Largest Microfinance Institutions Research Articles

Adapting to Climate Risk With Guaranteed Credit: Evidence From Bangladesh

Climate change is increasing the frequency of extreme weather events, with low‐income countries being disproportionately impacted. However, these countries often face market frictions that hinder their ability to adopt effective adaptation strategies. In this paper, I explore the role of credit market failures in limiting adaptation. To achieve this, I collaborate with a large microfinance institution and offer a randomly selected group of farmers access to guaranteed credit through an “Emergency Loan” following a negative climate shock. I document three key results. First, farmers who have access to the emergency loan make less costly adaptation choices and are less severely affected when a flood occurs. Second, I find no evidence of adverse spillover effects on households that did not receive the Emergency Loan. Finally, I demonstrate that providing the Emergency Loan is profitable for the microfinance institution, making it a viable tool for the private sector to employ in similar circumstances.

Agricultural credit supply and the performance of microfinance institutions in southern Togo

The problem of underfinancing in the agricultural sector has always been a subject of consideration for governments. Thus, for decades, programs have been implemented to eradicate poverty and facilitate access to financial services for the most disadvantaged segments of the population, represented mainly by the rural population. Among these programs, microfinance holds a predominant place. However, the latter is increasingly moving away from the agricultural sector, depending on its assessment of the risky nature of agricultural investments. This study sought to analyze the effect of agricultural credit supply on the performance of microfinance institutions (MFIs). Data from the two largest microfinance institutions (FUCEC-Togo and WAGES) were analyzed. The linear regression model was used for the analysis. The results show that the supply of agricultural credit has a negative impact on financial performance ratios of both MFIs in this study. The study recommended that microfinance institutions improve their agricultural financial services to adapt them to the needs of rural populations. The introduction of financial products should be adapted to the needs of producers and compatible with the profits of microfinance structures.

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.

Mission Drift and Scale: An Empirical Analysis of Indian Micro Finance Institutions

Studies have found that a small scale of operations could limit the firm performance since they do not enjoy economies of scale. Since the microfinance industry is focused on provision of financial services to the poor, performance is measured both from a social as well as financial perspective. As firms increase their scale of operations, their social performance needs to be on par with their financial performance. To measure the effect of scale on performance, we use data from the Microfinance Information Exchange (MIX) market consisting of 245 Microfinance Institutions (MFIs) covering a period of 21 years from 1999 to 2019. The dependent variables are outreach, efficiency, and financial performance. The control variables are age and the regulatory status of the firm. We find that while factors like financial performance, client retention, and measures of operational efficiency are dependent on scale; they come at the cost of outreach. The pursuit of economic goals by large MFIs seems to hamper their ability to reach the poorest and/or most needy clients, implying mission drift. This study thus draws the attention of policy makers to the importance of supporting small MFIs to survive and continue to address the social goals of MFIs.

Start-up microenterprise financing and financial performance of microfinance institutions

This article interrogates whether start-up microenterprise financing wields any benefits for the financial performance of microfinance institutions (MFIs). It is done with data from 532 MFIs drawn from 73 countries. Generally, the results show that financial support for start-up microenterprises improves the financial performance of MFIs. This result is robust under different panel estimation techniques. However, an interaction analysis reveals that the positive impact of start-up microenterprise financing on the financial performance of MFIs decreases when start-up microenterprise financing interacts with MFI size. The implication is that larger MFIs are likely to benefit less from funding start-up microenterprises.

Impact of income diversification strategy on credit risk and market risk among microfinance institutions

PurposeThis study explores the effect of income diversification strategy on credit risk and market risk of microfinance institutions (MFIs) in Ghana as an emerging market.Design/methodology/approachThe study is based on quarterly data of averagely 271 MFIs that have operated from 2016 to 2018. The dataset is unbalanced and pooled cross-sectional with 3,259 data points. The study measures the diversification strategy using income diversification indices, and accounting ratios to measure the other variables. We utilised the weighted least squares (WLS) approach to explore the nexus.FindingsThe findings show that income diversification is associated with better loan quality and credit risk management. Market risk increases with the level of income diversification of microfinance firms. It is evident that large MFIs can manage their credit risks well and can have a low default rate, depicting an overall U-shaped nexus. On the other hand, the effect of size on market risk is an inverted U-shaped. The effect of asset tangibility on credit risk is positively significant while the effect on market risk is negatively significant. High profitability enhances credit risk management leading to lower loan losses while in the case of diversified and profitable MFIs, they tend to invest more in government securities. The results suggest that MFIs that hold more cash and cash equivalents tend to have high loan loss provision and more government securities suggesting much attention should be paid to optimal cash management.Practical implicationsThe results throw light on the credit risk and market risk profile of the firms and the effect of diversification strategies on them. The findings are relevant for effective macroprudential regulation, market regulation and prudential regulation of the microfinance sector.Social implicationsThe findings reveal the nature of income diversification strategy of MFIs in emerging markets such as Ghana, pointing out how they affect the risk exposure of MFIs that lend to the pro-poor population.Originality/valueThis is a premier formal assessment of the nexus between income diversification strategies and risk management among MFIs that serve the pro-poor population in the emerging market context.

