Global Microfinance Industry Research Articles

BOARD GENDER DIVERSITY AND FINANCIAL INCLUSION: EVIDENCE FROM THE GLOBAL MICROFINANCE INDUSTRY

This study examines the effect of board gender diversity within Microfinance Institutions (MFIs) on their ability to acquire new borrowers, a key indicator of progress toward achieving the financial inclusion agenda of the Sustainable Development Goals (SDGs). Utilizing an unbalanced panel dataset consisting of 1,450 unique MFIs operating in 106 countries over the period of 2010–2018, this study deployed various econometric models, including the Pooled Ordinary Least Squares (POLS), Random Effects Model (REM), and Fixed Effects Model (FEM). Rigorous measures, including endogeneity-corrected techniques, alternative proxies for board gender diversity such as the BLAU index and sub-sample analyses were applied to ensure the reliability and robustness of our results. The study’s findings indicated a positive association between board gender diversity and financial inclusion within MFIs. However, the statistical significance of these outcomes varied depending on the specific analytical techniques, sub-samples, and alternative proxies used during the research. Overall, this study offers implications for practitioners and policymakers, encouraging women’s participation in the boardrooms of MFIs to advance the financial inclusion agenda of the SDGs.

Board gender diversity and debt utilization: Evidence from the global microfinance industry

To support the continued expansion of their operations, microfinance institutions (MFIs) worldwide rely heavily on debt, which exposes them to bankruptcy risk. This underscores the need for prudent selection of debt instruments by MFIs. Therefore, this study aims to investigate the possible influence of board gender diversity on the choice of debt instruments utilized by MFIs. Data from unique 1670 MFIs in 93 countries, spanning the period of 2010–2018, were collected from the World Bank and analyzed using various econometric methods, including Random Effects Model (REM), Fixed Effects Model (FEM), Pooled Ordinary Least Squares (POLS), Generalized Least Squares (GLS), and endogeneity-corrected techniques such as the Generalized Method of Moments (GMM). The study revealed that gender-diverse boards tend to utilize fewer debt instruments, reflecting the risk-averse nature of the female board members, as observed in the existing literature. However, the statistical significance of these outcomes varies depending on the specific debt, proxies, sub-sample, and econometric methods considered in the analysis.

Is it worth having more female managers? A portfolio risk perspective from the global microfinance industry

AbstractPromoting gender diversity at different organizational levels remains one of the hotly debated issues in recent years. Motivated by the paucity of research in this area, our study aims to investigate the impact of female managers on the credit risk of microfinance institutions (MFIs). We have collected data from 1004 unique MFIs across 96 countries, covering the period of 2010 to 2018, using the World Bank Mix Market data catalog. The data were then analyzed using several conventional tools and techniques, including endogeneity‐corrected estimators. The findings revealed that the presence of female managers lowers the credit risk of MFIs. The result mostly remains consistent and robust across different techniques and proxies. Therefore, promoting gender diversity at the managerial level could promote the long‐term sustainability of MFIs.

Influence of international ownership on the performance of local social enterprises: Evidence from the global microfinance industry

AbstractInternational ownership positively impacts the social performance of social enterprises at the expense of financial performance. International owners mostly use their resources and controlling rights to improve social performance at the expense of financial performance. Current ownership theories do not address how the multidimensional utility function might affect the governance and financing of a social enterprise. There is a need to develop theories for firms with conflicting objectives.

Does It Pay to be Green? A Study of the Global Microfinance Industry

This article examines whether it pays to be green in the microfinance industry. Environmental issues are important for all businesses around the world, and thus many microfinance institutions (MFIs) started embracing them as an additional objective alongside their traditional social and financial objectives. This article is among the first to test the relationships between environmental performance and both the financial and social performance of MFIs. Using a sample of 234 rated MFIs in 58 countries, we find that being green is associated with higher social and financial performance. Specifically, MFIs with environmental policies have higher financial performance (i.e., higher returns on assets, lower operating costs, and lower cost of capital) and higher social performance (i.e., a higher social rating score) than those without environmental policies. Overall, the results suggest that it pays to be green in the microfinance industry and this should motivate MFIs considering being green to do so.

