The relationship between the performance and legal form of microfinance institutions

Ruan Rodrigo Araújo Da Costa

doi:10.1590/1808-057x201703660

Ruan Rodrigo Araújo Da Costa

Open Access

https://doi.org/10.1590/1808-057x201703660

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Abstract

ABSTRACT This paper investigates the relationship between the legal forms adopted by microfinance institutions (MFIs) and their performance within three scopes: financial performance, social performance, and efficiency in resource allocation. The MFIs studied are classified into four groups: banks, non-governmental organizations, cooperatives, and a fourth group formed of for-profit institutions not characterized as banks, made up of non-bank financial institutions (NBFIs) and rural banks. The data used are annual and cover the six years from 2007 to 2012. The quantitative regression model with panel data was used together with dummy variables to compare between the four groups of legal forms, except for the group made up of NBFIs and rural banks, which was not represented by any dummy variable. 304 MFIs from 59 countries made up the sample. In the study it was observed that larger MFIs have higher profits, higher returns, and higher operational self-sufficiency rates than smaller MFIs, indicating that MFI growth could enable consolidation in the microfinance market. The results also indicate that for smaller MFIs the way to consolidate and improve the indicators could be through assimilating or merging with other MFIs. It was also noted that non-bank financial institutions and rural banks are able to serve more customers and that cooperatives provide smaller loans, causing a bigger social impact, and that they obtain higher returns and profits. The results indicate that these legal forms may be the most appropriate for the microfinance market.

Highlights

Microfinance constitutes an incentive tool for micro and small enterprises that have little or no access to the traditional financial system, as well as a source of credit for people and communities in need that do not have sufficient resources to access the traditional financial system
The results found show that nongovernmental organizations (NGOs) and cooperatives have a higher return on assets (ROA) and banks have a lower ROA than rural banks and non-bank financial institutions (NBFIs)
The results found show that the NBFIs and rural banks serve more customers than the cooperatives and diverge a little from Tchakoute-Tchuigoua (2010), since, due to the statistically non-significant result for NGOs and banks, it was not possible to carry out the same comparisons

Summary

INTRODUCTION

Microfinance constitutes an incentive tool for micro and small enterprises that have little or no access to the traditional financial system, as well as a source of credit for people and communities in need that do not have sufficient resources to access the traditional financial system. This paper is based on the problem of separating the ownership and control of the capital allocated in organizations, known as the agency problem (Fama & Jensen, 1983a), as well as on the different implications resulting from the distinct legal forms for the appropriate allocation of invested resources, and on the right destination for possible surpluses obtained by MFIs (Fama & Jensen, 1983b) In this context, legal form comes to be observed as a determinant for agency cost and for MFI performance, given the demands of the market, of investors, donors, and governments, which invest resources in microfinance (Tchakoute-Tchuigoua, 2010).

MFI Performance

Legal Form and MFIs

METHODOLOGY

Specification of the Model and Variables

Model Suitability Tests

Descriptive Statistics

Main Results

FINAL REMARKS