microfinance institutions is inferred.

Thus, from the above discussion, it can be thought out that in a highly competitive market, MFI focuses on a social mission that may experience lower financial performance or vice-versa. It means competition may influence the relationship between social and financial performance. In microfinance, understanding the characteristics of this market force (competition) and responding accordingly to it is vital to offer financial service permanently to the poor people and keep MFIs’ sustainability in the long run (Vogelgesang, 2003 ).

Although some studies examined the effect of competition on MFIs’ performance, the moderating effect of competition on the link between social and financial performances hasn’t been studied. Therefore, by considering these gaps, this study tried to analyze the following two research questions:

What is the relationship between MFIs’ social and financial performance?

Does competition has a moderating effect on the relationship between MFIs’ social and financial performance?

The overall objective of this research is to analyze the moderating effect of competition on the relationship between MFIs’ social and financial performance. Specifically, the research aims to identify the effect of competition on the link between depth and breadth of outreach, and Operational Self-Sufficiency (OSS) and Return on Asset (ROA) links.

Microfinance in India

The development and features of the Indian microfinance sector are discussed below. Microfinance has long been considered as instruments to provide financial services to the marginalized poor segment of the population in India.

The history of microfinance in India goes back to the 1970s when the first form of microfinance, Self Employed Women’s Association (SEWA), has established to provide financial services to poor women. In 1969 industrialization policy of India shifted its attention towards designing a new lending approach to the agricultural sector and rural poor (Burgess & Pande, 2003 .) This brought a downfall to informal credit operated by moneylenders, which accounts for more than half of the household credit in the 1970s (Shah, Rao, & Shankar, 2007 ). In early 19th India has long been recognized as a country where a large number of unbanked rural poor people found. To change this by providing access to finance to the remotely found rural poor people, microfinance is considered as a promising instrument to bring sustainable rural development.

Therefore, in the 1970s and 1980s, the government has designed the Integrated Rural Development Program (IRDP) with the mission to subsidized agricultural credit and bring livelihood improvement (Taylor, 2001 ). This program has been an opportunity for rural poor to experience the formal financial sector. Later, in 1972, the Self-Employed Women’s Association of India (SEWA) established and started providing financial services and led a path for the establishment of SEWA Bank (Datta, 2003 ).

After a decade of its first movement, another form of microfinance, Self Help Groups (SHGs) has emerged in India and became popular still now. Then, Non-Governmental Organizations (NGOs) and other community development institutions have been joined the industry and became major players in the sector.

Generally, the historical evolution of microfinance growth in India has divided into two stages. The first stage was the one motivated and supported by NGOs and other development organizations by offering micro-credit services. The second phase considered as a “microfinance movement” where formal financial firms have entered into the microfinance market to provide financial services to the unbanked poor people. In the “microfinance movement” the forms or legal status of institutions and their financial products and services have diversified. It is also considered as the transformation from mere credit age to all-rounded financial services age. Currently, Commercial Bank, Non-Bank Financial Institutions (NBFI), Rural Bank, Credit Union, and NGOs are the well-known forms of microfinance institutions operating in India that providing credit, saving, remittance, financial training (Guha, 2007 ). The Indian microfinance sector is dominated by NBFIs, has an 80% market share (Etzensperger, 2013 ).

As indicated above the Indian microfinance operation has been leading by the different forms of institutions. However, their services delivery model can be categorized into two main delivery models: SHG and MFI model. The latter is the most dominant model in the country. The MFI model provides a range of lending methodologies such as joint liability groups, Grameen, and individual banking.

From 2005 to 2010, the Indian microfinance industry has strongly been grown (Kar, 2016 ). The clients’ demand for the loan and huge flow of investment are the diver factors of the high growth of the industry. However, later, an unprecedented crisis affected the promising growth of the Indian microfinance industry.

The crisis happened in Andhra Pradesh, a southern state of India. Although Andhra Pradesh was the place where the crisis began before the watershed the state was considered as the hub of microfinance, and many NGO driven MFIs where found. In 2006 when the sector entered into crisis, in Krishna district of Andhra Pradesh, the borrowers turned into demonstration and violent to claim back their fixed asset seized as collateral. In Andhra Pradesh, as compared to other regions, averagely a household owe loans from nine MFIs (India Report 2010). Because this state placed the sector as a priority sector to tackle poverty and received support from the World Bank, the sector has been highly expanded, and overlapping became the main feature of Indian MFIs (Taylor, 2001 ). Until recently, because of the availability of loans from competitive sources, the sector represents a low repayment rate.

The crisis exacerbate when around 200 suicides were linked to microfinance institutions. Due to the crisis, the repayment rate of the sector dropped down to 10%. On top of that, a very high default rate, unethical loan collection practices, and high-interest rate (25% -40%) become the characteristics of the Indian microfinance sector (Ghate, 2007 and Sharma, 2006 ). By the time, 40% of the residents of the state of Andhra Pradesh had MFIs’ loan (Mader, 2013 ). Altogether puts 82% of households of the district indebted. Consequently, the government has taken action by closing around 50 MFIs (Mader, 2013 ).

After the crisis the microfinance industry of India continued to demonstrate high growth. However, commercialization and aggressive expansion of MFIs intensify the competition in the sector. The crisis and the entrance of MFIs into the stock market are considered as the main driver of commercialization in the Indian microfinance sector.

Following Compartamos (Mexican MFI), Indian MFI, SKS entered into the initial public offering and raised around $350 million. Due to the large commercial fund injected into the sector, the loan portfolio has been substantially increased and exacerbate the trend of commercialization.

On the other hand, the neo-liberal economic reform and commercial funding, have been taking as another pushing factor of commercialization in the microfinance sector of India (Bateman, 2010 ; Taylor, 2001 and Wichterich, 2012 ). Commercial funding affects MFIs to change their source of funds from loans to share capital by entering into the capital market (Mader, 2013 ; Taylor, 2001 ).

Moreover, the legal framework of the Indian microfinance sector is also responsible for the high growth of the commercialization of microfinance. In India, only formal financial Institutions are allowed to raise equity capital and mobilize public deposits. Hence, NGOs, SHGs, and other semi-formal money lenders forced to change their legal status into NBFIs and banks which then leads to shifting from their social mission to finance-oriented (Guha, 2013 ).

As evidenced above, commercialization becomes the main feature of the Indian microfinance sector. This commercialization leads to competition and market saturation (Mader, 2013 ). Competition, in turn, causes over-indebtedness in the sector. Later in 2010, the government of India introduced interest caps. Nowadays, the microfinance market of India undergone trough tight control and scrutiny. The growing trend of commercialization is the main reason for strict regulation.

As the above discussion shows, in its early stage of development, the main mission of Indian microfinance is fighting poverty through outreach. In this regard, although there has been an imbalance across the regions in India, MFIs have been demonstrating high growth of outreach in the sector.

Moreover, like the main notion of microfinance, it is clear that Indian MFIs have double bottom line objectives, MFIs’ social outreach, and financial sustainability (Morduch, 1999 ). Although some MFIs have been striving to achieve a balance between social and financial performance, competition makes it very challenging and sometimes lead to mission drift (Ngo, 2015 ).

However, now the rapid growth of commercialization in the Indian microfinance sector and competition pushes MFIs to change their social mission of providing access to finance for the unbanked segment of the population to profit-seeking institutions (Guha, 2013 ). In a competitive microfinance sector, achieving the double bottom line objectives is very challenging (Cull et al., 2011 ). Consequently, increasing competition creates frustration of poor financial performance that spurring MFIs to compromise their social mission. It has been witnessed that commercialized Indian MFIs provide larger loans, then non-commercialized MFIs (Taylor, 2001 and Wichterich, 2012 ) which shows that they might shift from their social mission.

Thus, whether market competition causes a shift in MFIs’ mission needs to be investigated. In a competitive market, do MFIs shift from their social mission towards financial objectives? is needs to be answered. Consequently, the objective of this paper is to examine whether competition has a moderating effect on the relationship between MFIs’ social mission and financial performance.

Literature review

In this section, a review of the literature on MFIs’ performance and competition are provided. First, both theoretical and empirical evidence on the relationship between social and financial performance are discussed. Second, the effect of competition on MFIs’ performance is reviewed. Finally, theories and literature that show the moderation effects of competition are discussed.

Social and financial performance: theoretical review

In the 1970s System theory was broken up the closed-lope strategies of institutions. According to Ackoff ( 1970 ) system theory advocates that all partners within the network are incorporated in organizational decision-making and problem-solving. From a System theory point of view, the optimal strategy is the one that able to combine partners’ interests in such that the firm’s strategy is optimal for the network. Based on this theory, given the strategy of the partners, to formulate an optimal business approach, the organization is considering the mutual benefits of all partners in the network of the organization. Concerning system theory, stakeholder theory has brought to incorporate social issues into the business model of firms.

Stakeholder theory states that socially responsible institutions have better financial performance (Freeman, 2010 ). Stakeholder theory helps to understand how incorporating the interests of stakeholder (customers) to influence the financial performance of the MFIs. It means it lays a foundation for the possible relationship between social and financial performance. This is because the domain of stakeholder theory thought out that satisfying the interest of customers has a positive direct contribution towards MFIs’ profitability. Contextually, MFIs are expected to fulfill their social objective by offering financial services that meet the interest of poor or low-income people. This theory asserts that stakeholders should involve in the decision-making process of the organization and institutions have to consider the meeting of their need as an unavoidable cost of doing business (Freeman, 2010 ). In the stakeholder theory perspective, sustainability is based on the organization’s understanding of the external environment and responds to those affected by its strategies. Stakeholder theory serves as a framework to examine the relationship between social and financial performance (Ruf et al., 2001 ) and has also supported by several empirical pieces of evidence. In line with stakeholder theory, studies found a positive relationship between social and financial performance.

Ruf et al. ( 2001 ) investigate the relationship between corporate social and financial performances from a stakeholder theory perspective. The result of their analysis suggests that improvement in social performance has both immediate and continuing impact on financial performance. This implies that meeting stakeholders’ interests (achieving the social mission) provide a competitive advantage to retain market share and enhance profitability in the long run. Ribstein ( 2005 ) supports this view by arguing that incorporating corporate social responsibility builds strong stakeholder loyalty which in turn enhances financial performance. Moreover, achieving a social mission reduce unsystematic risks (Orlitzky & Benjamin, 2001 ) and determine competitive advantage (Turban and Greening, 1996 ). Similarly, others have also found constant results in support of stakeholder theory (e.g. Cornell & Shapiro, 1987 ; Preston & O'bannon, 1997 ; Simpson & Kohers, 2002 ). The evidence seems to support the view that developing favorable social performance (positive public image, good reputation, stakeholder satisfaction, etc.) results in promising financial performance.

Social and financial performance’s relationship: empirical review

Starting from the early development stage of microfinance, there is an ongoing debate between two groups which is referred to as the “Welfarists” and “institutionalists” (Hudon, 2011 ). Based on the Welfarists’ doctrine, microfinance is a bank that provides financial services to the poor, and designed as a development tool to fight against poverty (Woller, 2002 ). Whereas, institutionalists argue that to provide permanent financial services without subsidy, MFIs have to focus on self-sustainability (Robinson, 2001 ). Since then, the Microfinance industry is growing and getting diversified in the forms of product and services, ownership status, lending methodology, size, and goals. Of these diverse characteristics, MFIs have the double bottom line objective of social outreach and financial sustainability (Morduch, 1999 ). The nature of a relationship between MFIs’ social mission and sustainability and whether they can pursue their social mission and become sustainable at the same time is part of the debates in microfinance literature for decades.

In microfinance literature, studies have been conducted to find out the nature of the relationship between social and financial performance and remain debatable. One group of scholars argues that there is a trade-off relationship between social and financial performance (e.g. Conning, 1999 ; Cull et al., 2008 ; D’Espallier, Goedecke, Hudon, & Mersland, 2017 ; Hermes et al., 2011 ; Navajas, Schreiner, Meyer, Gonzalez-Vega, & Rodriguez-Meza, 2000 ; Schreiner, 2002 ). On the other strand, scholars find that a positive complementary relationship exists between self-sustainability and outreach (e.g. Adhikary & Papachristou, 2014 ; Montgomery & Weiss, 2011 ; Quayes, 2012 ). Moreover, some findings show no or neutral relationship (e.g. Bassem, 2015 ; Lebovics, Hermes, & Hudon, 2016 ). In the following section, evidence that supports both positive and trade-off relationships are discussed. First, empirical evidence that supports positive association will present, and then trade-off follows.

Complementary (positive) relationship

More recently, Adhikary and Papachristou ( 2014 ) find that MFIs’ sustainability and outreach are positively correlated and have a complementary relationship. They argue that both depth and breadth of outreach are positively related to profitability (Return on Asset) and efficiency (cost per borrower) of MFIs. Furthermore, according to them, as compared to the better-off clients, serving the poorest segment of the population has lower credit risk; the smaller the loan size (depth of outreach) the lowest credit risk.

Montgomery and Weiss ( 2011 ), Quayes ( 2012 ) also suggest that MFIs are undertaking and achieving both financial and social missions concurrently. Likewise, social performance helps to develop mutual trust and increase customer participation, which in turn reduces delinquency and operating costs (Lapenu, 2007 ).