Institutional factors and efficiency performance in the global microfinance industry

PurposeMeasuring the success of microfinance institutions (MFIs) using a single efficiency value and then exploring its determining factors might be misleading. Hence, this study decomposed the efficiency measure into three divisions, namely operational, financial sustainability and social outreach. Subsequently, the authors identified factors affecting these efficiencies in the second stage regression analysis.Design/methodology/approachThis study employed the network data envelopment analysis approach to evaluate each division of efficiency of 90 MFIs from 2013 to 2018 and used second-stage regression techniques (Tobit and Truncated) to examine the effect of institutional factors.FindingsThe authors’ efficiency analysis revealed that financial sustainability and social outreach were responsible for the low overall efficiency. The second stage analysis revealed the negative influence of institutional factors such as efficiency wage (particularly among small MFIs) on financial sustainability, social outreach and overall efficiencies. Staff turnover reduced operational, financial and overall efficiencies, particularly for large MFIs. The presence of female board members and staff improved the efficiency of MFIs, thus highlighting the pivotal role of women in the success of MFIs. Besides, the effects of regional location of MFIs, regulation and legal status on efficiencies were further discussed.Originality/valueThe study has uniquely evaluated three different types of efficiency in MFIs and employed conventional techniques for the second-stage regression to identify the determinants of efficiency. The findings will enable managers to make appropriate decisions to enhance their organisational efficiency.

The challenges of supporting necessity entrepreneurs: Understanding loan officer exit in microfinance

Necessity entrepreneurship can serve as a pathway out of poverty for low-income individuals, with microfinance often providing important financial support. Yet the relational lending strategies common among microfinance institutions may influence loan officer turnover and, in turn, compromise entrepreneurs' access to credit. While there is some reason to suspect that relational lending with poor entrepreneurs will increase retention, we propose that serving the poor may make loan officers more likely to quit: loan officers in commercial microfinance institutions are unlikely to have strong commitments to poverty alleviation and may be taxed by the challenging fieldwork associated with lending in poor areas. Qualitative and quantitative data from a microfinance bank in Latin America support our expectations, showing that exit becomes more likely when loan officers' work involves more poor clients and that the effect is strongest when such work demands intensive fieldwork in low-income areas. Supplementary analyses of trends across the global microfinance industry demonstrate that poor clients have a stronger impact on exit in for-profits than non-profits, suggesting that prosocial motives among non-profit employees may have a buffering effect. Overall, our study reveals how providing services to necessity entrepreneurs can have negative, unexpected consequences for frontline employees.

Do women on boards affect employee benefits? Evidence from the global microfinance industry

By utilizing data of 2,964 microfinance institutions (MFIs), our study investigated the nexus between female board members and employee benefits. The findings showed that a higher proportion of female board members has a significant positive effect on the employee benefits.

A data envelopment analysis of the global microfinance industry

This work compares the technical efficiency of private and publicly listed Micro Finance Institutions (MFIs), to that of publicly listed commercial banks of a similar scale and geographical location. Two research questions are addressed: are MFIs that go public more efficient than non-public MFIs?; and, how efficient are MFIs relative to “comparable” commercial banks? Our results indicate that publicly listed MFIs are more efficient than private MFIs when the latter operate at a suboptimal scale. That is, listed MFIs are able to grant the same amounts of loans, invest as much, and have the same range of profits but, at the same time, are more technologically efficient in reducing expenses and use less assets. Moreover, the results indicate that listed commercial banks are the least efficient of all types of financial services providers included in the sample studied.

