ARE FINANCIAL AND SOCIAL EFFICIENCY MUTUALLY EXCLUSIVE? A CASE STUDY OF VIETNAMESE MICROFINANCE INSTITUTIONS

A major debate in microfinance focuses on the existence of a trade‐off between the financial sustainability of microfinance institutions (MFIs) and their outreach to poor clients. This paper adds to this debate by analyzing whether financial and social efficiency are mutually exclusive in a context of implicit subsidies by the state and international donors. We use data from a sample of 28 Vietnamese MFIs and apply Data Envelopment Analysis (DEA) to identify the existence of a trade‐off. Our analysis shows that for Vietnamese MFIs financial and social efficiency are not related. We interpret this as evidence for the fact that there is no support to believe that there is such a trade‐off. Subsidies, based on which most Vietnamese MFIs currently operate, helps them to show high financial efficiency, while at the same time being able to attain their social goals. Nevertheless, this model may not be sustainable in the long‐term.     

Determinants of margin in microfinance institutions

Microfinance institutions (MFIs) lend to the poor. However, microfinance clients suffer from high interest rates, a type of poverty penalty. This article analyses the margin determinants in MFIs. A banking model has been adapted to microfinance. This model has been tested using 9-year panel data. Some factors explaining bank margin also explain MFI margin, with operating costs being the most important factor. Specific microfinance factors are donations and legal status, as regulated MFIs can collect deposits. It has also been found that MFIs operating in countries with a high level of financial inclusion have low margins.     

Designing credit agent incentives to prevent mission drift in pro-poor microfinance institutions

Credit agents in microfinance institutions (MFIs) must be given incentives to acquire information on potential borrowers and select them in accordance with the MFI's objectives. We show that while giving incentives has no cost in for-profit MFIs, it is costly in pro-poor MFIs: When repayment and wealth are positively correlated, a pro-poor MFI cannot obtain the selection of poor clients in the proportion it wishes with incentives based solely on repayment. It then becomes necessary to audit the share of very poor borrowers selected by an agent in order to provide the latter with adequate incentives. When audit costs are large, pro-poor MFIs may have to forego selection on wealth — and use other targeting devices such as working in impoverished geographical locations. Driven by donor concerns with ‘mission drift’ away from the poor, audits on the wealth status of clients have been introduced at the level of MFIs. We show that introducing pro-poor incentives requires extending such audits to the level of credit agents.     

Does capital and financing structure have any relevance to the performance of microfinance institutions?

This paper aims to explore the impact of capital and financing structure on the performance of microfinance institutions (MFIs) from an agency theoretic standpoint. GMM and IV estimations with instruments have been performed using a panel dataset of 782 MFIs in 92 countries for the period 2000–2007. Results confirm the agency theoretic claim that an increase in leverage raises profit-efficiency in MFIs. The study also finds that cost efficiency deteriorates with decreasing leverage. Likewise, the negative significant impact of leverage on depth of outreach can also be explained. However, the study finds that capital structure does not have any noticeable impact on breadth of outreach and neither is it significantly related with women’s participation as loan clients.     

Pursuing efficiency: a data envelopment analysis of MFIs in Latin America

This article analyses the overall profitability efficiency (PE) of Microfinance Institutions (MFIs) in Latin America. The PE of each MFI in the study is broken down into two components: pure technical efficiency and scale efficiency. One data envelopment model is used to analyse each component. Each MFI was labelled as either a bank, cooperative and credit union, nonbanking financial institution or non-governmental organization, and then the analysis was performed on each separate group. The results suggest that, on average, banks are the most efficient MFIs; while NGOs are, on average, the least efficient MFIs. On average, all 4 groups are more pure technically efficient than scale efficient. Banks, nongovernmental organizations, nonbanking financial institutions, cooperatives and credit unions all seem to have problems with scale efficiency. Many MFIs seem to be operating on the increasing returns to scale frontier and are in a more favourable position for expansion.     

小额金融机构监管须谨防与服务低收入群体冲突

以服务低收入群体为宗旨的小额金融机构(MFI)近年来在中国发展迅速,其监管制度正在探索之中。国际经验表明,接受监管与不接受监管的两类机构在业务深度上存在显著差异。监管似乎抑制了MFI对低收入群体的服务,违背了其创立初衷。充足资本有助于MFI拓展业务深度,是监管可能带来的积极影响。此外,MFI的其他微观控制变量及所在国的宏观背景也会影响其业务深度。中国要防止简单套用传统金融机构的监管体制和方法,谨防业务出现漂移。     

Financing microfinance institutions: subsidies or deposit mobilisation

According to conventional wisdom, dependence on subsidies cannot achieve the double bottom lines of microfinance institutions (MFIs): outreach and financial sustainability. The application of market-based principles to microfinancing, such as deposit mobilisation, has been long suggested as an answer to this problem. This paper documents the following findings regarding this issue. First, deposit mobilisation crowds out subsidies. Second, subsidies and deposit mobilisation reduce microcredit interest rates and allow MFIs to reach poorer borrowers. Third, subsidies and deposit mobilisation worsen financial sustainability. Fourth, subsidies reduce repayment rates, while deposit mobilisation has no impact on repayment. Overall, the results suggest that neither subsidies nor deposit mobilisation solve the traditional problem of trade-off between outreach and financial sustainability.     