Trade-off (negative) relationship

Cull et al. ( 2008 ) argue that higher profitability is associated with low depth of outreach. Implies that MFI strives for profitability abandons the poor segment of the population from its portfolio. Hence, the trade-off relationship exists between MFI efficiency (financial performance) and serving low-income people (outreach) (Gonzalez, 2010 ; Maîtrot, 2019 ). Besides, small loan sizes and high transaction costs of serving the poorest are the immediate reasons for the MFIs’ high-interest rate (Mersland & Strøm, 2010 ; Morduch, 2000 ; Rosenberg, Gonzalez, & Narain, 2009 ). But, charging a high loan rate on a poor’s portfolio to cover high operating costs emanates from doing a transaction with them has taken as a trade-off between outreach and financial performance (Schreiner, 2002 ). So, these authors claim that high transaction costs associated with small loan size impend effort of maximizing depth outreach without sacrificing financial stability.

Consistent with the above findings, because of the lack of collateral and high risks associated with poor clients, an MFI targets poor individual incur high operational costs, and shows the trade-off between social and financial performance (Bédécarrats, Baur, & Lapenu, 2012 ; Nawaz & Iqbal, 2015 ). Altogether, Bédécarrats, Baur, and Lapenu ( 2012 ) conclude that MFIs attain social and financial performance in both trade-off and synergy. Additionally, Morduch ( 2000 ) also supports these views by arguing that a trade-off relationship exists between profitability and outreach.

Ngo ( 2015 ) also finds strong empirical evidence for a trade-off relationship between financial performance and outreach. He argues that there is a threshold level for a trade-off to happen in which beyond this threshold level MFI maximizes their financial performance at the expense of the social mission. The above empirical evidence is also supported by other findings. For instance, Hermes et al. ( 2011 ) reveal a trade-off relationship between efficiency and outreach, were undertaking a social mission threatens MFI’s cost efficiency.

Nevertheless, some evidences exposed neither a trade-off nor a complementary relationship. Recently, Lebovics et al. ( 2016 ) find that Vietnamese’s MFIs are both social and financially efficient, but neither trade-off nor synergy association exists between social outreach and financial sustainability. They assert that cost efficiency is indirectly correlated with the depth of outreach which implies targeting low-income people threatens efficiency. Other findings also support the above evidence. For instance, Bassem ( 2015 ) find a neutral relationship. Thus, based on the above empirical evidences, it can be thought out that, in microfinance, the trade-off between social and financial performances have demonstrated. So, a trade-off relationship is also expected.

Although the theoretical discussion consistently supports a positive relationship, the empirical findings in section 4.2.1 and 4.2.2 on the relationship between social and financial performance are mixed. Consequently, this paper proposed in both negative and positive hypotheses that hypothesize as:

Hypothesis 1: social performance has a positive/negative significant effect on financial performance

• Competition

Competition measures

Banking works of literature have been forwarded to different measures of Competition. Those measures are broadly classified into two paradigms, Structural Conduct Performance (SCP) and the New Empirical Industrial Organization (NEIO) paradigms. SCP paradigm measures competition based on market structure and assumes that the competition is lower in a concentrated market, but the profit is higher. Herfindahl-Hirschman Index (HHI) is one of the SCP technique (Van Leuvensteijn, Bikker, van Rixtel, & Sørensen, 2011 ).

HHI value ranges from 0 to 1. The value closer to 0 indicates high competition, whereas 1 indicates a monopoly structure. However, HHI is criticized by the fact that it doesn’t take into account competitive behavior and bank’s ownership, and its assumption also lacks theoretical support (Coccorese, 2009 ; Lau, 1982 ).

A New Empirical Industrial Organization (NEIO) approach is a nonstructural measure whereby competition is measured through estimating parameters that reflect the firm’s competitive behavior. Panzar and Rosse statistics and the Lerner index are categorized under this approach. These indexes estimate firms’ market competitive power by considering a bank or firm as an independent decision-making entity. H-statistics estimates competition parameters based on the relationship between the price of inputs and equilibrium revenue. It ranges from 0 to 1, 1 represents a perfect competition, market, and H = 0 represents monopoly competition (Panzar & Rosse, 1987 ).

Learner Index is another most widely used measure of competition. In Learner Index, the firm’s market power is estimated using its price (P) and marginal cost (MC), (P-MC) /MC. When the value of the Lerner index closes to zero, it shows the presence of intense competition, whereas when PMC > 0, competition is lower. Amir ( 2003 ) asserts that the learner index lacks a theoretical foundation and not a robust indicator.

Recently, Boone ( 2008 ) introduced a new measure of competition, Boone Indicator. Boone indicator works on the assumption that in a competitive market efficient firm always performs better than the inefficient one. The Boone indicator estimates competition between firms by considering the association of profit and marginal cost. Thus, according to Boone Indicator, in a competitive market inefficient firms lost their profit and market share.

The new approach to measure competition has the advantage of handling MFIs’ efficiency and market share relationship and allows them to easily measuring competition on the specific product-market (van Leuvensteijn et al., 2011 ). The details of the Boone Indicator presented in part 5.

Competition and MFIs’ performance

Vogelgesang ( 2003 ) finds twofold of effects between competition and MFIs; positive and negative. On one hand, high competition improves repayment behavior and induces clients to pay on time. On the other hand, competition increases the supply of loan which in turn creates a loan burden and then leads to defeat. Schicks and Rosenberg ( 2011 ) share Vogelgesang’s second thought by arguing that competition creates over-indebtedness which increase delinquency rate and impend the sustainability of MFIs.

McIntosh and Wydick ( 2005 ) analyze the impact of competition on clients’ behavior and the results show that raising competition worsens delinquency rates. However, they also find that increased competition doesn’t change the dropout rates and loan amount. According to them, the entrance of new competing lender leads to multiple loan taking which in turn worsen repayment performance and reduced saving level of borrowers. In a later study, McIntosh, Janvry, and Sadoulet ( 2005 ) examined the effect of competition on the performance of MFIs, which suggests that competition creates over-indebtedness and negative externalities. They find that competition increases asymmetric information between competing MFIs which negative influences both impatient and patient borrowers. Likewise, competition increases the supply of loans in the microfinance market and erodes the power of social capital to serve as collateral (Villas-Boas & Schmidt-Mohr, 1999 ).

Assefa et al. ( 2013 ) suggest that competition has a negative relationship with outreach, which leads to conservative lending activities. On the other hand, they argue that competition has a positive significant effect on loan repayment which means leads to lower repayment rate, in turn, brings to more loans at risk and writes off. But, they conclude that competition negatively correlates with MFIs’ financial performance. Olsen ( 2010 ) also confirms the negative relationship between competition and outreach.

As indicated above, competition leads to multiple loans taking which exacerbate the default rate and other indebtedness. However, Guha and Chowdhury ( 2014 ) argue that borrowing from multiple sources threatens the real impacts of MFIs in their society. They claim that in double-dipping situations MFIs are targeting poor people, not crowding out. Competition lowers interest rates, improves the quality of service, and enhances innovation in microfinance (Porteous, 2006 ). It can be contended that competition in microfinance has both positive and negative effects on MFIs’ social and financial performances. Motta ( 2004 ) and Navajas, Conning, and Gonzalez-Vega ( 2003 ) also suggest that competition reduces operating costs and the price of a loan, and foster innovation among MFIs.

Moderating effect of competition

Theoretical background.

There are two theories of competition, competition-stability, and competition-fragility. The competition-stability theory is a competition theory that sees competition as a market stability force (Beck, 2008 ). Whereas, competition-fragility is a theory favors market concentration by assuming competition as a negative force towards the firm’s performance (Carletti & Hartmann, 2002 ).

From the competition-fragility theory point of view, lack of competition in the market develops rent-seeking behaviors among firms (Boyd & De Nicolo, 2005 ). In such a market, MFIs are price setter rather than price takers. It creates a favorable environment for MFIs to increase prices up to the level that allows them to generate a large sum of profit (Bateman, 2010 ; Helms, 2004 ; Rosenberg et al., 2009 ). Due to this, borrowers bear all the risks to borrow money at a high loan price. Clients became a victim of the rent-seeking behavior of MFIs. It puts them in a higher loan burden and increases the probability of borrower strategic default. On such occasions, credit could appear as an obstacle rather than absorbing the risks of vulnerable poor borrowers.

On top of that, although charging higher interest rate increase MFIs’ profit, it doesn’t target the reality of poor borrowers. It means it is not in line with the very objective of MFI, poverty minimization. From these discussions, it seems that competition-fragility or concentration-stability theory supports that market concentration increases firms’ profit but has a negative contribution to their social performance. In the absence of competition, there is a trade-off between social and financial performances. Therefore, competition negatively moderates the relationship between social and financial performance.

On the contrary, the competition-stability theory views firms as price takers. The market is offering an affordable price to customers. Charging a reasonable price prevent the strategic defeat of the MFIs, thus keep their sustainability. As indicated above in the case of collusion, charging hefty interest rate lowers borrowers’ repayment rate that in turn leads to bankruptcy. According to the competition-stability theory, the competition allows clients to have strong barraging power on the price of a loan and to get a required loan amount at an affordable price. These enhance the repayment performance of borrowers and so, the bank could have sustainable financial performance. Moreover, competition fosters innovation to offer products or services that tailored to the demand of the clients. Accordingly, the financial market offers a reasonable price for each segment of the population and then outreach could be maximized. Hence, competition positively moderates the relationship between social and financial performance.

Empirical background

In a competitive environment, being a socially responsible institution has a financial cost, which hurts the financial performance (Barnett & Salomon, 2012 ; Fombrun et al., 2000 ; Friedman, 1970 ). Organizations participating in social development activities faced lower stock value as compared to the average and experience lower financial performance relative to competitors in the industry (Vance, 2011 ). If MFIs involved in the social mission, competition may threaten their financial performance. This is due to the additional costs of undertaking social activities.

In the less competitive market, MFIs serve not only low-income people but also unbanked wealthier clients (Vanroose & D’Espallier, 2013 ). Serving the better of clients represents a larger loan size and also profitable (Bateman, 2010 ). Indeed, providing larger loan size doesn’t mean that the MFIs are not in line with their social objectives of serving a marginalized segment of the population, rather they are meeting their defined purpose trough cross-subsidization (Armendáriz & Szafarz, 2009 ). Additionally, Vanroose and D’Espallier ( 2013 ) argue that MFIs reach a large number of people in a place where there is a less competitive market and also demonstrate good financial performance and sustainability.

On the other hand, in countries where there is high competition in the microfinance or banking sector, MFIs forced to go to the lower segment of the population (Cull et al., 2011 ; Vanroose & D’Espallier, 2013 ). These MFIs have a deep depth of outreach through offering smaller loan sizes, but the Lower breadth of outreach. Besides, in a competitive market, MFIs obliged to decrease the interest rate to survive and compete in the market, which exacerbates the situation by unable to cover their operational costs. Though these MFIs are keeping their social mission of serving poor people by providing smaller loan sizes, their financial performance and sustainability are in danger because of significant transaction costs emanated from offering smaller loan sizes (Khanam, Parvin, Mohiuddin, Hoque, & Su, 2018 ; Mersland & Strøm, 2009 ). It can be thought out that when competition introduced in the market, social and financial performances’ link has affected.

When competition increased, to attract both social and financially oriented stakeholders and investors, firms have to focus on increasing financial performance and at the same time investing in community development projects (Beisland, D’Espallier, & Mersland, 2019 ; Kanwal, Khanam, Nasreen, & Hameed, 2013 ).

Arguably, the analysis of theoretical and empirical evidence suggests that competition influences the relationship between MFIs’ financial and social performances either positively or negatively. It implies that the strength and form of the relationship between social and financial performance may depend on the value or level of competition. In these senses, it can be hypothesized that;

Hypothesis 2: competition has a positive or negative moderating effect on the relationship between social and financial performance ( Fig. 1 Conceptual Framework of the Study Full size image Fig.  1 ) .

Methodology and data

This section provides a discussion on competition measures, model specifications, and estimation methods. Additionally, the source and detail descriptions of the data are also briefly presented.

Competition measures: Boone indictor

As indicated in chapter two, this paper uses the new measure of competition which is Boone Indicator. Boone indicator is calculated by using the following profit function that measures competition in the market (Boone, 2008 ).

Where π it stands the profit of MFI i at year t which is proxied by Return on Asset (ROA), MC it represents the marginal cost of MFI i at year t, β is Boone indicator and \( {\mathcal{E}}_{\mathrm{it}} \) is the error term. Since the Boone indicator is based on the negative relationship between profit and cost, a negative coefficient value of β (β < 0) is expected. A higher negative value of β indicates the presence of strong competition in the microfinance market, whereas a positive value of β shows the existence of collusion (Van Leuvensteijn et al., 2011 ).

Equation 1 is used to measure the aggregate competition at the microfinance level. So, to capture the development of competition over the year, time dummies ( d t   for each year ) are added in the above equation which gives Eq. 2 below.

Additionally, obtaining the value of the Boone coefficient in Eq. 2 requires MC of MFI i at time t. but MC is not measured directly, following Van Leuvensteijn et al. ( 2011 ), a translog of cost function uses to estimates MC of MFI i at year t. Therefore, the cost function in Eq. 3 is applied to estimate parameters which are used to obtain MC it .