Factors affecting borrowers’ turnover in microfinance institutions: A panel evidence

AbstractIn the era of competitiveness, clients or borrowers remain an important asset for financial institutions, as they are the ultimate source of revenue. Although the departure of clients from one microfinance institution (MFI) to another is a common phenomenon, the manner in which organizational characteristics affect turnover is largely unknown in the context of the microfinance industry. Hence, by utilizing recent (2010–18) data on 235 MFIs from the global microfinance industry, this study investigates the factors affecting the borrower turnover rates (BTR) of MFIs by employing conventional panel regression techniques. To overcome endogeneity and ensure robust and dynamic results, the generalized method of moments (GMM) has also been used in this study. The findings reveal that the efficiency‐wage and financial self‐sufficiency of MFIs reduce BTR, while staff turnover rate, write‐off ratio and average loan size increase BTR. Our results remain robust even after controlling for several market and macro‐economic factors. The findings could be utilized to generate several policy implications to reduce borrowers’ turnover.

Geographic diversification and credit risk in microfinance

Abstract This paper examines the relation between geographic diversification and credit risk in microfinance. The empirical findings from the banking industry are mixed and inconclusive. This study extends the discussion into a new international setting: the global microfinance industry with lenders having both social and financial objectives. Using a large global sample of microfinance institutions (MFIs), we find that geographic diversification comes with more credit risks. However, this finding is more pronounced among non-shareholder MFIs like NGOs and cooperatives, compared to shareholder-owned MFIs. Moreover, the results show that MFIs can mitigate the effect of geographic diversification on risk with group lending methodology.

Influence of Ownership Type and CEO Power on Residual Loss: Evidence From the Global Microfinance Industry

This study examines whether the agency cost component referred to as “residual loss” differs between nonprofit and shareholder-owned microfinance organizations and whether such costs are further influenced by CEO power. We use operating expenses, asset utilization, liquidity, and tangible asset intensity to proxy for residual loss. Using 374 microfinance organizations located in 76 countries, we find evidence that the residual loss is higher in microfinance organizations incorporated as nonprofits, but only if the CEO is powerful. Our empirical evidence illustrates the importance of installing proper governance mechanisms to minimize costs caused by high managerial power in the nonprofit sector. When CEOs are not powerful, nonprofits appear to have lower residual loss than for-profit organizations do, consistent with a motivated agent perspective. An important message of our study is that traditional agency theory perspectives might be ill-suited to analyze residual loss as a function of the nonprofit versus for-profit organizational form.

How does the global microfinance industry determine its targeting strategy across cultures with differing gender values?

In this paper we empirically investigate the role of culture in determining the gender-targeting strategy of microfinance institutions (MFIs). We use female/male grammatical distinctions in language as the manifestation of culturally-inherited gender values. Our findings indicate that grammatical gender distinctions have a significant effect on the targeting strategy of MFIs. Specifically, MFIs target women in cultures where they are most likely to experience financial discrimination. This suggests that MFIs adapt to disparate discriminatory cultures in a way that serves their core mission of outreaching financially-excluded women, particularly where such strategy is most needed.

Does Religious Affiliation Influence the Design of Corporate Governance? Evidence from the Global Microfinance Industry

Christian affiliation has a minimal impact on the design of corporate governance in microfinance organizations.

The influence of the CEO’s business education on the performance of hybrid organizations: the case of the global microfinance industry

Microfinance institutions (MFIs) are typical examples of hybrid organisations, meaning organisations pursuing both a financial and social logic. This study examines the question of whether financial and social performance improves when an MFI’s chief executive officer (CEO) has a business education. We apply the random effects instrumental variable regression method to examine the influence of the CEO’s business education on the MFI’s financial and social performance. Our panel dataset that includes 353 MFIs from across the globe indicates that ‘only’ 55% of the MFIs have a CEO with a business education. The empirical results indicate that MFIs with CEOs who have a business education perform significantly better, financially and socially, than MFIs managed by CEOs with other types of educational backgrounds. The findings suggest that CEOs with a business education seem better at managing the much-debated tradeoff between providing small loans and producing healthy financial results.