Legal systems and performance of microfinance institutions

The paper investigates the impact of institutional environment resulting from the legal systems, on the financial performance of microfinance institutions (MFIs). Broadly categorized into common law and code law, the legal systems are found to significantly influence the efficiency of MFIs. We use an unbalanced panel of 1272 MFIs over a period of 16 years to analyze the effect of legal systems on their financial performance. In contrast to the accepted notion that common law systems are more conducive to effective market systems, our results show that MFIs operating under code law systems exhibit better financial performance than in common law systems.     

Microfinance and child mortality

Microfinance institutions (MFIs) offer targeted opportunities for the poor to generate additional income with a range of financial services including credit, insurance, savings accounts and money transfers. Aside from reducing poverty, microfinance can potentially improve health because it is the poor who are usually more constrained from health investments due to limited budgets. Furthermore, microfinancing specifically targets women, who are more likely to spend additional income on children’s well-being. Finally, several MFIs have also begun to offer health-related services, such as health education, health-care financing, clinical care, training community health workers, health micro-insurance and linkages to public and private health providers. Using a new data set, this article conducts the first multi-country study of the effect of microfinance on child mortality, the health outcome, which is most sensitive to the effects of absolute deprivation. Our findings confirm that an increase in the proportion of MFI clients in a country is significantly associated with lower under-five and infant mortality rates. We conclude that if MFIs’ educational and health services have indeed caused improvements in health outcomes at the community level, then it may be important for governments to complement these activities with similar campaigns, particularly in remote areas where MFI penetration is low.     

Does Institutional Linkage of Bank‐MFI Foster Inclusive Financial Development Even in the Presence of MFI Frauds?

Growing reports indicate the presence of frauds in microfinance institutions (MFIs), as it can occur in any organization in countries where there are weak institutions, weak rule of law, and fraudulent behavior of MFI officers for personal gain. While there are increasing calls to launch financial governance of these NGO MFIs, there are concerns as to whether frauds of this nature can damage MFIs’ contributions to the credit market, particularly in the bank‐linkage program where the NGO MFIs act as third party intermediary. The purpose of this study was to analyze the collusion decisions faced by MFIs and their impact on the bank‐linkage program, which has been offered as a solution to help overcome adverse selection and moral hazard problems in the credit market by harnessing local information via MFIs. Our results show that even when there is a chance of collusion between MFI and the borrower, the linkage between MFI and bank can still increase the probability that the borrower puts in full effort, and therefore decreases the probabilities of both credit rationing and strategic default. Such linkage in financing viable projects can make micro‐financing more effective in achieving inclusive financial development and thereby poverty reduction in rural areas.     

Effect of board gender diversity on the financial performance of microfinance institutions: Does judicial efficiency matter?

The impact of board gender diversity on the financial performance of firms is not known. This is because empirical investigations have yielded inconclusive outcomes. This study engages data from 408 microfinance institutions (MFIs) covering the period 2010–2018 from the six microfinance regions to investigate this impact using the Least Squares Dummy Variable (LSDV) and the System Generalized Method of Moments (SYS-GMM) estimation techniques. The study also explores whether judicial efficiency exerts any significant effect on the board gender diversity–financial performance nexus. The study observes that board gender diversity exhibits a strong negative effect on the financial performance of MFIs. The study also observes that the effect of board gender diversity on the financial performance of MFIs escalates in the presence of judicial inefficiency. The study, therefore, unveils the judicial system as a channel through which gender diversity drives the financial performance of MFIs negatively.     

Are microfinance institutions resilient to economic slowdown? Evidence from their capital ratio adjustment over the business cycle

Prior studies using pre-crisis data concluded that microfinance institutions are resilient to economic crises. However, some recent studies indicate that the microfinance sector is becoming part of the global financial system and microfinance lending activities are now vulnerable to economic and financial crises. Capital being a key resource to support lending, this paper analyzes the cyclical behaviour of capital ratio using an international sample of microfinance institutions from 2001 to 2014. We uncover a negative relationship between their capital-to-assets ratios and business cycle indicators. This relationship mainly concerns regulated institutions, comprised mostly of profit-oriented MFIs, and is driven by both asset-side and capital level adjustments. We identify the lending channel (loan-to-assets ratio) as the main mechanism to explain these cyclical variations. Our findings are consistent with the “procyclicality” of capital regulation documented extensively in the banking literature. Hence, macro-prudential regulation for MFIs should target regulated and profit-oriented MFIs.     