Where TC it stands for the total cost, (the sum of financial costs, labor costs, and administration costs) of MFI i at year t, q it is an output of MFI i at year t which is proxied by gross loan portfolio, Footnote 2 W it represents the three input costs Footnote 3 (cost of labor, cost of capital, and cost of fund) of MFI i at time t. The ratio of personnel expense to total assets, the ratio of financial expenses to total assets, and the ratio of administrative expenses to total assets are used as a proxy to measure the cost of labor, cost of fund, and cost of capital respectively.

In the above translog cost function, the input prices are linearly homogeneous (Delis, Iosifidi, & Tsionas, 2014 ). Linear homogeneity assumes that total cost is the result of the three input prices. Thus, following linear homogeneity restrictions imposed on the translog cost function.

\( {\displaystyle \begin{array}{c}\sum \limits_{j-1}^3{\alpha}_j=1\dots \dots \dots \dots ..\mathrm{1}\ \sum \limits_{j=1}^3{\delta}_{j+1}=0\dots \dots \dots \dots \dots 2\\ {}\sum \limits_{j=1}^3\sum \limits_{k=1}^3{\alpha}_{jk}\dots \dots \dots \dots \dots \dots \dots \dots \dots \dots .3\end{array}} \)

MC as a first derivative of the cost function, Eq. 3 .

Where MC it is the marginal cost of MFI i at time t, TC it is the total cost of MFI i at time t, q it is output (gross loan portfolio) and W it represents inputs price (cost of labor, cost of capital and cost of fund) of MFI i at time t. the value of MC it obtains by substituting the parameters estimated using the translog cost function in Eq. 2 .

MFIs’ performance measures

Social performance and competition are independent variables of the study. According to Rosenberg et al. ( 2009 ), social performance is the social impact of MFIs in providing financial service to low-income people. The social performance was measured by using depth of outreach which is gaged through depth (average outstanding loan to GNI per capita) and breadth of outreach (active number of borrowers).

Financial performance is the ability to cover all operating costs from operating income (Rosenberg et al., 2009 ), measured by Return on Asset (ROA), Return on Equity (ROE) and Operational Self-Sufficiency (OSS). Control variables are MFI size, MFI age, and donation. The linear regression model for financial and social performance variables are indicated below in Eq. 4 , and the moderating effect of competition represented by Eq. 5 (Table  1 ).

The depth and breadth of outreaches are the two most known measures of the social performance of MFIs. As one of the social performance indicators, depth of outreach refers to the type and poverty level of clients served by MFIs. The breadth of outreach refers to the number of active clients served by MFIs which indicates their scale of operations (Rosenberg et al., 2009 ). The most common proxies used to measure the depth and breadth of outreaches are average outstanding loan (gross loan portfolio to the active number of clients) as a percentage of per capita Gross National Income (GNI) and the logarithm of the number of active clients served respectvlly (Assefa et al., 2013 ; Cull et al., 2009 ; Hermes et al. 2011 ; Rosenberg et al., 2009 ).

Return on Asset (ROA), and Operational Self Sufficiency (OSS) are used to measure MFIs’ financial performance. ROA measures the MFIs’ ability to use its resources profitably. ROA calculates by dividing net operating income by average assets. OSS reflects the MFIs’ ability to cover all expenses through income generated from operational activities and calculates by dividing operating income by total expense.

The Boone indicator is used to measure competition based on the assumption that in a competitive market efficient firm always performs better than the inefficient one. It estimates competition between firms by considering the association of profit and marginal cost. Thus, according to Boone Indicator, in a competitive market inefficient firms lost their profit and market share (Boone, 2008 ). Since the Boone indicator is based on the negative relationship between profit and cost, a negative coefficient value of β (β < 0) is expected. A higher negative value of β indicates the presence of strong competition in the microfinance market, whereas a positive value of β shows the existence of collusion (Van Leuvensteijn et al., 2011 ).

However, obtaining the value of the Boone coefficient as specified above requires the marginal cost of MFIs and on top of that marginal cost is not measured directly. One output and three inputs are used to estimate parameters that are used to obtain the marginal cost of MFIs (Hermes et al. 2011 ). MFIs’ output proxied by gross loan portfolio. Three input costs (the cost of labor, cost of capital, and cost of fund) are used as inputs variables. The ratio of personnel expense to total assets, the ratio of financial expenses to total assets, and the ratio of administrative expenses to total assets are used as a proxy to measure the cost of labor, cost of fund, and cost of capital respectively.

Moreover, institutions level variables are added to control for the firm-specific situation. MFIs’ age (years since establishment), size (measured as the log of the total asset), ownership status (the possession of MFIs as None Bank Financial Institution, NBFI), and risk level (equity to total asset) are considered as control variables.

Model specification

FP it is the financial performance of MFI i at time t, SP it is the social performance of MFI i at time t, B jt is a degree of competition as measured by Boone indicator and M (SP it   ∗  B jt ) is moderating variable obtains by multiplying mean-centered value of SP it and B jt . In both models, MFI_age, MFI_size ownership status, and MFI risk are control variables.

Estimation methods

To test the relationship between social and financial performance, Fixed Effect regression is employed. The motivation to employ Fixed Effect Model is to control for time-invariant characteristics that may bias the endogenous and exogenous variables (Baltagi, 1995 ). Additionally, the Hausman Test has applied to verify whether the error term is correlated with the predictor variables, and the result shows that the P -Value is significant, the P-Value of the Hausman test is < 0.05. Thus, the null hypothesis that the error term is not correlated with predictors is not rejected. In such a case, the Fixed Effect Model is appropriate (Greene, 2008 ).

The translog cost function (Eq. 3 ) was estimated using a stochastic frontier -the time-variant inefficient model has employed. This approach has been widely used for efficiency analysis in banking literature and recently also in microfinance literature. Footnote 4 The time-variant inefficient model states that time and entity-specific variables significantly influence the technical inefficiencies (Battese & Coelli, 1992 ). Specifically, competition is subjected to technological change. Thus, the time-variant inefficient model is important to track the effect of a time trend.

The development of competition over time (Eq. 2 ) is estimated by using Two steps Generalized Method of Moments (GMM). The motivation for applying GMM is to control the endogeneity problems that emanate from the simultaneous estimation of cost and performance (Schaeck & Čihák, 2008 ; Van Leuvensteijn et al., 2011 ). Regressing the profit variable (ROA) on the cost variable (MC) brings the endogeneity problem. It means that the change in profit also leads to a change in cost. The joint determination of these endogenous variables makes the error term to be correlated with exogenous.

In the estimation of GMM, one lag of marginal cost is used as instrumental variables. The expected values of the Boone Indicator are negative (β < 0), whereby high competition in the microfinance market is observed. The positive value of β (β > 0) indicates the existence of collusion in the market. The higher negative value of β represents the strong competition in the market. Sargan- Hansen test is also used to identify the validity of the instruments.

Data descriptions and sources

The sample consists of Indian MFIs. For this research, MFIs’ Data and India’s GNI per capital will be collected from the Microfinance Information Exchange (MIX), and World Bank development indicators respectively. MIX Market is the most widely used source of data for microfinance studies. The study is based on 10 years of penal data cover a period of 2005–2014.

Table  2 shows the general description of MFIs in the data set of this study. The analysis is based on unbalanced panel data where observation per MFI ranges from 1 year to 10 years. MFIs are included in the sample based on the availability and quality of their data. The data set uses in the study contains 183 MFIs, 84 NGOs, 83 NBMFIs, and 16 Rural Bank and Cooperative. Among 183 MFIs in the data set, 33 MFIs are young, less than 5 years operation, and 150 MFIs are mature more than 5 years operation.

Table  3 presents the summary statistics of both dependent and predictor variables used in the econometric analysis. In the statistics table, mean, standard deviation, minimum and maximum values of both dependent and explanatory variables are shown. In addition to the variables shown in Table 3 , Control variables, age dummy, and MFI ownership status dummy thoroughly included in the analysis but aren’t presented in the table.

Return on Asset and Operational Self-sufficiency (OSS) are financial performance variables. Log of Number of Active Borrower (lnNAB) and average loan portfolio to GNI (Depth) is social performance variables. The log of Total cost (TC) is used as a dependent variable in the translog cost function that applied to find marginal cost estimators. The three input prices, Financial Expense to Liability (FEL), Administrative Expense to Asset (AEA) and Personnel Expense to Asset (PEA), and output (GLP) are exogenous variables employed in the translog cost function. Similarly, the Log of Return on Asset (ROA) uses as a dependent variable in the Boone profit function to estimate the competition coefficient of the Indian microfinance market.

Analysis of results

This section presents the discussion of the estimation results of the study and the test results of the hypotheses in the conceptual framework. First, estimations on the association between social and financial performances are presented, and then competition and its moderation impacts are followed (Fig.  2 ).

Conceptual Framework of the Study with Empirical Results

Social and financial performance

Table  4 shows the regression results of the effect of social performance (SP) on financial performance (FP).

In model 1, operational self-sufficiency is regressed on social performance variables (depth and breadth of outreach) and the result shows P-Value is significant. This implies that depth and breadth of outreach have a statistically positive Footnote 5 significant relationship with operational self-sufficiency. Similarly, in model2, ROA has a positive significant relationship with depth and breadth of outreach. Thus, when outreach increases, sustainability and profitability also increase. The results confirm the hypothesis that MFIs’ social performance has a positive effect on their financial performance. Thus, this rejects the null hypothesis that there is no relationship between MFIs’ social and financial performance. These lead to support hypothesis 1 (H1) that MFIs’ social performance has a positive significant effect on financial performance. The results of this hypothesis are also in line and consistent with the study of Adhikary and Papachristou ( 2014 ), Montgomery and Weiss ( 2011 ) and Quayes ( 2012 ). They found a similar result that social outreach and financial performance (profitability and sustainability) have a positive complementary relationship. It is also in line with stakeholder theory that meeting customers’ interest is positively related to the financial performance of firms.

To check the form of relationship, one lag and one led variables are used from both depth and breadth variables. The result shows (see Appendix ) OSS has both lead and lag form of relationship with the breadth of outreach. This lag result implies that the previous year’s breadth of outreach has a positive influence on MFIs’ operational self-sufficiency of this year. Increasing the number of active borrowers in the current year will have a positive contribution to the next year’s sustainability of MFIs. Thus, participating in social development activities has a positive contribution to the MFIs’ future financial performance. Similarly, Breadth of this year has also a significant relationship with the previous year’s MFIs’ sustainability. It means the accumulation of financial resource matter to the maximizing breadth of outreach.

But, the form of relationship between OSS and depth of outreach is neither lags nor led rather cotemporal. The depth of outreach has a cotemporal relationship with OSS. On the other hand, the lag of breadth (log of the active number of borrowers) and depth of outreach are not significant with ROA.

Estimation of marginal cost parameters: translog cost function

Table  5 shows the estimation results of time-variant inefficient models, translog cost function. Most of the explanatory variables included in the model are significant with the total cost, hence partly depicts the robustness of the model. The time decay coefficient ( η ) of the model is different from 0 exposes that time and random effects are significant.

The effect of technological development that captured by year dummies Footnote 6 is also significant. Additionally, as shown in the table, the sum of input prices’ coefficient equals one proves that the linear homogeneity restriction has imposed on input prices is satisfied.

The focus of translog cost function analysis isn’t to examine the cost efficiency of MFIs, rather to finds parameters to be used for marginal cost estimations. Thus, those parameters required for calculating the marginal cost of MFI i at year t are taken from the Table 5 above and used for generating marginal cost value of MFIs at each year by substituting in the marginal cost equation, Eq. 4 .

Estimation of competition over the years

Table  6 shows the estimation of Eq. 2 using Two steps Generalized Method of Moments (GMM). In the estimation, the log of Return on Asset (ROA) is a dependent variable. Year dummies are added to capture the evolution of competition over the years.

The result of Table 6 is also shown graphically in Fig.  3 that represents the evolution of competition over the years, 2005–2014. As expected the values of the Boone coefficient are negative except for the year 2012. Thus, strong competition among Indian MFIs has been undertaken from the year 2005–2014. The positive Boone coefficient observed in the year 2012 is may be due to the presence of market collusion or MFIs were focusing on enhancing demand by increasing their cost expenditures and competition by quality (Dick, 2007 ).

Evolution of competition: Boone Indicator (BI)- (2005–2014)

The results suggest that in the period covered in this study, 2005–2012, the Indian microfinance market was very competitive. As represented in Fig. 3 , the evaluation of competition from 2005 to 2014 is somehow dynamic. In the years 2005 to 2008, the microfinance market is highly competitive whereby the competition increased at an increasing rate and then after, from 2009 to 2012, although it is competitive, it experiences a decreasing trend, but increases again after the year 2012.

Moderating effects of competition

Table  7 shows the estimation results of the competition’s moderating effect on the relationship between social and financial performance. Operational Self-Sufficiency (OSS) is a dependent variable that regressed on DEPTH, BREADTH, competition (BI), moderation term, and other control variables. The interaction term Footnote 7 is a moderating variable created by multiplying competition (BI) and DEPTH-Model 1, (M1), Footnote 8 and competition (BI) and BREADTH -model 2, (M2). Footnote 9

The moderation test focuses on whether the causal relationship between social and financial performance changes due to competition. Model one represents the moderating effect of competition on the relationship between operational self-sufficiency and depth of outreach, M1. Model 2 estimates the moderating effect of competition on the relationship between operational self-sufficiency and breadth of outreach, M2.

