Beyond Outreach: Corporate Social Responsibility and the Financial Performance of Microfinance Institutions

Abstract

While the relationship between outreach and financial performance (CFP) of microfinance institutions (MFIs) is increasingly well researched, next to nothing is known about the relationship between broader measure of corporate social responsibility (CSR) of MFIs and their CFP. In light of the social promise of microfinance, the relationship between corporate social performance (CSP) and corporate financial performance (CFP) is also very relevant. Based on in-depth social ratings conducted by MicroFinanza Rating, we investigate this relationship. We hypothesise that the relationship is parabolic instead of linear, as MFIs' funders and clients probably appreciate a degree of CSP but MFIs cannot devote all their cash to CSP. Specifically, we believe that external, competition oriented CSP indicator have an U-shaped relationship to CFP, while the relationship between CFP and internal, employee motivation oriented CSP indicators approximates an inverted U-shape. Our empirical results broadly confirm these hypotheses, whereby we find the convex relationship between competition oriented CSP and CFP to be more pronounced among for-profit MFIs. In contrast, the concave relationship between motivation oriented CSP and CFP appears to be stronger among non-profit MFIs. Our results imply that corporate social responsibility might be a crucial driver of MFI's financial success. Hence, MFIs, their investors and policy makers appear well advised to devote more attention to MFIs' corporate social responsibility.