The effect of microloans on the subjective well-being of the poor in Gauteng

The effect of microloans on the subjective well-being of the poor in Gauteng by MMAPHEFO CHRISTINAH LEGODI A dissertation submitted in fulfilment for the degree of in Development Ec

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How to cite this thesis

Surname, Initial(s) (2012) Title of the thesis or dissertation PhD (Chemistry)/ M.Sc (Physics)/ M.A (Philosophy)/M.Com (Finance) etc [Unpublished]: University of Johannesburg Retrieved

Date)

The effect of microloans on the subjective well-being

of the poor in Gauteng

by

MMAPHEFO CHRISTINAH LEGODI

A dissertation submitted in fulfilment for the degree

of

in Development Economics

at the College of Business and Economics

UNIVERSITY OF JOHANNESBURG

Supervisor: Dr T Greyling

2017

i

Acknowledgement

The Almighty, Jesus Christ made it possible for me to complete my research study despite all the challenges faced This minor dissertation marks the end of a long and eventful journey, during which I have learned so much and met so many wonderful people who in different ways contributed not only to my work but also to my personal growth

I would like to express my sincerest gratitude to my supervisor Dr Talita Greyling, whose expertise, understanding, calmness and patience added considerably to my graduate experience I am very thankful to you for always having time for me, your quick and insightful comments on my research Thank you to my mentee Lesley Mogano for convincing me to start my postgraduate journey when I had given up hope to further my studies Thank you to my academic friends for your words of encouragement and guidance

Finally I would like to thank my parents, Israel Marumo Legodi (Papa) and Mokgadi Mary Legodi (Mama), to whom I dedicate this research They always motivated and supported me

to go for the highest possible education I would also like to acknowledge the support of my brother Itumeleng Legodi and sister Caroline Legodi-Mahahle I cannot thank enough my fiancé Tshililo Muedi and my daughter Omolemo for their patience, support and motivation

for me to complete this research

ii

Declaration

I certify that the minor diss M C

(Development Economics) at the University of Johannesburg is my independent work and has not been submitted by me for a degree at another university

MMAPHEFO CHRISTINAH LEGODI

iii

Abstract

Worldwide, poverty remains to be an obstacle to achieve sustainable development and improve the well-being of people Microloans have become a popular policy tool for poverty alleviation and is part of the larger microfinance industry It is used in many developing countries as one of the approaches in their poverty alleviation programs Microloans are based on the principle that poor people can initiate their own development out of poverty, given they have the starting capital to do so The capital can be invested in income-generating activities which, it is assumed, will lead to a higher income and additional positive effects, like

an increase in well-being However, others argue that the focus on income is only one aspect

of poverty Other forms of deprivation, such as education, health and a lack of subjective being should also be considered The main and primary research aim of this minor dissertation is to investigate how access to microloans is related to the subjective well-being

well-of the poor and, secondly, to investigate if the relationship with microloans is the same for both male and female borrowers To analyse these research questions we make use of a data set collected by the Gauteng City-Region Observatory (GCRO) in 2015 on the quality of life of the people in the province The results from our analysis show that microloans are negatively related to the subjective well-being of the poor, meaning that the subjective well-being of the poor in Gauteng does not improve though access to microloans This finding contravenes the notion of microloans being a policy measure to address poverty through the alleviation of poverty and improving subjective well-being For further analysis we added an interaction variable, where the microloan variable is multiplied by the gender variable We found positive and significant results which indicate that males and females who have a microloan might have different experiences regarding their subjective well-being Pursuing this matter further,

we analysed and compared the results of a male and a female subsample We found that although the microloan variable is only statistically significant in the female sample, the direction of the relationship in the two subsamples differs In the male subsample the relationship between microloan and subjective well-being is positive, but the opposite was found in the female sample, thus emphasising that gender matters when analysing the relationship between microloans and subjective well-being Furthermore, the results show that the standard factors found to explain the subjective well-being of people are also

relevant for the poor in Gauteng, the economic centre of South Africa This shows that there

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s policy intervention to improve the subjective well-being of the poor Instead, to find ways to increase the well-being of the poor, policy makers should adapt policy to fit the specific circumstances in South Africa and not blindly pursue policy measures used in other regions and countries The South African government should first understand which factors are relevant to subjective well-being and how it affects different demographic groups such as males and females within a region With this knowledge policy makers will be better equipped to take efficient policy decisions to not only improve the economic well-being, but also the subjective well-being of the poor