In model 1 the result shows that the moderating variable, M1, is significant at P -value < 0.05. Thus, moderation has occurred (Baron & Kenny, 1986 ). The study hypothesized that competition has a positive or negative moderating effect on the relationship between social and financial performance, H2. The results evidence the hypothesis that competition has a positive moderating effect on the relationship between MFIs’ social and financial performance. The results in Table 7 show the relationship between M1 (competition in model one) and OSS is significant at P -value < 0.05. Hence, hypothesis 2 (H2) is accepted. This leads to rejecting the null hypothesis that MFIs market competition doesn’t moderate the relationship between MFIs’ social and financial performance. Thus, the relationship between depths of outreach and operational self-sufficiency (OSS) is conditional upon competition. The positive β coefficient implies that competition influences the relationship between the depth of outreach and operational self-sufficiency positively. It implies that in a competitive market, the more MFI deepen their depth of outreach, the higher contribution it has to their operational self-sufficiency. As compared with the regression result found in Table 4 , the moderation isn’t partial moderation rather complete. This is because of the strength and magnitude of the relationship between depth and OSS change by competition.

Additionally, In model 2 of Table 7 , the moderating variable (M2) is not significant, so, moderation hasn’t occurred. This Implies that Competition doesn’t moderate the relationship between the breadth of outreach and operational self-sufficiency. Similarly, Table  8 shows that moderation hasn’t occurred between ROA and any of the social performance variables. Consequently, no moderation occurred

The results are partly consistent with competition-stability theory whereby in a competitive market firm becomes both financially sustainable and socially responsible. In support of this theory, the result reveals that competition strongly and positively moderates the relationship between the depth of outreach and financial performance.

Conclusions

This paper investigates the moderating effect of competition on the relationship between social and financial performances of MFIs. To examine the moderating effect of competition, first, the relationship between social and financial performance was tested. The main finding of the study indicates that social and financial performances have a positive significant relationship. When MFIs enhance their social performance by reaching out to the poor people, it boosts their profitability and sustainability.

Besides, the finding also shows that OSS and breadth of outreach have a positive significant led and lag form of relationship. Thus, MFIs’ previous year breadth of outreach affects this year’s financial performance. Similarly, MFIs’ previous year’s profitability also positively related to the following year’s breadth of outreach. But the relationship between operational self-sufficiency and depth of outreach is neither lag nor led rather cotemporal.

Moreover, competition measured by the Boone indicator reveals that during the 2005–2014 periods, the Indian microfinance market was very competitive. Surprisingly, the findings suggest that competition positively moderates the relationship between the depth of outreach and operational self-sufficiency. It appears that the association between MFIs’ depth of outreach and operational self-sufficiency is conditional upon competition. Therefore, in a competitive market, the more MFIs deepen their depth of outreach, the higher the contribution it has to their operational self-sufficiency. Competition spurring MFIs to reach out to the very poor segment of the population and helps them to be sustainable.

Furthermore, the study further supports the idea that competition doesn’t make MFIs to drift from its mission of serving poor people.

Therefore, the estimated results might allow this researcher to provide the following recommendations: first, to deepen financial outreach to the poor people, countries need to initiate and encouraging competition in their microfinance market. Along with this, policy regulators also need to design a policy framework that creates a sound competitive microfinance market. Second, to ensure a positive effect of competition, countries need to establish the institutional system that supervises and regulates the competition undergoing in the microfinance sector. Third, MFIs may consider social objective as a competitive advantage to be financial sustainability in the log-run.

In general, this paper finds robust results that competition moderates the link between social and financial performances. Therefore, this study may pave the way for upcoming empirical studies in microfinance on the moderating effect of competition on MFIs’ performance.

Practical implications for MFIs

The results bring some implications that might be useful to academics and policymakers as well as practitioners in the field. First, the positive relationship between social and financial performance suggests that although being a socially responsible institution has a financial cost, in the long-run, it positively contributes to financial performance through retain customers and increases sales volume. Second, a competitive financial system spurring MFIs to reach out to the unbanked segment of the population. Hence, competition doesn’t make MFIs to drift from their mission. It indicates that competition helps borrowers to have financial accesses and MFIs to be financially sustainable by widening the base and applying the innovative lending methodology. Third, the results show that providing financial services to the poor at an affordable price is the fundamental social responsibility that implant accountability and transparency into the microfinance sector. Last but not least, the social mission is an integral part of the microfinance sector that helps them to be financially self-sufficient.

Availability of data and materials

The data that support the findings of this study are available from the corresponding author upon reasonable request.

Double bottom line objective is refers to MFIs’ social outreach and financial sustainability (Morduch, 1999 ).

This has already applied in microfinance as output measures (see for example, Assefa et al., 2013 ; Hermes et al. ( 2011 )

All three ratios have already applied in microfinance (see Kar, 2016 ).

In microfinance see for example (Kar, 2016 ) and Hermes et al. ( 2011 ).

β coefficients of depth and breadth of outreach are positive.

Year dummies are included in the model but not reported and model test is enclosed in the Appendix .

The moderator variable is formed after mean centering of variables (B, DEPTH and BREADTH) to control multicollinearity problem that arises between the predictors and interaction term.

To capture the moderation between depth of outreach and financial performance.

To capture the moderation between breadth of outreach and financial performance.

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In presenting this review, I would like to express my gratitude to my collegues for their helpful ideas, and kind responses to my questions during the entire phases of my study.

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Journal of Economic Studies

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Article publication date: 29 April 2020

Issue publication date: 23 October 2020

The purpose of this article is to systematically review extant research on the corporate governance (CG) of microfinance institutions (MFIs) from a global perspective. In the process, it discusses scholarly contributions and highlights key issues from the findings of past studies on several governance attributes, in particular, their interconnections and influence on different institutional outcomes of the sector.

Design/methodology/approach

Although academic work on microfinance governance is substantial, prior studies lack a comprehensive approach to reviewing the literature on this topic. We adopted a systematic method to review past studies on microfinance CG by applying particular inclusion and exclusion criteria. In this regard, the study developed specific questions and sought to find their answers from the existing literature.

The findings from our research indicate that microfinance governance-performance relationship is the central focus of the majority of our reviewed papers, although a few attempts have been made to explain the interconnection between CG mechanisms at the firm and institutional level. Our findings also show that existing studies have used a variety of techniques to measure MFI performance vis-à-vis their hybrid mission, such as profitability and outreach. Moreover, the study found that common topics discussed in the mainstream literature include board structure, CEO characteristics, audit quality, external governance, disclosure and MFI ownership type.

Research limitations/implications

This review has some limitations that warrant further research. First, we considered only peer-reviewed scientific publications for our systematic review. Second, we omitted non-English journal papers from our sample. In light of these limitations, we provide some future research directions that may shed further light on our current inquiry.

Originality/value

This paper evaluates past relevant studies using a systematic approach (in preference to the commonly used narrative approach) for a span of over eighteen years; thereby contributing significantly to the sectoral governance literature. This study is novel in that it offers new incentives and opportunities for further research in order to meet the shortcomings of reviewed papers from various theoretical, empirical, methodological and geographical standpoints.

• Corporate governance
• Board of directors
• Microfinance institutions
• Systematic literature review
• Further research directions

Acknowledgements

We thank the Editor-in-Chief, Professor Mohsen Bahmani-Oskooee and anonymous referees for their useful and constructive comments during the review process. We also thank our colleagues and conference participants at the University of Bedfordshire for their insightful comments and suggestions.

Rasel, M.A. and Win, S. (2020), "Microfinance governance: a systematic review and future research directions", Journal of Economic Studies , Vol. 47 No. 7, pp. 1811-1847. https://doi.org/10.1108/JES-03-2019-0109

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Nikkei Newspaper article, August 6, 2021 ( https://www.nikkei.com/article/DGXZQOUF05AKP0V00C21A8000000/ ) (viewed on February 27, 2023).

My book, Ueda ( 2022a ), is a textbook on the financial system, and please see it for the detailed discussion and original papers (the original paper is Diamond and Dybvig ( 1983 ), which won the 2022 Nobel Prize in Economics). Also, I occasionally mention this book below.

In Obstfeld ( 1994 ), the expansion of risk-hedging tools such as insurance products results in the selection of projects with higher average returns, leading to an increase in economic growth. In the aforementioned Devereux and Smith ( 1994 ), it reduces precautionary savings and lowers economic growth, so the impact of financial expansion on economic growth is opposite in the two theories. Therefore, even if the positive or negative impact of financial development on economic growth is empirically shown, the impact on social welfare is theoretically unclear.

ROSCA usually has a fixed group of members. All the members meet repeatedly and continue to deposit money until all members have received money. Therefore, the lottery determines the order in which money is received. For a more detailed explanation, please see e.g., Ueda ( 2022a ).

Of course, as already mentioned, researchers are greedily seeking opportunities for natural experiments and taking advantage of available opportunities. There is also much to learn from history. In fact, the difference between quantitative economic history and empirical analysis of economic growth theory is not so large. For example, Dittmar ( 2011 ) uses a natural experiment based on the invention of Gutenberg's movable-type printing in the fifteenth century and its unique propagation route. Although it is considered as a paper of quantitative economic history, it also serves as a first-class empirical study on the impact of technological innovation on economic growth. Furthermore, many macroeconomic researchers are actively exchanging opinions with policymakers and market participants on macroeconomic conditions and policies.

See, for example, Wickens (2011).

Studies analyzing the COVID-19 situation in Japan include those by Fujii and Nakata ( 2021 ) and Kubota ( 2021 ).

For empirical research on business cycles, see also the introductory overview by Nakamura and Steinsson (2018). It introduces and explains a series of studies that use causal inference methods used in micro-empirics to estimate important parameters for aggregate economies.

In the analysis of social security measures like pensions, models include heterogeneity in age, gender, assets, etc. However, they abstract short-run fluctuations and other business cycle aspects.

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Ueda, K. (2024). Difficulties in Conducting Empirical Research in Macroeconomics: Evaluating Policies for Economic Growth. In: Otsuka, K., Kurosaki, T., Sawada, Y., Sonobe, T. (eds) Next-Generation of Empirical Research in Economics. Springer, Singapore. https://doi.org/10.1007/978-981-97-1887-0_10

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An Empirical Analysis of Corporate Governance Impact on Outreach of Microfinance Institutions (Mfis)

2015, Corporate Ownership and Control

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Krishna Reddy

Our study examines the relationship between gender diversity and financial performance of Sri Lankan Microfinance Institutions (MFIs). The OLS regression, fixed effect and random effect models are used to analysis an unbalanced panel data comprising 300 firm-year observations over the period 2007 to 2012. Our findings reveal that the institutions with female directors on the board have a significant negative effect on main financial performance but a significant positive relationship with the female CEOs and female chairpersons. We also find no significant relation between women leaders, operating cost and portfolio at risk 30 days of MFIs. This research provides insight for policy-makers regarding gender diversity on boards in Sri Lankan MFIs.

Dilip Kumar Jha

Purpose – The purpose of this paper is to examine the relationship between corporate governance (CG) and microfinance institution (MFI) performance, using a dynamic panel generalised method of moments (GMM) estimator to mitigate the serious issues with endogeneity. Design/methodology/approach – Inconsistent findings and a general lack of empirical results for the microfinance industry leave an unclear message regarding the impacts of CG on MFI performance, especially in emerging economies. The authors use GMM estimation techniques to examine whether CG has an influence on MFI performance. Findings – This study confirms that the MFIs’ contemporaneous performance and CG characteristics are statistically significantly positively linked with their past performance. This study finds statistically significant governance effects on MFI performance, including the presence of international directors and/or donor representatives on the board, client representatives on the board, percentage of non-executive directors and the quality of the national governance system. Practical implications – These findings provide some insights for policy-makers and practitioners to develop suitable policies and guidelines to streamline MFIs’ operations in emerging countries. Moreover, national and international investors and donors may use these finding as a benchmark for their investment and funding decisions. Originality/value – This paper is the first to estimate the CG and performance relationship of MFIs in a dynamic framework by applying the GMM estimation method. This approach improves upon traditional estimation methods by controlling the likely sources of endogeneity. Further, this paper examines whether quality of national-level governance characteristics is related to performance measures of profitability and outreach of MFIs. Keywords Performance, Corporate governance, South Asia, Microfinance institutions, Generalized method of moment, National governance system

This study examines the corporate governance practices of microfinance institutions (MFIs) in India and their relationship with both financial performance and outreach for the period 2007 to 2012. Using unbalanced panel data for 575 firm-year observations, we report that the financial performance and outreach of Indian MFIs improves when they have international/donor representation on their board. Independent directors and client representatives on board perform favourably on financial performance but no impact on outreach. However, female directors on the board increases outreach to the poor people but decrease the financial performance. This study significantly contribute to a better understanding of board diversity of microfinance sector by providing empirical evidence from one of the dominant countries in South Asian region.

