Does Digitization Affect Social and Financial Performance in Microfinance Institutions?

Abstract

This research aims to explore the effects of the digitization of microfinance institutions (MFIs) on their social and financial performances, and on the trade-off between them given the double mission pursued by these institutions. To reach this objective, we performed ordinary least squares (OLS), logit, and two-stage least squares (2SLS) regressions on a sample of 331 microfinance institutions from the ATLAS database. Findings reveal evidence of significant mixed effects of digitization on social and financial performance indicators. They also show that there is no significant effect of digitization on trade-offs. The novel aspect of this research lies in the approach used to measure social performance which is proxied by the SPI4 -Social Performance Indicators-developed by Cerise and Social Performance Task Force (SPTF), while previous research on the topic have used social mission outcomes indicators. The SPI4 tool allows financial service providers to evaluate the implementation of Universal Standards for Social Performance Management (USSPM). This study also provides evidence on the effect that digitizing MFIs operations may have on trade-off between their social and financial performances. The findings have significant implications for institutions, especially on the way they can implement and interconnect their digitization process, USSPM and financial strategy. Firstly, the significant effect of digitization on social performance reveals synergies between the adoption and use of digital solutions and the implementation of good practices of SPM. Secondly, the mixed effects of adopting digital solutions on financial performance suggest that while this process appears to drive efficiency within institutions, it does not necessarily improve their profitability, since capital expenditure appears to increase more than profits. Finally, since digitization does not appear conducive to trade-off, MFIs should better align their financial and investment strategy with their social objectives when going digital.