Keywords: Subjective well-being, microloan, poverty alleviation

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Table of Contents

Acknowledgement i

Declaration ii

Abstract iii

List of tables vii

List of figures viii

List of abbreviations/acronyms ix

CHAPTER 1: INTRODUCTION AND OVERVIEW OF THE STUDY 1

1.1 Introduction Background 1

1.2 Research Problem 4

1.3 Research Question 5

1.4 Contribution of the Study 5

1.5 Significance of the Study 6

1.6 Structure of the Minor Dissertation 6

CHAPTER 2: BACKGROUND 7 2.1 Profile of the Research Area 7

CHAPTER 3: LITERATURE REVIEW 8

3.1 Introduction 8

3.2 Conceptual Background 8

T 8

3.2.2 The concept of microfinance and microloans 9

3.2.3 The concept of subjective well- 10 3.3 Microloans, Poverty Reduction and Subjective Well-being 11

3.3.1 Microloans and subjective well-being 11

3.3.2 Microloans and subjective well-being of males and females 13

3.3.3 The impact of microloans programmes on alleviating poverty 14

3.3.4 Questioning the Ability of Microloans for Poverty Alleviation and improving subjective well-being 18

3.3.5 The Role of Microloans in Poverty Reduction 21

CHAPTER 4: METHODOLOGY AND DATA 23

4.1 Introduction 23

vi

4.2 Model Specification and Estimation Techniques 23

4.3 Data 25

4.3.1 Data and selection of variables 25

4.3.2 Selection of variables 28

4.3.2.1 Dependent variable 28

4.3.2.2 Independent variables 29

CHAPTER 5: ESTIMATION RESULTS AND DISCUSSION 36

5.1 Introduction 36

5.2 Assessing the Reliability of the Sample 36

5.2.1 Endogeneity 36

5.2.2 Correlation statistics 37

5.2.3 Multicollinearity 39

5.2.4 Heteroskedasticity 39

5.3 Results of the Whole Sample Estimated on OLS and Ordered Probit 40

5.4 Results per Gender 44

CHAPTER 6: CONCLUSION 47

REFERENCES 50

APPENDIX A: ESTIMATION RESULTS 61

A1.1 Marginal Effects 61

A1.2 IV Regression 63

APPENDIX B: DIAGNOSTIC TEST 64

B1.1 Model Specification 64

B1.2 Over Identification Test 65

B1.3 Endogeneity Test 65

Table 7: Estimation results for subjective well-being (w 42

Table 8: Gender differences in subjective well-bei 46

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List of Abbreviations/Acronyms

ATM Automated Teller Machine

DFID Department For International Development

GCR Gauteng City Region

GCRO Gauteng City-Region Observatory

GCRO Gauteng City-‘ O “

GDP Gross Domestic Product

HSRC Human Sciences Research Council

IGAs Income Generation Activities

ILO International Labour Organisation

MFRC Micro Finance Regulatory Council

MDGs Millennium Development Goals

NCA National Credit Act

NCR National Credit Regulator

NGO Non-governmental Organization

OWB Objective Well-being

OLS Ordinary Least Squares

QoL Quality of Life

SASAS South African Social Attitude Survey

SWB Subjective Well-being

VIF Variance Inflation Factor

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CHAPTER 1 INTRODUCTION AND OVERVIEW OF THE

STUDY

Poverty is an undesirable and unsustainable state of affairs which is considered to be a social, economic, political or psychological problem In recent years poverty has been seen

unmanageable The well-being of many populations have been jeopardised by it (Mosley, 2004) The South African government has created strategies and policies that have concentrated on poverty alleviation The social security system has been expanded in the course of the years, especially to children and the disability sectors However, the social security system may wind up noticeably unsustainable later on in the future Van der Berg, Burger, Burger, Louw and Yu (2005) propose that social assistance is nearing the limits of its capacity to alleviate poverty Poverty is apparent to the human eye and is profiled by shacks, homelessness, unemployment, casual labour, poor infrastructure and lack of access

to basic services

It is recorded that before 1994 the majority of South Africans were denied political rights and prohibited from taking an interest in the political process (Lund, 2008) African, Coloured and Indian individuals were rejected from taking part not just in the political existence of South Africa, yet in addition in the economic mainstream, bringing about extraordinary inequalities Inequality before to 1994 is shown through a two-layered educational system, a dual health system, and other socio-economic dimensions Amid the apartheid era, exclusion was depended on race and class Most of the energy of the liberation movement pre-1994 was devoted to eliminating the common enemy of racial exclusion The issue of class, with its dimension of inequality, did not feature as prominently However in post-1994, inequality now includes different classes of individuals who are excluded, and the shift profiles new zones of exclusion (Seekings & Nattrass, 2005)

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Regardless of the political and economic advances since 1994, South Africa continues to be tormented by poverty and unemployment Almost half of the population continues to live under a poverty datum line (Adelzadeh, 2006) There are estimates that just over twenty two million people in South Africa live in poverty (DBSA, 2005a) In 2010, 20% of South

A lower poverty line of R466 and were deemed poor (Statistics South Africa, 2017)

In this regard the 2005 South African Social Attitude Survey (SASAS) conducted by the Human Sciences Research Council (HSRC) found that, following 10 years of democracy, the larger part of South Africans still see themselves as sufficiently lacking enough food for sustenance and income to meet all their household needs However these measures of poverty all refer to objective monetary measures Lately the validity of these measures has been questioned and researchers have been increasingly adopting subjective measures of well-being to complement objective measures of well-being Subjective measures refer to

perceptions of their own well-being They are obtained through self-reports: people are asked to evaluate their lives as a whole or some aspect of it and respondents will then (to a set of open-ended survey questions) place themselves on a scale to indicate a measure of their well-being (Waldron, 2010) Increasingly, there has been solid support in

record of subjective well-being in assessments done through objective indicators It is acknowledged that individuals do not only base their behaviour with respect to what is accessible to them, yet on what they feel about the distinctive choices or limitation that they are confronting (Frey & Luechinger, 2007) However poverty is often measured by making use of objective monetary measures Objective well-being (OWB) is based on hard data, i.e it represents an external view of well-being and is measured by statistical indicators usually obtained from official statistical sources The objective well-being of a society assumes achieving and sustaining economic development (Boarini et al., 2006), while subjective well-being (SWB) theories base their idea of well-being on the fact that people are figured to be the best judges of their general quality of life (Frey & Sutzter, 2002:405) SWB can be characterised as individual multidimensional assessment of their lives, including cognitive judgments of life satisfaction and additionally affective assessment of states of mind and feelings (Eid & Diener, 2004:65)