Claire Matthews

Microfinance institutions (MFIs) have become central players in socio-economic development especially in developing countries. This paper investigates empirically the inefficiency factors of South Asian MFIs using stochastic frontier analysis (SFA). A total of 392 MFIs were sampled for the period from 2003-2013. The underpinning assumption is that governance i.e. ownership, regulatory structures of MFIs and women in several roles as a buyer, lender and board member are important efficiency indicators of microfinance business. The estimated results suggest that presence of female loan officers have a positive effect while female board members and female borrowers show a significant negative impact on financial and social efficiency of MFIs. A strong positive association is found between the governance of an MFI and its efficiency. Cost efficiency estimates show that, on average, South Asian MFIs are operating at similar financial and social efficiency levels. It is therefore not sugg...

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This paper examines empirically the relation between governance mechanisms and the performance of Euro‐Mediterranean microfinance institutions (MFIs) in terms of outreach and sustainability. Specifically, we found that performance‐based compensation of managers is not associated with better performance of MFIs. The results identify trade‐offs between MFIs outreach and sustainability depending on larger board size, and on higher proportion of unaffiliated directors. Moreover, the study shows that the more women there are on the board the better the performance, and reveals that external governance mechanisms help MFIs to achieve better financial performance. This study also allows us to distinguish other factors leading to better sustainability such as Regulation, and the use of individual lending methodology. However, the MFIs, active as NGOs, seem to be more consistent with their social mission than with their financial performance.

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• Published: 30 May 2024

Escaping poverty: changing characteristics of China’s rural poverty reduction policy and future trends

• Yunhui Wang   ORCID: orcid.org/0000-0001-8824-6109 1   na1 ,
• Yihua Chen   ORCID: orcid.org/0000-0001-9089-4172 2 , 3   na1 &
• Zhiying Li   ORCID: orcid.org/0000-0002-2219-5473 4  

Humanities and Social Sciences Communications volume  11 , Article number:  694 ( 2024 ) Cite this article

Metrics details

• Development studies
• Social policy

Eliminating poverty is a shared aspiration of people worldwide. This article analyzes 762 rural poverty-related texts promulgated and implemented by the Chinese Government since 1984 using content analysis based on a three-dimensional framework encompassing the time of policy issuance, policy goals, and types of policy instruments. The study outlines the overall landscape and evolutionary context of the policy system. The results show that, during absolute poverty governance, China’s rural poverty governance can be broadly divided into three stages: regional development-oriented poverty alleviation, comprehensive poverty alleviation, and targeted poverty alleviation. Based on the production-oriented welfare model, economic development became the primary goal of poverty alleviation policies, while insufficient attention was given to service support and capacity-building goals. The alleviation of poverty mainly relied on the propulsive force generated by supply-side policy instruments led by the Government and the external driving force generated by environmental policy instruments, with a significant deficiency in the propulsive force produced by demand-side policy instruments. Entering the phase of relative poverty governance, optimizing poverty governance policy instruments requires breaking free from path dependence, following the evolutionary pattern of poverty governance. It involves ensuring that policy instruments support economic development while emphasizing addressing service support and capacity-building goals. It is crucial to increase the frequency of using demand-side policy instruments, stimulate their pulling force on poverty alleviation, and achieve a trend of evolutionary innovation and the collaborative governance of policy instruments.

Problem statement

The aspiration to eliminate poverty has been a longstanding societal ideal since ancient times. It represents an intrinsic right for people across the globe in their pursuit of a fulfilling life. The elimination of hunger and poverty, central targets outlined in the 2030 Agenda for Sustainable Development, also stands as a cornerstone in the development agendas of numerous nations worldwide. Rowntree’s ( 1902 ) early definition of poverty in 1902 classified it as primary and secondary poverty. He argued that a family is in poverty when its total income fails to meet the essential survival needs of its members. This concept is considered the foundation of research into absolute poverty. Essentially, absolute poverty is a physiological concept that explores the link between nutrition and survival (Lister, 2021 ). As economic and social development advances, Peter Townsend contends that absolute poverty overlooks the social and cultural aspects of ‘human need,’ both ‘need’ and ‘poverty’ are products of social construction. “Both ‘need’ and ‘poverty’ are social constructs.” Townsend ( 1979 ) introduced the concept of relative poverty, which signifies exclusion from typical social lifestyles and activities. However, Sen ( 1982 ) proposed in “Poverty and Famine” that the core of poverty lies in the lack of viability rather than mere low income. Alongside research, countries generally categorize poverty into absolute and relative forms. Research shows that most of the world’s impoverished population resides in rural areas (Poverty and Initiative, 2018 ). The capacity of rural people to elevate themselves from poverty holds profound implications for their daily sustenance and global food security. The United Nations and countries worldwide are working to eradicate rural poverty by promoting inclusive growth and sustainable livelihoods.

As an agricultural powerhouse with a massive rural populace, China’s countryside constituted over 80% of its total population in the nascent years following the establishment of the People’s Republic. The rapid economic growth brought about by the reform and opening-up has also exacerbated the development gap between urban and rural areas. The natural and economic factors that have long impeded rural development have become more pronounced, with the hollowing out of the countryside, the aging of the population, the abandonment of infrastructure, environmental degradation, and persistent poverty drawing the Government’s attention. In 1978, 250 million rural residents living under the poverty threshold of 100 RMB annual per capita income represented a 30.7% rural poverty rate Footnote 1 (see Fig. 1 ). Alleviating rural poverty thus emerged as an urgent priority fettering China’s socioeconomic advancement. Since the 1980s, the Chinese Government has embarked on large-scale anti-poverty initiatives in the countryside, promulgating numerous policies that achieved remarkable success in eradicating absolute poverty. From 1985 to 2000, the rural absolute impoverished population rapidly declined from 125 million to 32.09 million, with poverty rates plummeting dramatically from 14.8% to 3.5%. Upon entering the 21st century, both the quantity and incidence of rural absolute poverty persisted in substantial decreases. In 2015, the Central Government further proposed targeted poverty alleviation targets. By 2020, China had accomplished its poverty alleviation targets, eliminating destitution under extant standards.

The rural poor population and poverty incidence rate for 1985–2000 were calculated using the 1978 poverty standard per capita net income of 100 yuan; the rural poor population and poverty incidence rate for 2000–2020 were calculated using the 2010 poverty standard per capita net income of 2300 yuan—data from China Statistical Yearbook.

Governance refers to the process by which a variety of governmental and non-governmental institutions and actors work together to establish conditions for social order and collective action (Stoker, 2012 ). It involves diverse approaches employed by individuals and institutions, both public and private, to manage public affairs. This ongoing process entails cooperative actions, including the implementation of formal institutional arrangements and the agreement on informal arrangements that align with their interests (The Commission on Global Governance, 1995 ). Kooiman and Jentoft ( 2009 ) introduced three essential elements of governance: imagery, instruments, and action. Imagery refers to the rationale behind governance, encompassing vision, judgment, beliefs, and goals, typically grounded in systematic values or knowledge systems. Instruments involve the selection and application of governance methods, serving as intermediaries that connect imagery to action. Action, in turn, represents the practical implementation of these “instruments”. Poverty governance in China constitutes a collaborative effort among the government, market, and society, with a focus on people’s interests, aimed at achieving common prosperity. It encompasses both economic and social dimensions, with the goal of reducing poverty, protecting the rights of the impoverished, and enhancing social equity. In this fight against poverty, which is the largest and most robust in the history of human poverty alleviation, China has taken many original and unique major governance initiatives and accumulated a series of replicable and generalizable experiences in poverty alleviation. However, eliminating absolute poverty does not mean there is no poverty in China, and China is still far from achieving high-quality and high-standard poverty alleviation (Zhou et al., 2020 ). Poverty presents dynamic, multifaceted challenges, including policy-dependent severe behaviors (Wan et al., 2021 ) and the objectivity that relative poverty cannot be entirely eradicated (Hagenaars, 2014 ). With China’s elimination of absolute poverty, the Government’s poverty alleviation focus has shifted from abolishing destitution to alleviating relative hardship (Shen and Li, 2022 ). Given the evolving forms and aims of poverty governance, the period of relative poverty alleviation necessitates continued efforts to prevent regression and enact efficacious policies to mitigate dependence. There is an urgent need to clarify questions about optimal relative poverty governance policies and how they differ from periods of absolute poverty governance. However, current literature exhibits limited systematic investigation into the textual content of absolute rural poverty policies. This study offers an original contribution by analyzing policy texts to reveal changes in China’s poverty reduction policy from the absolute to relative poverty governance periods.

This paper examines the Chinese Government’s rural poverty alleviation policies over time, utilizing content analysis to address two key questions: First, what characterized the Government’s poverty governance model during absolute poverty governance, and what was the operational logic? Second, in the relative poverty governance period, how is pro-poor policy logically related to absolute poverty governance, and what policies should the Government adopt? Answering these questions scientifically can delineate dynamic changes in China’s rural absolute poverty policy instruments, analyze the utility and limitations of existing pro-poor instruments, and inform suggestions to optimize relevant policies moving forward. The research aims to contribute Chinese experiences and insights to the broader cause of international poverty alleviation. Examining the evolution of poverty governance models and policy instruments across periods of absolute and relative poverty has implications for developing effective, context-specific poverty reduction strategies tailored to contemporary implementation environments.

Literature review

Research of the typology of policy instruments.

Policy instruments, sometimes called government or governance instruments, represent the government’s strategies and actions to attain policy targets (Hughes, 2017 ). No universal standard exists for categorizing policy instruments, leading researchers to classify them based on distinct characteristics and targets. Dahl and Lindblom ( 1953 ) have proposed a classification of instruments into regulatory and non-regulatory categories based on their authority attributes; Owen E. Hughes categorizes policy instruments into four distinct groups: government supply, production, subsidies, and regulation, based on the Government’s functions (Hughes, 2017 ); Rothwell and Zegveld categorize policy instruments into three groups: supply, environmental, and demand, considering their intended purposes Howlett and Remash distinguish among voluntary, hybrid, and coercive instruments based on the level of coercion (Howlett et al., 1995 ).

Based on typological analyses and investigations of policy instruments, some scholars have also directed their attention to the factors that influence the choice and utilization of policy instruments to better achieve policy targets in intricate public policy decision-making and implementation contexts. Several studies have emphasized the “fit” of policy instruments, whereby the selection of these instruments is associated with policy targets, the development of state capacity, civil society (Howlett et al., 1995 ), temporal characteristics, field-specific attributes, instrument attributes, and policy strength, all of which impact the effectiveness of policy instrument configurations (Zhang et al., 2022 ). This concept captures the degree of alignment between the selection of policy instruments and specific conditions. In line with this notion, research has conducted empirical analyses of the selection and allocation of policy instruments in specific domains, such as China’s research and development of new energy vehicles (Shao et al., 2021 ), low-carbon city pilot programs (Hong et al., 2021 ), and government attention to the power sector (Cheng and Yang, 2023 ).

Chinese scholars emphasize the role of the Government as a policy solution provider and prefer the “supply-demand-environment” policy instrument classification framework proposed by Rothwell and Zegveld (Rothwell and Zegveld, 1984 ) when conducting policy instrument research and apply it to environmental governance (Liao, 2018 ), energy policy (Li et al., 2023 ; Yang et al., 2021 ), and photovoltaic poverty alleviation (Zhang et al., 2018 ), among other policy area studies.

The selection of policy instruments in poverty alleviation research

In several developing countries, the implementation of measures such as increased financial support, infrastructure development, and enhanced educational levels plays a crucial role in elevating the income of impoverished individuals and stimulating economic growth in disadvantaged regions (Arsani et al., 2020 ; Cross and Neumark, 2021 ; Deepika and Sigi, 2014 ; Mugo and Kilonzo, 2017 ; Page and Pande, 2018 ). This pattern extends to China as well. With the growing focus on policy instrument research, the policy instrument perspective has become increasingly prominent in examining various policy domains (Peters, 2020 ). Nonetheless, the literature concerning inductive analysis utilizing policy instrument typology, grounded in the attributes and characteristics of poverty alleviation, remains exceedingly scarce. Although a substantial portion of research related to poverty alleviation centers on specific policy measures, it remains pertinent.

Promoting industrial development is a paramount strategy in pursuing poverty eradication. As elucidated by Mariara and Kiriti ( 2020 ), the advancement of the industrial sector can bring about more substantial benefits for impoverished communities by facilitating the organization and active participation of rural populations within the industrial framework. It enhances production efficiency and reshapes production dynamics, ultimately culminating in economic development-driven poverty alleviation. Furthermore, Economic development can also be attained through strategic infrastructure development. Zhou et al. ( 2023 ) found that transport infrastructure can significantly enhance economic development, especially public investment in poor areas, and therefore, infrastructure development should be a priority policy option.

Poverty alleviation through education represents an enduring mechanism for sustained poverty reduction. Song ( 2012 ) explored the influence of primary education on China’s labor market, discovering that universal access to primary education yielded a significant reduction in poverty within China, with urban areas particularly benefiting from this effect. Liu et al. ( 2023 ) found that compulsory education more effectively addresses rural poverty than upper-secondary education. The Government should prioritize implementing compulsory education as a long-term policy instrument in rural areas, recognizing its potency in poverty alleviation.

