Trade-offs in South Asian MFIs: regulation and governance structure

Abstract

ABSTRACT This paper evaluates trade-offs and investigates the key performance determinants in different types of 468 South Asian Microfinance Institutions (MFIs) for the period 1998–2019. Three indicators of financial performance are compared against multiple dimensions of breadth and depth of outreach to evaluate the trade-off between financial and social performance of MFIs. To clarify the direction of trade-off, we run Granger-Causality tests and accordingly, we regress financial performance measures on each suggested indicator of breadth and depth of outreach . Simultaneously, we also investigate the financial performance in relation to mainly different regulatory structure and profit orientation of types of MFIs by controlling for financial ratios, country and institutional control variables. The regression results show that there is no significant trade-off between the financial and social objectives in almost all specifications rather we have significant evidence for compatibility of dual objectives both in terms of breadth and depth of outreach in some specifications. We also find capital to assets ratio and experience to be prominently positively responsible for financial sustainability while risky and costly loans and being regulated MFIs reducing the financial performance of South Asian MFIs while profit orientation does not matter once we have controlled for regulatory structure.