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As Diener (2002:2) points out, SWB is utilised as an umbrella term alluding to detachable segments: life satisfaction and satisfaction with life spaces, for example, marriage, work, income, housing and recreation: feeling positive affect (pleasant feeling and state of mind) more often than not: encountering rare sentiments of negative affect (for example, despondency, stress and outrage); and judging life to satisfy and significant In order

to capture SWB, researchers for the most part depend on self-reported enquiries concerning happiness or life satisfaction In this manner, enquiries concerning happiness, global or domains satisfaction, self-reported adequacy of life domains, frequency of good and bad feelings, etc are commonly included in surveys and used as indicators of SWB In order to achieve this, microloans were introduced as a policy approach that aims to improve the SWB of people (Wolday, 2003)

As it was found that subjective measures are important in measuring the well-being of people, this study investigates whether microloans as a policy measure to decrease poverty also plays a role in improving the SWB of the poor Microloan programmes consist of small loans that are provided to the poor in order to undertake self-employment and other financial and business activities, giving them the ability to care for themselves and their families and thus, to achieve a level of independence Microloans are also referred to as micro-lending, which has demonstrated to be an effective tool in the on-going struggle against poverty and which enables those without access to lending institutions to borrow and start small businesses (ABS, 2005)

Previous studies have investigated the economic effect of microloans on alleviating poverty and, among others, Jacobs et al (2010) results showed that microloan programmes play

an important role in enabling the poor to have access to finance This allows them to

improve their poverty situation Demirguc-Kunt et al (2014) also shows evidence that

proves that access to microloans by the poor households not only reduces the poverty inequality gap, but also improves the well-being among the poor South Africa has had major financial reforms since 1994 and the proliferation of microfinance institutions, yet there is no research on the relationship between microloans and the well-being or SWB of

N Sustainable Development Goals (SDGs) It is argued that poor people own numerous types of skills, such as self-employment, which they can use in generating income However, the capacity to create self-employment depends, amongst others, on the accessibility to appropriate financial services Also, while there is apparent general consensus on how lowering income inequality can reduce poverty, a clear indication of how access to microloans can cut poverty levels and improve the SWB of the poor in Gauteng has not yet been established Stewart et al (2012) argued that there is no guarantee that microloan recipients use the loans in a manner that ultimately improves their SWB It is likely that the poor will use the loans for alternative purposes, e.g to deal with their current circumstances (i.e consumption), rather than investing in a business As a result, giving loans

to the poor could cause more harm than good as the accumulated debt that must be repaid would lead the already poor individual into further destitution, creating a possible cycle of debt (Bateman & Chang, 2012) However, there is no consensus in the literature regarding the relationship between microloans and the alleviation of poverty (an objective measure of well-being), or whether microloans improve the SWB of the poor (Steward et al., 2012) This

is despite the fact that an intriguing and vibrant debate is raging about the real effectiveness

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of microloans as a tool for directly reducing poverty, and indirectly improving their SWB (Pronyk et al., 2007) Therefore, policy measures to alleviate poverty and the effects of poverty on the SWB of the people in South Africa are of utter importance A policy measure introduced by Yunus (2001) is that if poor people are given access to loans, their well-being will improve The purpose behind this is for them to distinguish and take part in feasible income producing exercises, for example, processing (e.g paddy husking), manufacturing (e.g pottery, weaving and clothing sewing), storage, advertising or transport administrations Thus, they are probably going to raise their status, lessening their reliance

on their partners and could improve their homes and the nourishing benchmarks of their children, which all might lead to higher levels of SWB Therefore, in this minor dissertation

we would like to incorporate the notion of Yunus and test if it also holds on a subjective

level, thus investigating if access to microloans is positively related to the SWB of the poor

Studies conducted by the International Labour Organisation (ILO) (1997) and Ellis et al (2007) focus on the relationship between microloans, economic development, wealth and the empowerment of poor women Although this can be useful to determine whether or not microloans are an effective tool to improve the economic situation of the poor, it does not automatically mean an improvement in the SWB of poor people Chibba (2009) and

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Schoombee (2004) noted that financial inclusion is an inclusive development policy; hence its significance is taking centre stage in addressing inequalities in South Africa, but the study was not micro-focused on the effects financial access has on the well-being of poor Laeven (2003) and Jones (2006) researched financial access and development, focusing on the financial access of small businesses Honohan (2008) conducted a study on financial access

in different countries, but did not address the linkages between microloans, poverty reduction and SWB Levine (1997) discussed the linkage between financial development,

-being, but the study did not adapt to the local intricacies of the South African context

This minor dissertation will contribute to the literature in addressing the gaps in the literature by determining whether access to microloans can improve the SWB of the poor in Gauteng We also investigate if there is a similar relationship between microloans for females and males The purpose of this thesis is to look at the relationship of microloans beyond the monetary measures of economic development and consider the SWB of the

poor

Microloans have attracted worldwide attention because of their potential to reduce poverty among poor communities and improve the well-being of the poor It is believed to be one of the strategies suitable for emancipating poor people from poverty It is, therefore, urgent and important to carry out this research to establish whether access to microloans will not only alleviate poverty but also contribute to the SWB of the poor The findings of the study will provide knowledge to those involved in designing and supporting development, such as the policy makers, the government and the development agencies, to fill the gap in previous literature that might play a role in improving the SWB of the poor in Gauteng, and that can also be extended to the rest of South Africa

The rest of the minor dissertation is structured as follows: Chapter two provides a background to the research area Chapter three is the literature review on the theme of

