Abstract
This paper studies the determinants of microfinance institutions’ (MFIs) financial performance (FP: self-sustainability and profitability) and social performance (SP: depth of outreach), and examine the FP/SP tradeoffs they face. Based on a sample of 120 MFIs over the period 2000–2009, we use the random effects method to isolate the effect of fixed-time factors such as loan lending technique, legal status and location (sub-region) on MFIs’ behavior. We find that financial expenses, wages and portfolio quality, mainly influence MFIs’ financial performance whereas social performance is mostly influenced by lending methodology and institutional form, and to a lesser extent by location. The analysis of FP–SP shows that mission drift is a concern primarily for banks, mutual/cooperatives and individual lenders. The results question the trend toward microfinance commercialization since it weakens outreach without improving significantly self-sustainability and profitability.
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Notes
A village bank is an informal self-help group of 20–30 members, predominantly female heads-of-household. These women meet once a week in the home of one of their members to avail themselves of working capital loans, a safe place to save, skill training, mentoring, and motivation.
Results are available upon request.
Thus, when lending methodology is taken into account, equations are estimated only over the MFIs reporting this information which explains the varying number of observations and MFIs in result tables.
Financial revenue/(financial expense + net loan loss provision expense + operating expense).
Net operating income, net of taxes/average total assets.
These two ratios don’t take into account capital costs i.e. the expenses that the MFI should face in order: (1) to finance its loan activity without running on subsidies (including soft subsidies or non-concessional interest rates) and donations; (2) to generate enough revenues to maintain the value of their equity in face of inflation (except tangible fixed assets which value is supposed to be more stable).
[(Financial revenues/average loan portfolio) – Inflation rate] / [1+ Inflation rate].
Outstanding balance, loans >30 days overdue/Gross Loan Portfolio.
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I would like to thank the anonymous referee for many helpful and insightful comments and suggestions.
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Arrassen, W. The determinants of MFIs’ social and financial performances in sub-Saharan Africa: has mission drift occurred?. Ann Finance 13, 205–235 (2017). https://doi.org/10.1007/s10436-017-0296-x
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DOI: https://doi.org/10.1007/s10436-017-0296-x