The empowerment of underprivileged individuals can be aptly realized through talent development and expanding employment opportunities. Guo and Wang ( 2021 ) found that rural labor transfer augments the per capita livelihood capital of the remaining population and facilitates the escape from vulnerability and the attainment of stable employment among the impoverished. The significance of government service support for impoverished segments of society should not be underestimated. Yang and Cao ( 2022 ) revealed that augmenting the provision of fundamental public services in rural areas constitutes a crucial strategy for alleviating rural poverty, significantly reducing the incidence of such poverty. Furthermore, Jiang et al. ( 2020 ) uncovered that engaging farmers in underdeveloped and impoverished regions of China in savings and commercial insurance can effectively diminish poverty vulnerability. Deng ( 2019 ) also found that savings and commercial insurance can reduce health expenditures where catastrophic or poverty-inducing levels occur.

The primary approach to poverty alleviation is intricately linked to the formulation and execution of public policies. Government-led initiatives constitute a crucial facet of China’s poverty governance, highlighting the pivotal role of policy instrument selection and allocation. Scholarly investigations have delved into using policy instruments in poverty alleviation, enriching our comprehension of related policies. Nonetheless, research combining policy instruments to scrutinize pro-poor policy evolution remains limited (Zhang et al., 2018 ), with a dearth of comprehensive examinations that draw on policy instrument theory to elucidate pro-poor policy change and optimization recommendations. Consequently, this study commences when the Chinese Government launched large-scale poverty alleviation efforts, focusing on central policy documents closely associated with poverty alleviation between 1984 and 2022. It employs content analysis to conduct text mining of standardized policy documents, dissecting the semantic information conveyed by specific word frequencies and frequencies within the policy texts across various phases. When coupled with coding results, these findings facilitate the categorization and quantitative analysis of policy instruments for poverty alleviation, enabling a comprehensive discussion on their application in poverty governance.

Analytical framework and research methods

Policy text selection.

The sample for this study is primarily obtained from the Peking University-Chinese Laws and Regulations Database. Focus on policy samples regarding poverty alleviation and reduction from 1984 to 2022. First, utilizing the keywords “poverty, poverty reduction, poverty alleviation, help, and special hardship,” examining central laws and regulations, and conducting a full-text search for the timeframe up to November 2, 2022, is necessary. To ensure the comprehensiveness of the policy texts, this study supplemented the selected policies by using the policy repositories on the official websites of the State Council, the State Council’s Bureau of Rural Revitalization, and various government agencies.

Furthermore, this study follows specific policy selection criteria to ensure the representativeness of the selected policy document: first, the government-issued policy texts are heavily linked to poverty alleviation and reduction efforts. To accurately reflect the national Government’s attitudes and actions towards poverty alleviation, the literature must directly outline their measures. The literature’s scope should encompass policy documents from different areas of social development; second, the selected texts mainly include notices, announcements, opinions and methods, decisions, and other policy documents from the central Government and its supervised ministries and commissions. Finally, the study selected 762 policy texts that met its needs.

Policy analysis framework

Policy instruments are one of the most important ways to study and analyze public policies. As the primary means and effective way of government management, policy instruments have an essential impact on the implementation effect of public policies. China’s poverty alleviation policies have been regularly adjusted in response to changing goal circumstances, making the timing of policy implementations a crucial element in tracking the evolution and forecasting future trends of poverty alleviation in the country. The policy target is the core element of public policy, an essential criterion for measuring the degree of response to public problems, and it also determines the means chosen to achieve the target. Hence, this paper examines the trends in China’s anti-poverty policy from three perspectives: policy initiation time, policy targets, and policy instruments.

Time dimension. This paper analyzes the characteristics and influencing factors of China’s poverty alleviation policies in different periods by examining the quantitative trends and evolution of policies over time. Starting from the period of the Chinese Government’s large-scale poverty alleviation efforts, we will examine the development of these policies in a historical context.

Policy goal dimension. In order to sort out China’s anti-poverty policies in a more detailed way, China’s anti-poverty policy targets will be divided into specific categories based on the value of the targets. For a long time, China’s rural poor groups generally have had poor economic conditions, lack of ability, and insufficient support and assistance groups. Given this, this paper divides anti-poverty policy targets into three major categories: economic development category, capacity-building category, and service support category. The economic development category is to improve the infrastructure construction and economic development level of poor areas to drive the poor groups out of poverty and become rich. The service support category provides various services and policy support for developing poor groups, such as employment skills training, policy promotion and interpretation, and information and counseling services for poor groups. Capacity building focuses on the self-development awareness of poor groups and the cultivation and enhancement of their capacities to make up for the shortcomings of development and strengthen the endogenous motivation for poverty alleviation and enrichment.

Policy instruments dimension. Each classification of policy instruments has specific application scenarios, and their combination and comprehensive use aims to maximize effectiveness and synergistic value. However, the policy instrument model Roy Rothwell and Walter Zegveld developed is more comprehensive and operational from a comparative standpoint (Dylander, 1980 ). The analytical framework presents a downgraded view of the complex policy system, focusing on the instruments and measures for operationalizing policy instruments. It highlights the dual effectiveness of intra-dimensional aggregation and inter-dimensional differentiation to aid in identifying each policy instrument’s content and boundaries, thus simplifying the presentation of specific operations. Due to the superiority of this policy model, it has been widely used in policy research in many fields, such as economic development (Eisinger, 1988 ), environmental pollution prevention (Qin and Youhai, 2020 ), and public health care (Yue et al., 2020 ). Concurrently, within the realm of rural poverty governance in China, the backing furnished by both central and local governments for poverty alleviation development, the cultivation of a propitious economic, social, and legal milieu through high-level strategic planning to steer and oversee the trajectory of development in the sphere of poverty alleviation, alongside the emphasis placed on the regulatory functions of central and local governments in shaping poverty alleviation policies in line with market and societal demands to address the genuine requirements of impoverished segments of society, all underscore the pivotal role of government macroeconomic control.

These strategies primarily hinge on the implementation paths meticulously devised by policymakers to attain their designated policy targets. They exhibit a substantial congruence with the internal logic and external utility of supply-side, environment-side, and demand-side policy instruments. Consequently, this approach serves as a valuable analytical instrument within this paper.

Supply-side instruments refer to the Government’s role as a provider, taking the necessary measures to ensure the basic livelihood security of people experiencing poverty and to improve the quality of life and development motivation of people experiencing poverty, specifically including financial inputs, information services, talent training, and infrastructure construction. Demand-side instruments measures refer to the Government’s efforts to stimulate consumption in poverty-stricken areas by promoting poverty alleviation markets, expanding poverty alleviation channels, and promoting poverty alleviation industries, including government purchase, service outsourcing, market shaping, and collaborative exchanges. Environment-side instruments refer to the strong guarantee provided by the Government to create a favorable external environment for poverty alleviation, strengthen the elements of poverty alleviation, and stimulate the endogenous impetus, specifically target planning, regulatory control, tax incentives, and guiding publicity. Examining the policy instruments’ specific measures makes it possible to understand the differentiation of the anti-poverty governance approach, the existing problems, and the direction of future improvement.

The deployment of these three policy instruments within poverty alleviation reinforces one another, as depicted in Fig. 2 . When viewed through the lens of poverty reduction as a mechanism for propelling economic and social development in impoverished regions, the evolution and advancement of poverty alleviation stem from the interaction and synergy among pushing, pulling, and external forces. In this dynamic, the three policy instruments act as a direct impetus, a direct attractor, and an indirect influencer, respectively, jointly propelling the progression and development of poverty alleviation efforts. These three forces are not static but evolve over different stages of the developmental process, each concentrating on distinct policy targets and modes of poverty management. This study’s central inquiry examines the focal points and attributes of supply-side, demand-side, and environment-side policy instruments throughout China’s rural anti-poverty endeavors.

Schematic illustration of the impact of policy instruments on pro-poor development.

Research methodology

This study employs content analysis to categorize and distill policy texts regarding rural poverty governance in China. Content analysis is a scientific research method that objectively describes observable phenomena and can handle massive amounts of data over extended periods (Riffe et al., 2019 ). Based on specific statistical principles, content analysis can be employed for any type of text, such as policy documents, sounds, images, and videos (Drisko and Maschi, 2016 ). To conduct content analysis, the following vital steps must be followed: defining the study purposes, identifying the unit or sample to be analyzed, determining the categories to be analyzed, identifying and coding the coding elements, testing for reliability, and analyzing and interpreting the results. Policy documents contain explicit content with multiple dimensions and valuable information. The central Government of China holds absolute authority and leadership. Its policies are highly targeted, allowing effective regulation and management of economic and social development and safeguarding people’s well-being. Therefore, we applied the content analysis method to thoroughly analyze 762 anti-poverty policy texts. Through this analysis, we examined the development of China’s anti-poverty policies from three dimensions: policy initiation time, policy targets, and policy instruments.

With the help of NVivo12 software, this paper classified 762 pro-poor policy texts into quantifiable textual analysis units according to the three-level coding principle of “policy text period—type of policy instruments—specific policy content.” According to the type of instruments and the temporal order of the policy, the analysis unit of this paper is coded, and each code is categorized according to the feature words corresponding to the nodes to analyze the use of different policy instruments in terms of the frequency of use of policy instruments. Where “A, B, C” in the code represents the policy instruments type, “1, 2, 3” represents the policy period, and “a, b, c, d” represents the specific policy content. For instance, the document “A-1-d” includes details about the supply-side policy instrument in the “Notice on the National Poverty Alleviation Program of 1987,” released in 1994. The specific policy instruments reference point is “With the support of the state, develop and utilize local resources, develop raw material production, and rely on scientific and technological progress to provide production impetus for the masses to escape from poverty.” Then, following the policy instruments framework, each textual analysis unit is analyzed, and finally, each textual analysis unit is categorized into the corresponding policy instruments (see Table 1 ).

Another coder examined the policy text’s credibility to ensure the study’s validity and reliability. Both parties agreed on disputed issues to establish coding guidelines. The author then recoded for robustness in reverse policy text order, resulting in a final Kappa coefficient of 0.875 (>0.81), indicating high reliability and validity (Richard, 1977 ).

Policy text analysis

Time dimension analysis.

This paper delineates the various stages of policy evolution through a quantitative analysis of 762 policy documents and a comprehensive interpretation of the keywords within these texts. Furthermore, it offers a specific examination of the characteristics of anti-poverty policy evolution at different junctures. It sheds light on the trajectory of the Chinese Government’s efforts in poverty alleviation.

As Fig. 3 illustrates, from 1984 to 2022, there has been a discernible upward trend in introducing anti-poverty policies in rural China, with an exceptionally remarkable surge in recent years. Notably, the number of anti-poverty policies exhibited three peaks in 2000, 2013, and 2018, and the disparity in the number of policies before and after these peaks is quite substantial.

The trends in the distribution of the introduction time of anti-poverty policies in China.

In consideration of the actual context of rural poverty governance and the pivotal time points highlighted in the previous analysis, this paper categorizes the evolution of China’s anti-poverty policy into the following four distinct stages:

The first stage (1984–2000) is characterized as the “Regional Development-Side Poverty Alleviation” phase. During this period, the Chinese Government embarked on large-scale, organized, and meticulously planned rural poverty alleviation and development initiatives in impoverished rural areas. This approach to poverty alleviation was underpinned by a regional development strategy, marking the Government’s proactive involvement in addressing poverty. For instance, in 1986, the Central Government convened the inaugural national conference on poverty alleviation, setting forth the ambitious goal of achieving “Eighty-seven Years of Poverty Alleviation and Attack,” aiming to resolve the fundamental subsistence challenges of 80 million impoverished rural residents by 1990. In 1994, the Central Government issued the first national poverty alleviation and development program, the “National Plan for Poverty Alleviation in 1987.” This program emphasized the importance of focusing on impoverished counties that required assistance. It introduced the concentration of resources and the mobilization of social efforts to ensure the effective implementation of poverty alleviation programs. 109 relevant documents were introduced during this stage, all aimed at achieving the fundamental resolution of subsistence issues for impoverished rural households by 2000.

The second stage (2001–2012) is the “Comprehensive Poverty Alleviation” phase. During this stage, poverty alleviation efforts moved in a more diversified and sustainable direction. The focus of poverty alleviation policies shifted from poor districts to poor villages, and the approach to poverty alleviation transitioned from a “blood transfusion” approach to a “blood-creation” approach, gradually forming a government-led poverty alleviation model with the active participation of many parties. The goal is to empower poor individuals to escape from poverty through the development of industries and skills training. Key measures include implementing industrialized poverty alleviation policies, supporting and nurturing leading enterprises, and enhancing the agricultural industry’s added value to enable people experiencing poverty to improve their economic situation. Key policy documents during this stage included: In 2001, the Central Government issued the “Outline of Poverty Alleviation and Development in Rural China (2001–2010),” which provided a comprehensive framework for poverty alleviation and development in the new era. In 2007, the State Council issued the “Circular on the Establishment of a Rural Minimum Livelihood Security System throughout the country,” effectively addressing the challenges faced by impoverished individuals in rural areas. In particular, the number of complementary policies increased significantly with the establishment of the Rural Subsistence Security System in 2007, providing security for poor rural families.”. During this period, the number of pro-poor policies reached 224.