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microloans, the connection between microloans, poverty alleviation and SWB and the measurement of SWB Chapter four presents the methodology and the data used in conducting the research Chapter five outlines and discusses the empirical findings Chapter six provides a conclusion and recommendations in light of the results from the analyses

Chapter 2 BACKGROUND

South Africa is a constitutional democracy with a three-tier system of government, namely the national, provincial and local levels of government The general overview of the South African economy is that poverty continues to be a distressing characteristic of the economy

“ A s of poverty and inequality can be concentrated among Africans (61%) and female-headed households (60%) and with a Gini-coefficient of between 0.59 and 0.63 (StatsSA, 2016), the country has a highly skewed distribution of income directly linked

to the coun The estimated unemployment rate of Statistics South Africa (2016) was 25.9% in 2015, while 35.9% of the country was living below the poverty line in 2012

For the purpose of this minor dissertation, Gauteng is the province of interest due to its dynamic mix of languages, cultures and entrepreneurial energies However, it is beset by high levels of poverty and inequality Historically the province established itself as the economic centre of South Africa due the large concentration of gold mines and subsequent development of industrial and financial services According to Stats SA (2017 “ Apopulation is estimated at 55,91 million, while Gauteng has 13,2 million residents, which

“ A ation in 2014/2015 and contributed 34% of the

GDP G “ Aeconomy, a trend common to most city regions in the world (OECD, 2011) National Credit Regulator (NCR) (2011) noted that, compared to other provinces in South Africa, higher levels of microloan financing have been made available in Gauteng Therefore, Gauteng is the most suitable province on which to conduct this research With such a vibrant economy,

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one would expect benefits of a large economy to reach the poor by means of the trickledown effect However, existing evidence shows that the poor have not been the direct beneficiaries of economic growth

3.2.1 The concept of poverty

Literature contains various meanings of poverty, beginning with the absence of main resources to meet fundamental needs to manage life, to lacking access of main services As stated in Smith (1776, p.21), ch or poor according to the degree he can

of poverty that truly varies when characterising what is truly implied by poverty As eluded

by Fasoranti (2010), observation contrasts as per experiences of individuals, the surrounding environment condition, education and their meaning of a decent life Consequently poverty

by the level of education, health and nutrition It is even widened to incorporate vulnerability and exposure to risk and frailty It is alluded to by Amartya Sen (1987 in Haughton & Khandker, 2009) as the individual ability to function in the society

Hence poverty is a multidimensional marvel that cannot be characterised by simply improving the income of the poor people or expanding their levels of consumption, or maybe it requires an incorporated technique to empower the poor to procure the capabilities expected to improve their well-being in general (Woolard & Leibbrandt, 2001)

3.2.2 The concept of microfinance and microloans programmes

Microfinance is an economic development approach that involves providing financial services, through institutions, offered to poor persons, where the market fails to provide appropriate services (Khandker, 1998) The services provided by the Microfinance Institutions (MFIs) include loans, saving and insurance services Our focus in this minor dissertation is microloans, which is a component of microfinance and is the extension of small loans to individuals or entrepreneurs who are too poor to qualify for traditional bank loans Especially in developing countries, microloans enable poor people to engage in self-employment projects that generate income, thus allowing them to improve their standard

of living and SWB for themselves as well as their families (Awojobi & Bein, 2011) Normally the span of these sorts of loans are short-term, at most two years, moulded to be utilised in

There are additionally different types of microfinance institutions A survey in developing countries by Lapenu and Zeller (2002), classified microfinance organisations as either NGOs, cooperatives, registered banking institutions, government organisations or projects The research results demonstrated that banks are the best in terms of staff efficiency, yet are the most noticeably bad regarding reaching out to the poor, particularly women As per Lapenu & Zeller (2002) NGOs are the best in reaching out, but have low efficiency Then again government institutions are low in both staff efficiency and outreach However, microfinance institutions performance is not in the scope of this minor dissertation Rather,

it is the relationship of microloans in alleviating poverty and as a result improving the SWB

of poor people

3.2.3 The concept of subjective well-being

SWB incorporates life satisfaction, happiness, affective experiences and quality of life, which tend to be used interchangeably in the research of SWB (Easterlin, 1974; Howell & Howell, 2008) Literature suggests that the measures of these concepts are highly correlated among each other and with relevant personal and social attributes (George, 2006) Diener and colleagues defined SWB (i.e., life satisfaction) and affective (i.e., happiness) self-evaluation (Diener, Oishi & Lucas, 2012; Diener et al., 1999) The cognitive element will therefore refer to the way people might think about their life satisfaction as a

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whole, whilst the affective element will refer to an individ

such as when a person describes themselves as being happy, for example (Diener et al., 1985; Watson et al., 1988)

In this minor dissertation, SWB

of life in terms of general happiness as a whole It is generally agreed that happiness is a subjective, positive, and inner psychological state of mind (Veenhoven, 2010) In this sense SWB is a concept for the individual to assess whether life is good

