Transparency and microfinance institutions' risk in Sub-Saharan Africa

Abstract

Using a sample of 151 MFIs from 21 countries over the 2005–2014 period, we examine the impact of transparency on MFIs' risk in Sub-Saharan Africa (SSA). We use a three-stage least squares method to address the issue of reverse causality between transparency and risk. Our results indicate that SSA MFIs have low levels of failure risk and operate in a moderate business disclosure environment. We find that higher MFI transparency reduces Not-for-profit MFIs (NFP MFIs') financial and insolvency risk. However, greater transparency is associated with higher credit risk for both for-profit (FP) and NFP MFIs and increases FP MFIs' failure risk. Country-level business disclosure does not influence MFI risk. Overall, our results provide new empirical evidence identifying the difference between for-profit and not-for-profit MFIs' risk behaviour and highlight the impact of transparency on MFI risk.