The third stage (2013–2020) is characterized as the “Precise Poverty Alleviation” phase. In 2013, General Secretary Xi Jinping introduced the pivotal concept of precise poverty alleviation, which marked a transformative moment in China’s poverty alleviation efforts. This concept catalyzed the introduction of top-level designs and complementary poverty alleviation policies, resulting in minor fluctuations in the number of policies before and after 2013. The advent of precise poverty alleviation strategies brought about significant changes, elevating anti-poverty initiatives to a strategic level. For instance, In 2015, the central Government articulated the general requirements for poverty alleviation targets. In 2017, the introduction of the rural revitalization strategy elevated the “three rural areas” issue to a top priority for the entire party. In 2018, designated as the year of poverty alleviation, China implemented a series of targeted measures to combat corruption and formalism in poverty alleviation. In the same year, the Government issued the “Opinions on the Implementation of the Rural Revitalization Strategy” and the “Strategic Plan for Rural Revitalization (2018–2022)” aimed at rejuvenating the countryside and addressing deep poverty. It led to a significant increase in anti-poverty policies in rural areas in 2018, accelerating the implementation of policies in deeply impoverished regions. In 2019, “Two no worries and three guarantees” became a central focal point of poverty alleviation and development, with targets set to ensure that poor households would be lifted out of poverty by 2020 and address regional poverty comprehensively. Overall, policies during this phase experienced explosive growth, reaching 429. It is noteworthy that demand-side instruments began to proliferate during this stage.

The fourth and current phase (2021-) is the “Relative Poverty Governance” phase. In this stage, the approach to poverty governance transforms, focusing on consolidating absolute poverty governance’s effectiveness and addressing the issue of relative poverty. Given that this phase is still in its exploratory stage, this chapter will not delve into it extensively, and the governance outlook will be presented in the discussion section.

The preceding analysis outlines the progression of China’s policies to alleviate poverty and offers an interpretation of the Government’s initiatives within their contextual framework. The following section presents a categorization and evolutionary analysis of poverty alleviation policies by measuring high-frequency keywords extracted from Chinese rural poverty alleviation policy texts.

Based on an analysis of the stages of evolution of rural poverty alleviation policies in China, this study conducts a quantitative analysis of high-frequency keywords in China’s rural poverty alleviation policy texts to assess the development stages of these policies (see Table 2 ). The results show that terms such as “economy,” “finance,” and “funds” reflect the core principle of poverty alleviation, which revolves around bolstering economic growth in impoverished areas with the backing of government financial resources.

Combined with the time dimension, the terms “education,” “agriculture,” “training,” and “ethnic minorities” appear frequently between 1984 and 2000. It also reflects the Government’s focus on the crucial role of education in poverty alleviation, especially among ethnic minorities. High-frequency terms such as “development,” “impoverished villages,” “health,” and “pilot project” between 2001 and 2012 indicate that poverty alleviation efforts during this period focused on economic and social progress in impoverished rural areas, with a particular emphasis on the provision of essential public services and support mechanisms for disabled groups. 2013 During the period from 2013 to 2022, keywords such as “precision,” “file-listing card,” “plantation industry,” and “urban-rural integration” emphasize the transition to integrated urban-rural development. This stage emphasizes the development of the plantation industry to increase farmers’ income, thus driving people experiencing poverty to diversify their employment opportunities and increase their income through industrialization methods such as plantation. “Evaluation” also implies that local governments are beginning to pay attention to the effects of poverty alleviation and aim to strengthen monitoring.

In summary, it is evident that the emphasis on poverty alleviation endeavors has shifted over time, and this dynamic highlights the critical role of the various phases of poverty alleviation efforts in shaping the differences in the number and effectiveness of policies.

Policy targets dimension analysis

Policy targets represent the intended purposes and outcomes that policy implementation seeks to attain. The statistical analysis of 762 policy documents in this study reveals that China’s poverty alleviation policy targets can be broadly categorized into three primary groups: economic development, service support, and capacity building. As depicted in Fig. 4 , there are notable distinctions in the distribution characteristics of these three policy targets across different stages.

Nodal distribution of policy targets for rural poverty reduction in China.

First, policy nodes targeting the achievement of “economic development” targets were the most prevalent, constituting 76.07% of the total anti-poverty policy nodes. The number of policy nodes in the first, second, and third phases amounted to 186, 1,510, and 2,414, respectively, with the second and third phases experiencing significant expansion. This phenomenon can be primarily attributed to China’s poverty alleviation policies following a productivity approach (Holliday, 2000 ), which views wealth creation as a form of welfare and economic growth as a means of social security. In a context of absolute poverty, characterized by underdeveloped rural areas with weaker infrastructure than urban regions and an increasing urban-rural economic divide, the Government seeks to address poverty through the trickle-down effect of economic growth. Government pro-poor policies aimed at achieving the “economic development” goal include the construction of roads in impoverished areas, bolstering information infrastructure, supporting the agricultural industry, and implementing policies to aid and benefit the rural sector. Policies such as the “four exemptions and four subsidies” fall under this category, aiming to enhance the well-being of impoverished farmers through rural economic development, ultimately resulting in improved living conditions for these individuals.

Second, policy nodes aimed at achieving the “service support” goal constitute less than 20% of the total anti-poverty policy nodes. The number of policy nodes in the first, second, and third phases is 146, 375, and 514, respectively, indicating a consistent upward trend. China’s rural anti-poverty efforts encompass the ongoing enhancement of various support systems, with the Government introducing a series of policies to alleviate poverty in rural areas. Government-led poverty alleviation policies to attain the “service support” goal include establishing a minimum subsistence guarantee system for rural areas. The formulation of a policy regarding subsidies for individuals with disabilities. The deployment of first secretaries to assist in poverty alleviation efforts. The provision of care services for individuals with disabilities. Extending additional financial aid and tax incentives to households with established records. The promotion of volunteerism and the engagement of social organizations in anti-poverty initiatives. These initiatives collectively contribute to providing essential services and support to impoverished populations.

Third, policy nodes that aim to achieve the “capacity building” goal constitute less than 5% of the overall anti-poverty policy nodes. The number of policy nodes in the first, second, and third phases is 11, 46, and 201, respectively, displaying a modest upward trend. This phenomenon can be linked to China’s prevalent government-led nature of rural anti-poverty efforts. Especially in the initial stage, the Government adopted a “blood transfusion” approach to poverty alleviation, investing significant resources in impoverished villages to address basic subsistence needs while neglecting impoverished groups’ capacity building. As subsistence needs were addressed, in the second and third stages, the Government started paying more attention to enhancing the abilities of poor households to overcome poverty. Anti-poverty policies shifted towards a “blood-creation” approach; diversifying poverty alleviation methods aimed at stimulating the intrinsic motivation of impoverished groups. These methods encompassed training, management, education, and agricultural development. The goal was to boost the motivation of impoverished households to combat poverty actively. For example, initiatives like the industry-university-research model, promoting collaboration between universities and industries in sectors such as tourism and agriculture, have been employed to enhance the skills of impoverished households. Additionally, in the 2016 Circular of the State Council on the Issuance of the 13th Five-Year Poverty Alleviation Plan, the “Thousand Schools Action for Skills Poverty Alleviation” was introduced. This initiative aimed to provide impoverished individuals with the capacity and willingness to undergo vocational training, enabling them to secure employment opportunities.

Policy instruments dimension analysis

Policy instruments represent the means to attain policy targets or address societal issues. As illustrated in Fig. 5 , during the first stage, there is a substantial difference in the frequency of use of various policy instruments. Supply-side policy instruments are the most commonly used, accounting for 71.85%, followed by environmental-side policy instruments at 19.54%. Demand-side policy instruments are the least frequently employed, constituting only 8.61%. There are noteworthy shifts in utilizing these policy instruments in the second and third stages. The proportion of supply-side policy instruments exhibits a substantial decline, while the proportion of demand-side policy instruments shows a pronounced increase. The share of environmental-side policy instruments peaked during the second stage but continues to exhibit an upward trend.

Evolutionary trend of policy instrument nodes for rural poverty governance in China.

In this study, China’s rural poverty alleviation policy instruments have been counted, and their evolutionary trends and quantitative distribution are presented in Table 3 .

The results presented in Table 3 indicate 3235 nodes of supply-side policy instruments. Among these, the proportion of secondary nodes, in descending order, is as follows: infrastructure construction (39.41%), Financial inputs (31.66%), talent training (18.42%), and information services (10.51%). A Chinese proverb says, “To get rich, we must first build roads.” It is reflected in the frequent utilization of infrastructure construction and capital investment as supply-side policy instruments. The Government vigorously promotes the development of electricity, road networks, and other public facilities in impoverished areas through various agricultural funds and infrastructure guarantee funds. For instance, the 2018 Measures for the Management of Funds for Supporting Poverty Eradication in Poor Old Revolutionary Areas, supported by the Central Special Lottery Public Welfare Funds, highlights the backing for the construction of farmland, water conservancy facilities, and photovoltaic power stations, among other infrastructure in impoverished old revolutionary areas. This strategy aims to enhance the efficiency of fund utilization. However, excessive financial inputs may inadvertently encourage dependency among the impoverished population, making it challenging for them to become self-reliant and leading to increased reliance on welfare programs. It can hinder the development potential of people with low incomes. In contrast, talent training and information services have been used less frequently as supply-side policy instruments. It suggests that there is room for improvement in areas such as skills training, vocational education, and the provision of information services, particularly in regions with ethnic minorities and remote areas.

The results in Table 3 reveal 2471 nodes related to environment-side policy instruments. Among these, the secondary nodes, in descending order, are as follows: tax incentives (37.51%), target planning (36.02%), guiding publicity (19.87%), and regulatory control (6.60%). These specific measures appear clustered and polarized within environment-side policy instruments, focusing on strategic guidance for poverty alleviation through implementing tax incentives, transfer subsidies, establishing development plans, and updating work guidelines. Given poverty alleviation’s multifaceted and complex nature, which necessitates comprehensive institutional arrangements and strategic planning, goal planning is frequently employed within environment-side policy instruments. In China, intricate organizational relationships and networks exist, requiring constant coordination of targets and expectations among various actors. Typically, central targets provide guidance and planning, while local governments establish locally tailored targets based on their preferences and capacity for action. While advocacy guidance and regulatory control are less commonly used among environment-side policy instruments, it is crucial to emphasize advocacy and guidance in poverty alleviation efforts and to strengthen the rule of law and regulation within anti-poverty actions.

The results in Table 3 indicate 1202 nodes associated with demand-side policy instruments. Among these, the secondary nodes, in descending order, are as follows: market shaping (44.18%), collaborative exchanges (34.28%), services outsourcing (11.06%), and government purchase (10.48%). Demand-side policy instruments directly address the basic needs of impoverished households and provide them with more opportunities and resources. These instruments stimulate market demand and contribute to efforts to alleviate poverty. The rise of welfare pluralism has facilitated a shift from a model dominated by the “welfare state” to a “welfare society,” emphasizing the participation of multiple actors, including the market, NGOs, communities, and families, in meeting people’s welfare needs (Gilbert, 2000 ). China’s social security system has become more complex (Lu et al., 2013 ), aligning with this concept. The reform of China’s social security system also adheres to this idea, and demand-side policy instruments represent a critical step toward achieving this target. However, the frequency of using demand-side policy instruments is not exceptionally high, especially in the case of service outsourcing and government purchases, which remain at relatively low levels. This situation may hinder the transformation of the state’s role in addressing poverty-related issues.

In general, China’s anti-poverty initiatives have established a government-led policy implementation mechanism marked by a high degree of promotion. The execution of poverty alleviation policies primarily follows a top-down supply-side approach led by the Government, complemented by environmental support. This approach underscores that addressing rural poverty primarily relies on the impetus generated by government-led supply-side policy instruments and external support from environmental policy instruments. In contrast, the pull created by demand-side policy instruments is notably insufficient.

In summary, when it comes to policy targets, central-level poverty alleviation policies have primarily emphasized enhancing infrastructure construction and promoting economic development in impoverished regions. Conversely, policy targets related to service support and capacity building have not received sufficient attention from the Government. On the one hand, China’s predominant feature of poverty governance remains government-led. This governance model has evolved since 1984, with initiatives driven from the top-down by the central Government. Regional economic development delegates the task of poverty reduction to grassroots governments, connecting poverty governance with local economic development to create a “trickle-down effect.” The central Government utilizes incentives and assessment measures to motivate grassroots governments to achieve poverty reduction targets, granting them decision-making and deployment authority, along with inspection and evaluation powers. Ideally, this economic development-driven “trickle-down effect” should lead to income growth for people experiencing poverty.

On the other hand, the “polarization effect” of economic development has widened income inequality. At this stage, the marginal effect of relying solely on economic development for poverty reduction has diminished, making it increasingly challenging to achieve comprehensive poverty alleviation through economic development alone. As poverty alleviation governance continues to evolve, China’s approach to supporting people experiencing poverty has diversified, shifting from providing funds, materials, and food to raising the incomes of people experiencing poverty, enhancing the social security system, and bolstering human capital. The discussion above suggests that China should give more attention to policy targets related to service support and capacity building.