3.3.1 Microloans and Subjective well-being

The available literature on microloans and SWB is limited, much more so than the available literature on microloans in developing countries Here the focus will be on distinguishing the relationship between microloans and the SWB of the poor There are distinctive perspectives about microloans and whether it really fills as an instrument to enhance well-being or not (Becchetti & Conzo, 2013; Duvendack et al., 2011; Sinclair, 2012) Chowdhury, Mosley and Simanowitz (2004) contended that if microloans are to satisfy its social objectives of conveying financial services to the poor people, it is essential to know the degree to which its effects add to well-being According to Johnson and Rogaly (1997) the provision of microloans can assist the poor in finding the means to protect their livelihoods (food, water, shelter and clothing) against shocks and to build up and diversify their livelihood activities (Johnson & Rogaly, 1997) A study of 16 distinctive MFIs from everywhere throughout the world indicated out that having access to microloan services has prompted an improvement in the quality of life of customers, has expanded their self-assurance, and has helped them to differentiate their livelihood security methodologies, along these lines expanding their income (Robinson, 2001) According to Robinson (2001) health services and education are two key zones of the non-financial effect of microloans at household level Wright (2000) expressed that, from the little research that has been directed on the effect of microloans mediations on health and education, nutritional indicators appear to enhance where microloan lending has been working Microloans mediations have been appeared to positively affect the education of customers

In contrast with the logic that the SWB of successful microloans customers would improve while becoming more financially capable and getting an expanded income Sinclair (2012) argued that it relies upon the MFIs It is hard to enhance well-being while charging financing costs of more 100%, since the borrowers at that point need to make profits surpassing this

capacity and ability to deal with their capital

in such a powerful way, is far-fetched (Sinclair, 2012) It is clearly more probable that highly rated MFIs with reasonable loan fees would contribute more in expanding individualfinancial ability and well-being than MFIs charging large financing cost One study from country Malaysia found that microloans prompt expanded quality of life (Al Mamun, Adaikalam & Abdul Wahab, 2012) A potential impact of income change from microloans is financial capability (Becchetti & Conzo, 2013) Taylor, Jenkins and Sacker (2009) found that poor Brits expanded their level of happiness because of increased financial capability, and loans effect on life satisfaction may be due to the enhanced financial capability (given that the borrower effectively repays) despite the fact that this impact might be offset by the worry of repayment due dates (Becchetti & Conzo, 2013) Another fascinating by-product of microfinance is its possibly gainful or happiness-expanding non-monetary impacts, communicated by Becchetti and Conzo (2013) They assess loans

3.3.2 Microloans and Subjective well-being of males and females

A key feature of microloans has been the targeting of women on the grounds that compared

to men, they perform better as clients of microfinance institutions and that their participation has more desirable development outcomes (Pitt & Khandker, 1998) According

to Yunus (2003) women need empowerment though microloans as they are constrained by the norms, beliefs, customs and values by which societies differentiate between women and men However, Kabeer (1999) noted that micro-lending cannot empower women directly, but can help them through training and awareness to rise to challenge the existing norms, cultures and values that place them at a disadvantage in relation to men, and also help them to have greater control over resources and their lives Littlefield et al (2003) expressed that access to microloans can empower women to wind up noticeably more certain, more self-assured, more inclined to participate in family and community and better able to confront gender inequities

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Hulme and Mosley (1996) additionally made this point when they alluded to the naivety of the conviction that each loan made to a woman adds to the strengthening of the economic and social position of women By providing material capital to poor people, their sense of dignity is strengthened and this can help to empower the person to participate in the

economic participation and so promotes gender equity Based on various case studies, microloans have played a crucial role in reducing poverty, promoting education, improving health and empowering and enhancing women SWB These findings will be tested in the current minor dissertation

3.3.3 The impact of microloans programmes on alleviating poverty

The impact of microloans programmes on diminishing poverty and improving the SWB of the poor people has been broadly explored Assessing the literature researching the microfinance effect on poverty alleviation demonstrates differences amongst supporters and opponents In outline, one can recognise three principle positions in the microfinance literature: those that contend for the positive effect of microloans on poor people; those that contend for the adverse effect of microloans on poor people; and a third position lying

in the middle of, where there is a positive effect yet not for the poorest

As per the first position, microloans programmes have a positive effect not just on the level

of poor household income and consumption, however on their SWB also, as reflected by the effect of these programmes on the

Moreover it reaches out to women sentiments of empowerment and independence The positive effects of microloans on income and consumption levels have been very much archived (Becchetti & Conzo, 2013) For instance, in his research on participants from Grameen Bank in Bangladesh, Hossain (1988) discovered noteworthy effects of the impact

of microloans programmes on alleviating poverty in Bangladesh This was reflected in higher income, capital accumulation and employment among loan recipients Correspondingly

escape poverty because of the loans from microloan institutions In both studies there were spill-over impacts where the general wage and employment rates were improved in the

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entire village in which the microloans programmes worked Furthermore the noteworthy impacts of the programmes were observed to be more prominent when the recipient was a woman (Pitt & Khandker, 1998) Other research in Bangladesh by Mustafa et al (1996) found that microloans programmes empowered the recipients to upgrade their material well-being as reflected in indicators such as wealth, revenue earning assets, value of house structure, the level of cash earned, per capita expenditure on food and total household expenditure Zaman (1999) found microloans capability

to build assets and lessen vulnerability, by empowering them to smooth their consumption through adjusting between their savings and spending amid various periods of their lives, consequently becoming less vulnerable to income shocks The outcomes demonstrated that,

in general, woman participants are more proficient than men in advancing the SWB of their households As confirmed in Pitt et al

health and enhance their nutritional status These outcomes were additionally emphasised

in further studies in Bangladesh (Khandker et al., 1998; Khandker, 2001, 2003)

