Rural microfinance sustainability: Does local wisdom driven - governance work?

Abstract

Microfinance has been addressed as a mechanism to increase financial access to the poor as one of the sustainable development goals. Accordingly, a more comprehensive understanding of the determinant factors of microfinance sustainability is necessary to implement further these financial institutions in rural areas. This research seeks to develop sustainability microfinance models and policy formulation to alleviate poverty in rural communities in East Sumba. We collect the data by distributing questionnaires to 148 stakeholders of the Tapa Walla Badi microfinance group in Mbatakapidu and the Rinjung Pahamu microfinance group in Wangga village. Focus group discussions in those locations supplement the data from the questionnaires. The endogenous and mediating variables of this study are microfinance sustainability and governance factors, respectively. Meanwhile, the exogenous variables are social, economic, and environmental factors. We then quantitatively analyze the data by using structural equation modeling (SEM) through the analysis of moment structures (AMOS). The findings show the mediating role of governance factors in microfinance sustainability. To do so, the MFIs need to maintain their positive attitudes towards the environment and implement green practices to achieve sustainability. The last but not least, this study provides empirical evidence regarding the level of adaptation of small-scale MFIs to green MFIs. Thus, the transformation process towards a green MFI can survive in the long-run through good governance support. The MFIs can oversee the process by initiating green practices and launching environment-based loan products.