Financing Businesses in Africa: The Role of Microfinance

World Bank's Policy Research Working Paper 5975 evaluates how microfinance performed in providing business financing in 27 Sub-Saharan African countries. It uses data from the 2009 and 2010 Gallup World Poll, a nationally representative survey conducted in around 157 countries per year. The paper also analyzes the challenges the poor face in setting money aside to save and discusses what policymakers can do to promote savings. The data, supported by statistical evidence in related literature on the use of microcredit around the world, demonstrates that economic gains from microcredit have been more modest than what was once believed. Findings include:

• Poor people save in order to start new businesses;
• Introduction of formal products for small savings can be a key financial innovation;
• Microcredit is primarily useful as a consumption-smoothing and risk-management tool;
• Microsavings plays a greater role than microcredit in wealth creation;
• Neither savings nor credit would be able to do much in an environment that does not inspire public confidence;
• World's poor need financial innovations that help them save, borrow, lend, and an environment that helps them do so securely.