Positive effects of microloans have additionally been found by Kaboski and Townsend (2005) who assessed the effects of microfinance institutions in Thailand They discovered it to upgrade asset growth, consumption smoothing and occupational mobility, while diminishing

likewise particularly if women were the main recipients In another study Kaboski and Townsend (2009) found that income, consumption and agricultural investment expanded among recipients also general wage levels in a village in Thailand In Mexico, Bruhn and Love (2009) found positive effects in opening another microloan institution branch on business ownership, income and employment In a randomised trial research in Manila Philippines, Karlan and Zinman (2009) found that microloan institutions increased business profits, but only for male entrepreneurs not females Comparable outcomes were found in another investigation by Banerjee et al (2010) in a randomised assessment of the effect of presenting microloans in a new market in Hyderabad, India They took a random sample of customers prior and after the presentation of the microloans programme in the market and found that only the expenditure on durable goods and number of new businesses increased in the treated regions while expenditure per capita per month remained unchanged

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In addition microloans programmes have been found to improve household SWB and women empowerment In his study Khander (1998) found significantly higher levels of schooling for children and especially that of girls for all loan program participants Other positive effects of microloans -

education, health and household nutrition especially when woman are the participants (Zaman, 1999; Panjaitan-Drioadisuryo & Cloud, 1999; Pitt et al., 2003) Furthermore, microloans engage women by empowering them to make their own decisions, increase their versatility, awareness and confidence (Hashemi et al., 1996; Schuler et al., 1997; Husain, 1998; Zaman, 1999) Mustafa et al (1996) found that the effect on women lives albeit small was visible; women have better influence in decision-making inside the household and better treatment from their spouses Notwithstanding, this positive effect of microloans was not reached by other studies Banerjee et al (2010) did not find such positive effects on well-being, such as Finally, Karlan and Zinman (2009) found no positive effect on the well-being of the households in India, particularly when women were the participants Despite what might be expected the authors found that male applicants are essentially more prone to enrol their children in school than female applicants

On the other hand, contradicting the argument, Adams and Pischke (1992) observed microloans to be an ineffective tool to improve poor people income and overall SWB status The researchers contended that lacking financial services was not the most pressing issue facing poor people; and further contended that their issues would not be settled by going into further debt The cost of giving these financial services was additionally high compared with the benefits received by recipients, especially in poor countries This was additionally underlined by Buckley (1997) in his research on micro-entrepreneurs in Kenya, Malawi and Ghana He found that this form of cap figment of settling the significant issues of these individuals, who rather require more structural changes in the socio-economic conditions that characterise their activities

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In Bangladesh, Morduch (1998) utilised a cross-sectional survey of 180 respondents from participants and nonparticipants in microloans programmes He did not find any evidence showing higher consumption levels or educational enrolments for children of loan holders, yet just a reduction in consumption variability over the seasons for the participants Accordingly, microloans programmes were not found to empower households to increase their consumption level, but essentially offered them approaches to smooth their consumption through smoothing income This advantage he discovered immaterial contrasted the programme s expenses In his work Morduch (1998) contended that the estimation system utilised by both Khandker (1998) and Pitt and Khandker (1998) overestimated the positive impact of microloans programmes Pitt et al (1999) thus scrutinised the estimation procedure utilised by Morduch (1998) accusing it of underestimating the programme impacts, yet Roodman and Morduch (2009) in their research answered to this study and scrutinised the legitimacy of the results regarding the econometric techniques used in the research Utilising a randomised trial examining around 5,000 households in Morocco who received loans of $125 to $1,850 for the duration of two years, Duflo et al (2008) found insignificant outcomes in the consumption of these households, their SWB and women empowerment

In the middle of the road a few researchers see the advantages of such establishments, yet

in addition recognise the relative traps For instance, Hulme and Mosley (1996) in their survey explore in Bangladesh, India, Sri-Lanka and Indonesia found that more affluent recipients benefited more from the microloans programmes than poor people, subsequently questioning the efficiency of microloans programmes as a poverty alleviation tool This is additionally underlined by Mosley (2001) in his research in Bolivia He found that despite the fact that these loans assets and income, it did not diminish extreme poverty Moreover, Hulme (2000) showed that viable microfinance institutions only provide services for the poor but not for the poorest of the poor Hulme (2000) supported Adams and Pischke (1992) on the naming of microloans as micro-debt , since not all microloan programmes were found to deliver great outcomes particularly for the extremely poor working in low returns activities and vulnerable to economic and environmental shocks

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Moreover, while assessing the effect of two microloans providers in Thailand, Coleman (1999) found that the wealthier participants will probably take an interest in these microloan programmes than poor people The positive effects on the households were found to happen when microloans went to generally affluent households Coleman (1999) prescribed re-examination of the qualification criteria to be more watchful to poor people This finding was supported by Kondo (2007), in a study in the Philippines where he found that microloans enhanced income per capita and per capita expenditure, however this connected primarily to the more affluent recipients while the effect was negative or irrelevant on account of poorer loan recipients Utilizing panel data, Khandker (2003) discovered large positive effects of microloan programmes on consumption levels and household non-land assets for the extreme poor in Bangladesh, despite the fact that Roodman and Morduch (2009) scrutinised the legitimacy of these outcomes due to the technique utilised

In conclusion, the research assessing the adequacy of microloans institutions on people and households is blended One cannot recognise an unmistakeable positive or negative effect for microloans programmes in improving subjective well-being for poor people Clearly further research should be conducted in this area