Regarding policy instruments, it is evident that demand-side policy instruments are falling behind, potentially resulting in a skewed implementation of pro-poor policies. In the future, the Chinese Government should develop a more comprehensive set of demand-side policy instruments to provide additional impetus for poverty governance. Furthermore, flexible policy instruments such as government purchasing, collaborative exchanges, and guiding publicity are being underutilized. This underuse could lead to inadequate market, social, and public involvement in poverty alleviation. It also reflects that the Chinese Government’s approach to poverty alleviation governance has not entirely shifted from a coercive method to an endogenous drive. While government-led poverty alleviation effectively mobilizes resources and integrates efforts, it may not be conducive to establishing a long-term mechanism. It could result in dependence on poverty alleviation funds among those in need, creating a form of dependency that is more challenging to address. Nonetheless, it is worth noting that the Chinese Government has created a favorable policy environment, encouraged active participation from social organizations in poverty alleviation and development, and promoted endogenous motivation among impoverished groups. It is evident in the gradual increase in demand- and environment-side policy instruments.

Economic development often relies on state intervention when resources are scarce, resulting in a “government-led development” economic system (Oqubay and Lin, 2020 ). In China, where industrialization occurred relatively late, the Government played a crucial role in combating absolute poverty by implementing numerous supply-side policy instruments, leading to significant achievements. Regarding social policy expenditures, China’s government spending on social policies as a proportion of the Gross National Product (GNP) has approached the standards in developed countries. However, the continued growth of China’s social policy expenditures, particularly the high implementation of supply-side social policies designed to serve economic development, highlights the need to utilize policy instruments efficiently. It includes harnessing the pulling power of demand-side policy instruments and the driving force of environmental policy instruments to achieve sustainable development. In the phase of relative poverty governance, it is crucial to ensure that policy instruments, while still supporting economic development, are not solely used for redistribution but also focus on promoting equitable distribution. This emphasis should prioritize the targets of service support and capacity building, as neglecting them may hinder the resolution of relative poverty issues.

From absolute to relative poverty: an explanatory framework of “path dependency-institutional change”

Path dependence describes how past choices can have a lasting impact on the present and future, similar to the idea of “inertia” in physics, where once a particular path is chosen, it tends to be followed and maintained. David, an early proponent of the concept, was the first to apply it to the analysis of technological change. Arthur ( 1989 ) defined path dependence as the inability to deviate from a particular trajectory in a dynamic economic process. In other words, if different historical events and their developmental sequences cannot lead to the same market outcome with 100% certainty in a dynamic economic system, that system is path-dependent. Building on the ideas of David and Arthur, North integrated path dependence theory into the institutional analysis framework, giving rise to the path dependence theory of institutional change. Within established institutions and mechanisms, there are typically two possibilities for progressing (Pinch and Bijker, 1984 ). One is to maintain the existing system, even if it may be inefficient. The other is to create a new system. Path dependence and path creation are intertwined and complementary, and both play a role in driving the process of institutional change (Garud et al., 2010 ).

This paper highlights that the effectiveness of addressing absolute poverty is characterized by a “short-term, quick” approach (Wan et al., 2021 ) while addressing relative poverty requires establishing long-term mechanisms. Currently, China’s poverty alleviation efforts face several challenges, including a heavy reliance on rural support resources, significant multidimensional relative poverty in both urban and rural areas, and a lack of internal motivation in impoverished regions (Liu et al., 2017 ), which presents obstacles to effective poverty governance. In this new era of poverty governance, there is an urgent need for a strategic perspective, with the central Government taking a leading role in systemic coordination through top-level design to ensure the orderly progress of poverty governance. To better analyze poverty governance policy instruments, this study introduces North’s path dependence theory (North, 1990 ), treating poverty governance policy instruments as the evolution of institutional arrangements. It also considers other institutional factors and their impact on the poverty governance system, examining the evolution of poverty governance policy instruments through path dependence.

According to North’s theory, path dependence is primarily driven by the “limited rationality” of institutional actors and the high transaction costs of interest groups, influenced by political and economic constraints, as well as informal systems like culture (North, 1997 ). In poverty governance, when policy instruments such as “blood transfusion” and “development-side” approaches are frequently employed and deliver significant results, they become entrenched and even strengthened by vested interest groups. These policy instruments and the enduring influence of informal systems like the culture of poverty that aligns with absolute poverty gradually form multiple dependencies in the poverty governance process.

After eliminating absolute poverty, the Government seeks to consolidate the gains by maintaining the stability of existing policies and systems. It introduces institutional arrangements such as dynamic monitoring mechanisms and measures to prevent a return to poverty. It also strengthens the linkage between poverty eradication outcomes and rural revitalization. Simultaneously, as China enters the phase of relative poverty governance, the Government initiates innovations and expansions in the poverty governance system. It proposes creating a long-term mechanism for addressing relative poverty and modernizing the goal of achieving shared prosperity among all citizens. Through promoting and implementing government policies and systems, relative poverty governance gradually breaks through the closed environment and the lack of internal motivation characteristic of the original poverty governance. However, breaking the original multiple dependence paths takes time and involves a co-evolutionary process of new policies and the existing system. During this period, innovation and expansion of new policies coexist with stabilizing old policies, leading to path divergence. The system subjects consciously guide decision-making to challenge the old institutional arrangements. The Government continuously adjusts, optimizes, and constructs an ideal path for relative poverty governance. Its leading decision-making behavior drives the system’s transition from path divergence to path innovation, comprehensively replacing the old policy instruments for poverty governance and shaping the policy instruments for relative poverty governance.

Based on the above theoretical analysis, this paper constructed an analytical map of the evolution of the path of poverty governance (see Fig. 6 ).

Poverty governance pathway.

Conclusion and policy implications

In the context of poverty governance in China, the achievement of short-term poverty alleviation goals has been driven by a pressure-based system, characterized by centralized decision-making and strong administrative mobilization carried out by the central government. This has been facilitated through significant investments, major projects, and large-scale mobilization efforts. However, the predominant focus of poverty alleviation has been on income enhancement, with inadequate emphasis placed on fostering internal motivation and facilitating access to education to build aspirations for the impoverished. Consequently, there is an overreliance on supply-based policy instruments, leading to potential challenges in sustaining the effectiveness of this approach.

To achieve meaningful and sustainable poverty reduction, it is necessary to continuously optimize coordination among various stakeholders such as government, political cadres, and local enterprises. Looking at the development stages of poverty alleviation governance practices in rural China, the central government has consistently taken the lead in rural anti-poverty efforts at each stage. However, due to significant variations in the outcomes of nationwide policies among different regions, especially after entering the comprehensive poverty alleviation stage, the actions and preferences of political cadres have a more pronounced impact on local poverty outcomes (Deng, 2023 ; Liu and Liu, 2022 ). After transitioning to the precise poverty alleviation stage, the role of local enterprises has also been actively mobilized, participating in the national strategy of “industry-based poverty alleviation” to precisely assist impoverished rural areas, further harnessing the power of the market and society.

Moreover, it requires a precise synergy among multiple policy instruments based on both supply-based, demand-based, and environment-based approaches, aiming to foster comprehensive rural revitalization. This requires strategic allocation of resources and organizational coordination, centered upon a cohesive foundation, and dynamically integrated with the moral and cultural aspects. By doing so, it becomes possible to forge collective efforts in the governance of relative poverty. Ultimately, the collaborative model of poverty governance entails practical processes encompassing diverse resource allocation methods and balanced utilization of various policy instruments. Naturally, dynamic coordination among government, market, and societal actors, as well as the effective integration of supply-based, demand-based, and environment-based policy instruments, necessitate continuous exploration and innovative governance practices that are adaptable to local conditions, circumstances, and trends.

Policy implications

The poverty governance policy instrument facilitates the translation of national-level poverty governance policies into actionable directives implemented at the local government level. The strategic alignment of this policy instrument empowers local governments to establish a practical policy framework for impoverished areas. This framework helps bridge the gap between government supply and the needs of impoverished areas and households. It also promotes synchronization in the poverty governance policy system concerning supply and demand quality, quantity, and structure, ultimately facilitating poverty alleviation and prosperity. The interplay between government resource allocation and the needs of impoverished regions characterizes the process of implementing poverty alleviation policies. It involves the direct influence of government macro-control and the indirect impact of market forces on the poverty alleviation environment. Therefore, based on an overview of the evolution of policies in the period of absolute poverty governance and consideration of the path dependence theory, this study argues that the following points should be considered in the implementation of policies for the governance of relative poverty:

First, adhere to the evolutionary principles of poverty governance policies, emphasizing the sustainable development of poverty reduction and enhancing the relative poverty governance system. A comprehensive policy cycle comprises policy formulation, government-led policy implementation, evaluation, monitoring, and policy adjustment for optimization. Relative poverty governance is a lengthy and intricate endeavor. The Government should approach it from the policy cycle standpoint, formalize poverty governance in policy formulation, adhere to legal principles in relative poverty governance, enhance system precision, and boost resilience. Incorporating third-party evaluation entities and amplifying social oversight in assessing local government policy implementation will elevate public participation and voice, safeguarding people’s right to express their views. Reinforce the policy leadership in poverty governance, aligning it with the various stages of relative poverty governance. Adjust governance policies to harmonize with the evolving needs of each stage in relative poverty governance. Employ laws, regulations, and specific policies to effectively regulate and guide each stage.

Second, Strengthen the policy coherence and alignment in the governance of relative poverty. Relative poverty governance represents a holistic progression and advancement beyond absolute poverty eradication, focusing on establishing a sustainable mechanism for addressing relative poverty and comprehensively mitigating the multifaceted challenges of rural poverty. In the phase of absolute poverty governance, the utilization of policy instruments displayed fluctuations, imbalances, and path dependencies. Consequently, tailored adaptations are implemented during the relative poverty governance to utilize specific policy instruments across diverse dimensions to address deficiencies in rights, capabilities, and incentives. This strategy aims to achieve alignment with the policy targets of relative poverty governance.

Third, Enhance the coordinated management of policy instruments and refine the application system. In relative poverty governance, it is vital to focus on the effective deployment and integration of policy instruments that align with the specific attributes of relative poverty. Initially, optimization of supply-side policy instruments is essential. The Government should elevate the utilization of talent development, information services, and public services, thereby enhancing the quality of fundamental public services in rural regions. Additionally, actively promoting the digital industry and facilitating information resource exchange and vocational skills training for farmers are crucial measures. Second, intensifying the utilization of demand-side policy instruments is imperative. Expanding the Government’s procurement scope and leveraging the market’s potential is crucial. Cultivating a mechanism for the involvement of multiple stakeholders in poverty governance, enhancing collaboration among various actors, and attracting social organizations, businesses, and individuals to participate in service outsourcing, thereby compensating for governmental limitations, are essential steps. Finally, it is crucial to capitalize on the guiding potential of environment-side policy instruments. Enhancing related laws and regulations, fostering innovation in financial support, boosting tax incentives, strengthening capacity development, and nurturing farmers’ intrinsic motivation for poverty alleviation and prosperity through effective communication and guidance is vital. This approach aims to foster a conducive environment for poverty governance.

Data availability

The data that support the findings of this study are available from https://home.pkulaw.com . However, restrictions apply to the availability of these data, which were used under license for the current study and are not publicly available. Data are available from the authors upon reasonable request and with permission from the Beida Faber-China Laws and Regulations Database.

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Acknowledgements

Sincere thanks Dr. Jiang for his support of this article. This paper was supported by the Shanghai Social Science Innovation Research Base of “Research on Transitional Sociology with Chinese Characteristics”, China Scholarship Council (Grant No. 202206140110), National Philosophy and Social Sciences Research Fund of China: Research on the causes of the phenomenon of digital “incapacitation” of the elderly and coping strategies (Grant No.23BSH090) and Shanghai Municipal Education Commission: Research on Improving Social Policies to Address Relative Urban Poverty (Grant No.2021-01-07-00-08-E00129).

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School of Public Administration, Sichuan University, Chengdu, China

Yunhui Wang

School of Social Development, East China Normal University, Shanghai, 200041, China

Department of Global Development, College of Agriculture and Life Sciences, Cornell University, Ithaca, NY, 14850, USA

School of Public Administration And Policy, Shandong University of Finance and Economics, Jinan, China

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YW contributed mainly to text writing, data analysis, and revisions. YC contributed primarily to guidance, revisions, and communications. ZL prepared materials, collected data, and formally analyzed them. All the authors discussed the results.

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Wang, Y., Chen, Y. & Li, Z. Escaping poverty: changing characteristics of China’s rural poverty reduction policy and future trends. Humanit Soc Sci Commun 11 , 694 (2024). https://doi.org/10.1057/s41599-024-03204-0

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Received : 28 June 2023

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DOI : https://doi.org/10.1057/s41599-024-03204-0

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The Bright Side of Political Uncertainty: The Case of R&D

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Julian Atanassov, Brandon Julio, Tiecheng Leng, The Bright Side of Political Uncertainty: The Case of R&D, The Review of Financial Studies , 2024;, hhae023, https://doi.org/10.1093/rfs/hhae023

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We use close gubernatorial elections as a quasi-natural experiment to document a positive effect of political uncertainty on firm-level R&D. This finding is in contrast to the existing literature documenting a negative impact of political uncertainty on capital investment. We examine potential mechanisms and find that our results are consistent with the growth option view of R&D investment. The effect is stronger for politically sensitive and high-tech industries.The results are robust to different proxies for political uncertainty shocks. As predicted by models of investment under uncertainty, the real effects of political uncertainty critically depend on the type of the investment. ( JEL G18, G38, O31, O32)

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