Non-grant microfinance,incentives and efficiency

I show that charging interest on funds provided by donors or investors to microfinance institutions (MFIs) can increase efficiency, the total number of loans and borrower welfare, compared to grant or concessionary funding. In a setting in which MFIs supply costly non-contractible effort, putting a price or raising the price of loanable funds strengthens the MFIs’ incentives to put effort in credit administration or monitoring, to extend more loans, and/or reduce overhead costs. This theoretical result is robust to several variations of the benchmark model allowing for an endogenous lending rate, motivated MFIs and endogenous overhead costs.     

Do microfinance institutions benefit from integrating financial and nonfinancial services?

This article examines the impact of microfinance ‘plus’ (i.e. coordinated combination of financial and nonfinancial services) on the performance of microfinance institutions (MFIs). Using a global data set of MFIs in 77 countries, we find that the provision of nonfinancial services does not harm nor improve MFIs’ financial sustainability and efficiency. The results however suggest that the provision of social services is associated with improved loan quality and greater depth of outreach.     

Depth of outreach and financial sustainability of microfinance institutions

The primary justification for subsidizing Microfinance Institutions (MFIs) is their enhancement of social welfare by extending credit to the poor households. Therefore, recent emphasis on their financial self-sufficiency has created concern, that this may adversely affect the mission of social outreach. Utilizing data from 702 MFIs operating in 83 countries, this study shows empirical evidence of a positive complementary relationship between financial sustainability and depth of outreach.     

MICROFINANCE REGULATION AND SOCIAL SUSTAINABILITY OF MICROFINANCE INSTITUTIONS: THE CASE OF NIGERIA AND ZAMBIA

This study examines the effect of regulations on microfinance institutions in Nigeria and Zambia by focusing on the post‐regulation experiences and reflections of the microfinance institutions (MFIs) and their regulators. Based on in‐depth interviews with the Central Banks as regulators, MFI managers, practitioners and apex microfinance associations, the study finds that regulations in both countries have managed to professionalize the sector, but their effectiveness in augmenting the centrality of social goals to microfinance and MFIs remains doubtful. The poorly designed regulations are not only undermining social goals but also sending wrong signals to would be social investors, with implications for the social image of the industry. The study further finds that regulations have neither speeded the emergence of sustainable MFIs (especially in Zambia) nor accelerated the sectors’ outreach to the poor and the financially excluded. Additionally, considerable levels of political interference and poor regulation have led to unintended consequences to the sector, further frustrating the ultimate goal of extending financial services to the poor. These findings have policy and practical implications for how microfinance engages with the regulatory logic and continues to serve those at the bottom of the pyramid.     

Microfinance institutions’ transparency in Sub-Saharan Africa

This study analyses the impact of the ownership structure and macro-level factors on Microfinance institutions’ (MFIs) transparency in Sub-Saharan Africa (SSA). Using cross-sectional data from 223 MFIs in 11 countries, we find that MFI transparency in SSA is low and highly variable. Our results indicate that larger MFIs and non-governmental organizations (NGOs) are associated with greater transparency. Greater transparency of NGOs is consistent with the need to sustain and attract donor funding. Country-level resources, such as the level of financial sector development, also impact MFI transparency.     

SUSTAINABILITY AND OUTREACH: A COMPARATIVE STUDY OF MFIs IN SOUTH ASIA AND LATIN AMERICA AND THE CARIBBEAN

Previous studies indicate that microfinance institutions (MFIs) in Latin America and the Caribbean (LAC) have different operational strategies to MFIs in South Asia (SA). Given the recent emphasis placed on the feasibility of MFIs to achieve the dual goals of outreach and sustainability concurrently, we examine and compare the relationship between sustainability and outreach of MFIs in LAC with MFIs in SA. Our results indicate that trade‐offs exist between outreach and sustainability in both regions. However, the severity of trade‐off is dependent on which goal MFIs decide to focus on in each region.     

微型金融机构双重目标的冲突与治理:研究进展述评

微型金融机构要同时实现财务可持续(财务目标)与减缓贫困(社会目标)两大目标,然而,这两个目标间的冲突问题却长期困扰着其发展。本文系统整理了国内外有关微型金融机构双重目标冲突与治理领域的理论与实证文献,研究发现对微型金融机构双重目标是否冲突在理论和实证研究中均存在争议。伴随着微型金融商业化,目标偏离已成为双重目标冲突的新表现,但通过实施社会绩效管理,微型金融机构可以有效地降低双重目标间的冲突。虽然我国农村金融机构双重目标冲突问题已经显现,但相关研究并不多。因此,我国未来的研究应该集中在界定农村金融机构双重目标含义、构建评估体系、制定报告标准、探索双重目标约束下的可持续发展机制等方面。     

Outreach and performance of microfinance institutions: a panel analysis

Using a panel of 764 microfinance institutions (MFIs) from 87 countries, this study analyses the possible trade-off between outreach and performance and shows that greater depth of outreach has a positive impact on the financial performance of an MFI. The empirical results of this study should dispel the widely held apprehension that the recent emphasis on attainment of financial sustainability by the MFIs could seriously impair their outreach efforts and shows that outreach to the poor can actually bolster financial performance.