3.3.4 Questioning the ability of microloans for poverty alleviation and improving Subjective well-being

Bateman (2011) gives examples of developing countries such as India, the Balkans and Bosnia, where microloans made the poor indebted as opposed to bailing them out of poverty As a result in India the poor have been driven to take loans from local shark money lenders just to have the capacity to pay back the microloan debt These money lenders for the most part charge considerably higher financing rates on the loans than MFI , which makes poor people to be much more submerged owing debtors (Gokhale, 2009) It is important that these high financing costs charged by loan sharks was one of the fundamental reason which drove Muhammed Yunis, the Bangladesh Professor initiator of microfinance programmes, to elevate microloans to global contributors As contended by

s sustenance Henceforth microloans satisfy an essential safety- What is more, aside from the effect on consumption or income, these types of microloans engage the poor people and give them a few open doors, expectation and confidence

Moreover, the failure of the microloans programmes to reach or target the extreme poor may not be because of the deficiencies of these programmes, but may be the aftereffect of the way that the poor individuals themselves are risk averse, are dreadful of new initiatives

as well as require adequate information on these programmes (Hermes & Lensink, 2007) Likewise, the poor are regularly detached and do not have fundamental human and social capital needed to be knowledgeable and be participants of microloans programmes (Khandker et al., 1998) As per Ciravegna (2005) the absence of the dissemination of microloans programmes in Italy, for instance, was because to the absence of microloans culture itself, where individuals were not completely mindful of the advantages of these programmes and therefore they were hesitant to attempt new initiatives Likewise, the presence of strict principles for acquiring loans and permits are among the elements

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abridging the functioning of these programmes Another vital factor influencing the accomplishment of microloans initiatives, is the general country specific economic conditions (Ciravegna, 2005), where economic stagnation could hinder the success of any development initiatives such as microloans programmes

Subsequently the absence of achievement of some microloans programmes cannot be completely ascribed to the lacks of these programmes themselves, but instead to the economic climate and culture of the host nation Microloans can be thought to be an essential however not an adequate instrument for reducing poverty (Mahajan, 2005) As expressed by Prof Mohammed Yunus, microloans are not a supernatural occurrence cure that can dispose poverty all at once But it can end poverty for some and decrease its severity for others while enhancing their well-being Joined with other innovative programmes that release individual loans are fundamental instruments in our hunt for a free poverty world (Yunus & Jolis, 2003) In addition to human capital, abilities to market and produce goods and social capital, it is essential to first be informed about microloans programmes and then afterwards to deal with the business after taking the loans Another legitimate point in such manner is the focusing on criteria of microfinance institutions; they ought to reflect and consider the social culture and environment where they will be situated Women are not normally more successful than men in overseeing such loans (Karlan & Zinman, 2009) In addition, mainly concentrating on women as the intended interest group may be another factor for the failure of such loans in certain areas Regardless of the possibility that women are the loan holders, the loans in some cases windup in men grasp, and the women progress toward becoming labourers in their husband business (Goetz & Gupta, 1996; Barsoum, 2006)

Viewing the literature of microloans, one gets the feeling that it is increasingly a factual or econometric debate between two groups: promoters and opponents of microloans programmes This question mostly concentrates on the methodologies and techniques utilised by researchers, rather on the capability of these programmes to enable the poor out

of poverty Such concentration on the methodological issues of the quantitative strategies utilised as part of studying the effect or impact of these programmes is pointless and

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inadequate to judge the genuine effect of these programmes It has offered establishing to question enormously the usefulness of these programmes and removed consideration from genuine issue, which is attempting to enhance this tool and grow its advantages in reality

Microfinance institutions have a crafty opposing mission They have a social and compassionate side, assisting the poor to beat their destitution and in the meantime manage their finances (i.e profit) However, microfinance institutions bear high expenses to maintain their business, because of high information and exchange costs Subsequently they have to set high loan costs for their customers This lessens the potential positive effects on income from the credits (Cull et al., 2006; Hermes & Lensink, 2007) Given the shortage of sustainable financial resources and high costs, still there is not sufficient empirical research contemplating the cost-viability of microloans programmes (Hermes & Lensink, 2007)

Accordingly, there are yet many missing answers in the paradox of microloans programmes, their financial sustainability, commercialisation, effect and social advancements All these should be considered while looking for more incorporated ways to deal with measuring the viability of these programmes in poverty reduction and the improvement of SWB

3.3.5 The role of microloans in poverty reduction

In figure 1 below, if the poor households and individuals who are limited in resources, especially financial capital, receive microloans and some form of training or business skills, they are bound to utilise the funds into small profitable business projects Business training

is given to the poor households and individuals to capacitate them to use funds received for income generation activities (IGAs) For example, the provision of microloans together with business skills has helped most women in Bangladesh to escape poverty and become self-reliant (Yunus, 2001) Another example is Kenya, where the World Bank has introduced some skills development to the poor that are tailor-made for entrepreneurial projects for the poor (World Bank, 2003) Some of the loans are used to supplement for food, handicraft production, agriculture and weaving The income obtained from these activities is channelled for consumption, savings for investments, the acquisition of household assets, and the provision of health care, as well as school fees for their children

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Figure 1:Microloan and Poverty Reduction Cycle

Source: Adapted from DFID (1999: 5)

With the passage of time, individuals and households are able to save from the proceeds they get from the entrepreneurial activities, thus building a very strong asset base Asset building within the poor communities will bring about the accumulation of human capital assets, financial capital assets and physical capital assets With these different forms of assets, SWB will eventually be increased among the poor Considering the fact that poverty can be viewed from a financial, social and capabilities approach, the acquisition of these different forms of assets will address poverty holistically When the poor are able to meet their daily consumption needs and pay for health care and education, they are also able to repay their loans without defaulting In so doing, the microfinance institutions become sustainable and self-reliant

Lack of assets (e.g low human

development, physical capital)

