The drivers of the financial integration of microfinance Institutions: Do financial development, agency costs and microfinance performance matter?

Abstract

The aim of this paper is to identify the drivers that could increase the financial integration of microfinance institutions with commercial banks. Importantly, financial integration ensures the sustainable growth of microfinance institutions through the provision of more financial resources, if needed. To identify these drivers, we used a panel dataset of 953 microfinance institutions (MFIs) from the MIX market dataset and country-level data from the World Bank for the 2003–2016 period. We applied a panel quantile approach with nonadditive fixed effects. Our results reveal that an increase in financial development slows the financial integration of MFIs. However, considering the transitory aspect of financial integration by each quantile, it appears that financial development positively impacts the financial integration of MFIs. The impact of financial development increases as the financial integration level increases. Similar results show a positive link between agency costs and financial integration. More financial interconnections with commercial banks justify the appearance of high agency costs due to an increased interest of commercial banks. There is a significant and negative link between the profitability of MFIs and their financial integration. Moreover, the results reveal that financial integration is a significant determinant of mission drift occurrence in client portfolios.