Assessing the Potential Impact of Microfinance with Agent-Based Modeling
This study attempts to develop an agent-based modeling (ABM) framework for testing the effectiveness of alternative microfinance policies prior to their implementation.
The study states that although microfinance is emerging as a tool for poverty reduction in many countries, the causality between microfinance and poverty reduction is not well-established. Challenges include contradictory results yielded by different methodologies, and constant changes in policy environment and other variables. The ABM framework provides decentralized, dynamic and simplified environments where random interaction allows agents to organize themselves into various groups. The objective of the model used in the study was to evaluate the impact of microfinance on income levels of the poor and repayment rates of microcredit.
The article suggests two policy directions based on the simulation results to enhance the success of microfinance. They are:
- Increasing the amount of loanable MFI funds, making them easily available and providing easy market access of products;
- Enabling lower interest rates by keeping a watch on competitive behavior of moneylenders, and reducing MFI interest rates.