Acute vulnerability, lack of voice etc

Individuals/ Households Production/Trading/Services Consumption/Investment

C Health services

CHAPTER 4 Methodology and Data

This chapter addresses the research method adopted to answer the questions raised in chapter one It includes the model specification and estimation techniques, data collection process and the selection of variables approach taken

As seen in the literature review in order to examine determinants of SWB, the baseline model used by Becchetti and Conzo (2013) is give as follows:

y = 0 + x 1+

Where 0 is the constant, x is a vector of variables assumed to influence SWB, with

corresponding coefficients 1 T y , not accounted for by x The main interest is in estimating the elements of 1, which represent the well-being weights of x

The following function is estimated in this minor dissertation:

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SWB i = 0 + 1 microloans i + 2 race i + 3 age i + 4 age squaredi + 5 education i + 6 health i +

7 gender i + 8 employment i + 9 marital status i + 10 dwelling i + 11 crime i + 12 household size i + 13 money satisfaction i + 14 microloan*gender i + i

Where SWB is the dependent variable of individual i, measured in a scale from 1 to 5 (1

0 is the constant, represent the coefficients which capture the relationship of different characteristics on the dependent variable, a vector of independent variables (e.g Microloan, household size, etc.) and t is a

vector of random error terms

The majority of the models used in the estimation of SWB functions fall under either of two categories: OLS or probit/logit models (Gujarati & Porter, 2009) In this research we use both models, using the Stata 14 statistical software package Since the dependent variable is reported in an ordinal scale (i.e variables that are measured in a scale), which have greater than just two values, the most suitable model for analysing ordered dependent variables is

an ordered probit (Van Praag et al., 2003) We therefore use ordered probit models, since they are a preferred method of estimation in SWB studies (Van Praag et al., 2003) The main drawback of the ordered probit model is the coefficients which are not directly interpretable For the interpretation of probit model coefficients, the marginal effects of the coefficients at the mean need to be calculated In general, the marginal effect of an independent variable is the partial derivative, with respect to this independent variable, of the prediction function For the purpose of this minor dissertation we interpret the OLS results, as it was shown by Ferrer-i-Carbonell and Frijters (2004) that the results of probit and OLS estimations are similar in statistical significance and direction of association However, for the purpose of comprehensiveness we report the probit estimations and include the estimated marginal effects in Appendix A We prefer the OLS estimations, as they have the advantage over probit models of coefficients that are easily interpretable (MacKerron, 2012; Bartram, 2013)

However, OLS may suffer from an endogeneity problem (i.e contains one or more regressors that are correlated with the error term) In turn, this correlation will impede the

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true relationship between an endogenous variable and a dependent variable (Wooldridge, 2009) The standard approach to solve this issue is to employ an instrumental variable approach This requires a variable termed an instrumental variable an instrumental

variable is defined as a variable that is correlated with the independent variable and uncorrelated with the error term in a linear equation (Gujarati & Porter, 2009) However, it has been proven difficult to come up with a strong loanand empirical researchers are often confronted with weak instruments (Roodman &

4.3.1 Data and selection of variables

This minor dissertation uses a cross-sectional data set which was collected by the Gauteng City-Region Observatory (GCRO) in 2015 using the Quality of Life Survey The sample is particularly rich in detail and, among other things, queries the respondents about levels of SWB The survey was conducted in order to measure the quality of life of adults aged 18 and above living in the Gauteng City Region (GCR) To improve the representativeness of the sample by reducing sampling error, the GCRO used a stratified sampling method to collect the data The survey is the largest social attitudes survey ever conducted in the Gauteng province and boasts over 30 000 respondents The questionnaire, which has been refined with input from a range of stakeholders, tries to get to the heart of some of the key

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challenges facing the GCR (GCRO, 2015) The survey provides robust results at provincial,

municipal and wards levels

This minor dissertation only focuses on poor households in the GCR, therefore the total

number of the poor in this subset is 16306 and consists of 7345 males and 8961 females

Most respondents in the sample are African, followed by Whites Table 1 gives a summary

and definitions of variables included in the model

The specification includes standard regressors used in life satisfaction estimates such as

race, years of education, health status, age, gender, employment status, marital status,

household income and number of household members(Ferrer-i-Carbonell & Frijters, 2004)

More specifically, Table 1 gives a description, coding, mean/frequency, standard deviation,

minimum and maximum of the variables used in the estimation of the SWB of the poor

Table 1: Description of variables used in the empirical analysis

Variable Descriptive Coding

Race Africans are the

reference group, Coloured, Indian/Asian and White

Age2 Age in years squared - 1857.74 1472.45 324 10000 Education Number of schooling

Health

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Source: A wn analysis using GCRO dataset (2015)

The descriptive statistics in Table 1 shows that the mode of the SWB variable is 4, that is

46% of the sample reports to be satisfied with life In addition, 16.2% show that they are

very happy with life This finding is interesting, since we expect that people who are in

poverty should have lower levels of life satisfaction than their wealthier counterparts This

once again proves that monetary measures are not good measures of SWB Nevertheless

there is also a substantial proportion, almost 40%, of the sample that is not satisfied with

life, which is the proportion that is in most need of policy measures that focus on SWB

It is observed that the average age of participants is 40.14 years of age and approximately

36% of the households in the sample are microloan recipients, of those 55% being female

and 45% male, showing that there are more female respondents than male ones The

sample consists of 90.82% African respondents Over half (72%) of the participants are

Employment Any type of work

done in the past 7 days

Crime

How safe the respondent feels at home

Satisfaction with

money

Satisfaction level of respondents personal money