University of Groningen

Financial Inclusion: progress, motivations and impactLi, Linyang

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Publication date:2017

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Citation for published version (APA):Li, L. (2017). Financial Inclusion: progress, motivations and impact. [Groningen]: University of Groningen,SOM research school.

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Financial Inclusion: Progress, Motivations and Impact

Linyang Li

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Publisher: University of Groningen

Groningen, The Netherlands

Printed by: Ipskamp Drukkers B.V.

Enschede, The Netherlands

ISBN: 978-90-367-9732-0

eISBN: 978-90-367-9731-3

© 2017 Linyang Li

All rights reserved. No part of this publication may be reproduced, stored in a retrieval

system of any nature, or transmitted in any form or by any means, electric, mechanical,

now known or hereafter invented, including photocopying or recoding, without prior

written permission of the publisher.

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Financial Inclusion: Progress,

Motivations and Impact

PhD thesis

to obtain the degree of PhD at the

University of Groningen

on the authority of the

Rector Magnificus Prof. E. Sterken

and in accordance with

the decision by the College of Deans.

This thesis will be defended in public on

Thursday 22 June 2017 at 12.45 hours

by

Linyang Li

born on 3 April 1989

in Shaanxi, China

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Supervisors

Prof. C.L.M. Hermes

Prof. B.W. Lensink

Assessment Committee

Prof. T. Beck

Prof. A. Oude Lansink

Prof. J. de Haan

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To my parents, my forever love, Yujie

谨此献给我的父母，我的挚爱，玉洁

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Contents

1 Introduction

1.1 Background ........................................................................................................................... 1

1.2 Research Questions .............................................................................................................. 5

1.3 Outline of the Thesis and Basic Findings ......................................................................... 8

1.4 Policy Implications ............................................................................................................ 12

1.5 Limitations and Future Research ..................................................................................... 16

2 Productivity Convergence of Global Microfinance: What is the Source of

Productivity Improvement?

2.1 Introduction ........................................................................................................................ 21

2.2 Theoretical Background .................................................................................................... 25

2.2.1 Microfinance Performance: A Brief Literature Review ......................................... 25

2.2.2 Operating Efficiency .................................................................................................. 29

2.2.3 Capital Deepening ...................................................................................................... 30

2.2.4 Technological Innovations ........................................................................................ 32

2.3 Data and Methodology .................................................................................................... 33

2.3.1 Data .............................................................................................................................. 33

2.3.2 Intertemporal Data Envelopment Analysis ............................................................ 34

2.3.3 Convergence of Productivity in the Microfinance Industry ................................ 37

2.3.4 Sources of Productivity Convergence ...................................................................... 39

2.4. Results of the DEA and Empirical Estimations ............................................................ 44

2.4.1 Financial Productivity Frontier ................................................................................. 45

2.4.2 Social Productivity Frontier ..................................................................................... 48

2.4.3 Testing for Financial Productivity Convergence .................................................... 52

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2.4.4 Testing for Social Productivity Convergence ......................................................... 55

2.4.5 Decomposition of Financial Productivity Convergence ....................................... 58

2.4.6 Decomposition of Social Productivity Convergence ............................................. 60

2.5 Summary and Concluding Remarks ............................................................................... 62

2.A Appendix ........................................................................................................................... 65

3 Political Connections and Household Access to Bank Loans: Evidence from China

3.1 Introduction ........................................................................................................................ 69

3.2 The Importance of Political Connections: A Review of Literature ............................. 72

3.3 Data ...................................................................................................................................... 77

3.4 Empirical Methodology .................................................................................................... 84

3.4.1 Household’s Self-Selection Process .......................................................................... 85

3.4.2 Bank’s Selection Process ............................................................................................. 88

3.4.3 Control Variables ........................................................................................................ 90

3.4.4 Econometric Strategy .................................................................................................. 94

3.5 Descriptive Statistics and Empirical Results .................................................................. 96

3.5.1 Descriptive Statistics ................................................................................................... 96

3.5.2 Empirical Results ...................................................................................................... 103

3.5 Conclusions ....................................................................................................................... 109

4 Depending on Social Context: The Signaling Effect of Households’ Informal

Indebtedness in Bank Credit Allocation

4.1 Introduction ...................................................................................................................... 113

4.2 Literature and Hypotheses ............................................................................................. 118

4.3 Data and Methodology ................................................................................................... 123

4.3.1 Data ............................................................................................................................. 123

4.3.2 Methodology.............................................................................................................. 124

4.4 Results ............................................................................................................................... 132

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4.4.1 Summary Statistics .................................................................................................... 132

4.4.2 Heckman Selection Model ....................................................................................... 138

4.4 Conclusions ....................................................................................................................... 146

5 Financial Inclusion and Poverty: The Role of Relative Income

5.1 Introduction ...................................................................................................................... 149

5.2 Literature Review and Hypotheses ............................................................................... 153

5.2.1 Relative Income Hypothesis .................................................................................... 153

5.2.2 Keeping Up with the Joneses Effect ....................................................................... 154

5.2.3 Tunnel Effect .............................................................................................................. 156

5.2.4 Hypotheses ................................................................................................................ 158

5.3 Data .................................................................................................................................... 160

5.4 Methodology .................................................................................................................... 164

5.4.1 Basic Specification ..................................................................................................... 164

5.4.2 Income Indicators ...................................................................................................... 164

5.4.3 Tests of Hypothesis 1 ................................................................................................ 166

5.4.4 Tests of Hypothesis 2 ................................................................................................ 167

5.4.5 Tests of Hypothesis 3 ................................................................................................ 168

5.4.6 Econometric Strategies ............................................................................................. 169

5.5 Results ............................................................................................................................... 170

5.5.1 Summary Statistics and Univariate Analysis ........................................................ 170

5.5.2 Impact of Income Comparisons .............................................................................. 175

5.5.3 Who Is Affected by Income Comparisons? ........................................................... 180

5.5.4 Keeping Up or Tunnel Effects? ............................................................................... 183

5.6 Robustness Tests .............................................................................................................. 189

5.7 Conclusions ....................................................................................................................... 191

5.A Appendix ......................................................................................................................... 194

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Samenvatting (Summary in Dutch) 199

References 205