Microfinance Control Fraud in Latin America

Over the past three decades, the global microfinance industry has witnessed phenomenal growth in terms of the numbers of borrowers and the total gross loan portfolio outstanding. An application of the criminologists' perspective and Black's theory of control fraud to the global microfinance industry reveals a high degree of overlap between the common characteristics of control frauds and the characteristics of the microfinance industry and suggests that the sector provides a criminogenic environment suitable to Ponzi-type dynamics, including an imperative of growth, misrepresentation of financial and operating performance, a reputation for integrity and innovativeness, concentration in unregulated markets and areas most conducive to accounting fraud, non-transparency and secrecy, dubious accounting methods, lobbying in favor of deregulation, attempts to suborn controls such as accountants, lawyers, regulators, and rating agencies, executive use of the company for personal gain, excessive risk taking at the expense of investors' capital, warnings raised but ignored, and, finally, inevitable collapse. Regulatory interventions are needed to prevent predatory lending and over-indebtedness of poor microfinance borrowers in Latin America and elsewhere. Such regulation, while necessary to protect the poor, is not well liked by the investment community as it places microfinance institutions under local scrutiny, reduces the profitability of the sector, and limits opportunities for control fraud.

“Low Profile” or Entrepreneurial? Gender, Class, and Cultural Adaptation in the Global Microfinance Industry

Summary This study examines how discourses of entrepreneurial womanhood, filtered through a chain of hierarchically positioned actors in global microfinance, translate into interactions with borrowers. Drawing from ethnography, interviews, and document analysis on a set of entrepreneurial trainings delivered to nonentrepreneurial borrowers in urban India, this study argues that parallel, conflicting processes of cultural adaptation within the organization, and tensions between various actors, create an environment in which there is no incentive to cater to the interests of working class clients. Commercialized microfinance, thus, may not necessarily produce accountability to client interests.

The Association between microfinance rating scores and corporate governance: a global survey

The global microfinance industry has experienced high growth rates over the past decades, and the World Bank foresees a future market with billions of customers. However, the industry's continued growth is contingent on its ability to create a governance structure that supports microfinance institutions' long-term performance. Because microfinance institutions' performance is multidimensional and difficult to measure, prior research has not been successful in establishing consistent associations between governance structures and microfinance institutions' performance. We apply microfinance rating scores – a unique innovation of the microfinance industry – as a summary performance metric and find that several governance metrics are related to microfinance performance. Specifically, we find that CEO/Chair duality has a negative relation to rating scores, whereas the number of international board directors, the presence of internal auditors and the level of competition intensity are positively associated with rating scores. These findings should prove useful in an industry in which there is no established ‘best set-up’ for governance mechanisms.

A Critical Evaluation of the SKS Microfinance Fiasco

Crises have hit various players from different parts of the world in the global microfinance industry in the past. In the present study, we critically evaluate the SKS and Andhra Pradesh microfinance crisis in India. SKS established itself as a leader in the microfinance industry in India, and became the first listed microfinance company in the country. The dream run did not continue for long, as the Andhra Pradesh government started putting some regulatory conditions in place. We critically evaluate the SKS crisis to ascertain whether the cause was purely the government's action or the over-indebtedness amongst the borrowers of the microfinance industry. Further questions on commercialization of the microfinance industry are also discussed.

Does Offering Microsavings Make Sense for Microfinance Institutions?

Within the past decade, two trends have emerged in the global microfinance industry. First, there has been a recent emphasis on financial sustainability. At the same time, microfinance institutions (MFIs) have begun to offer microsavings deposit services to their clients. Could there be a link between these two trends? As MFIs offer savings deposits, do they achieve greater financial sustainability? David Hulme (2008) asserts that Grameen Bank became more financially sustainable after it changed its business model to include microsavings. However, Hulme observes that Grameen Bank also moved away from its poorest clients when it made the shift to savings. This paper explores, as MFIs have switched to offering savings, whether or not MFIs have achieved greater financial sustainability and whether or not they have moved away from their poorest clients. The data examined were collected from the financial statements of Opportunity International MFIs. The results indicate that Opportunity International MFIs that offer microsavings are more financially sustainable than those that do not. Moreover, there is no significant evidence that, by offering microsavings, Opportunity International MFIs have abandoned their poorest clients. Opportunity International MFIs could provide a model of how microfinance institutions can improve their financial sustainability without compromising their core mission to serve the poor.