Productivity growth, catching-up and technology innovation in microfinance institutions in India: evidence using a bootstrap Malmquist Index approach

PurposeThis paper aims to examine the total factor productivity (TFP) change and its components: efficiency change and technical change in microfinance institutions (MFIs) in India operating from 2005 to 2018. The study also scrutinizes the variations in productivity levels across the distinct organizational form and size groups of MFIs. In addition to this, the authors identify the contextual factors that determine TFP growth, catching-up and technology innovation in MFIs.Design/methodology/approachThe study employs a smooth homogeneous bootstrap estimation procedure of Simar and Wilson (1999) for obtaining reliable estimates of Malmquist indices –productivity and its components – in a data envelopment analysis (DEA) framework for individual MFIs. In order to identify the determinants of productivity change and its components, the study follows Simar and Wilson's (2007) guidelines and applies a bootstrap truncated regression model. The double bootstrap procedure performs well, both in terms of allowing correct estimation of bias and deriving statistically consistent productivity estimates in the first and root mean square errors in the second stage of the analysis.FindingsThe empirical results reveal that the MFIs have shown average productivity growth of 6.70% during the entire study period. The observed productivity gains are primarily contributed by a larger efficiency increase at the rate of 4.80%, while technical progress occurs at 2.3%. Nonbanking financial companies (NBFC)-MFIs outperformed non-NBFC-MFIs. Small MFIs show the highest TFP growth in terms of size groups, followed by the large MFIs and medium MFIs. The bootstrap truncated regression results suggest that the credit portfolio, size and age of MFIs matter in achieving higher productivity levels.Practical implicationsThe practical implication drawn from the study is that the Indian MFI industry might adopt the latest technology and innovations in the products, risk assessment and credit delivery to improve their productivity levels. The industry must focus on enhancing the managerial skill of its employees to achieve a high productivity level.Originality/valueThis study is perhaps the initial attempt to explain the productivity behavior of MFIs in India by deploying a statistically robust double bootstrap procedure in the DEA-based Malmquist Productivity Index (MPI) framework. The authors estimate the bias-adjusted productivity index and its decompositions, which represent more reliable and statistically consistent estimates. For contextual factors responsible for driving productivity change, the study deploys a bootstrap truncated regression approach.

Loan Officers Impede Graduation from Microfinance: Strategic Disclosure in a Large Microfinance Institution

One of the most important puzzles in microfinance is the low rate of borrower graduation to larger, more flexible loans. Utilizing observational and experimental data from a large Chilean microfinance institution, we demonstrate that loan officers impede borrower graduation due to common features of their compensation contracts. Our partner lender offers both microloans and larger, more flexible graduation loans, and relies on loan officer endorsements to determine borrower graduation. Loan officers are rewarded for the size of their portfolio and repayment, and so are implicitly penalized when good borrowers graduate. In an experiment designed to isolate strategic disclosure, we modify compensation to reduce this implicit penalty and document that loan officers withheld endorsements of their most qualified borrowers prior to the shift. Graduated borrowers endorsed after the shift are 34% more profitable for our partner lender than those endorsed beforehand. A back-of-the- envelope calculation suggests that strategic behavior of loan officers accounts for $4.8-29.2 billion in lost social value from forgone borrower graduations in microfinance worldwide. Our experimental design may prove useful for other experiments within firms.

ASSESSING ECONOMIC IMPACT OF MICROCREDIT SCHEME: A REVIEW OF PAST STUDIES ON AMANAH IKHTIAR MALAYSIA (AIM)

Background and Purpose: Microcredit scheme was introduced to provide credit facilities for poor people to start a business activity. Microcredit creates income-generating self-employment activities that allow poor people to venture into small businesses and achieve economic independence. The scheme has been recognised as a successful tool to uplift the socio-economic status among the poor. Amanah Ikhtiar Malaysia (AIM) is the largest microfinance institution in Malaysia and therefore, its impact on the beneficiaries is crucial to be studied. This paper aims at reviewing the economic impact of AIM based on the existing literature.
  
 Methodology: Four electronic databases, which are Scopus, Science Direct, Springer and Ebscohost were used to search the literature. Subsequently 118 articles were generated from this search. However, only 13 articles which met the selection criteria were analysed. We selected only empirical studies that focused on the economic impact of AIM.
  
 Findings: Results of the review showed that income has dominated the economic impact assessment followed by asset, economic vulnerability and spending. Low concentration on the indicators other than income should be noted especially on spending as it provides a clear evidence that the recipients enjoy the economic well-being in terms of consumption expenditure.
  
 Contribution: This review reveals that microcredit has a great potential to uplift the economic status of the poor.
  
 Keywords: Amanah Ikhtiar Malaysia, asset, economic impact, income, microcredit.
  
 Cite as: Muda, N. S., & Tuan Lonik, K. A. (2020). Assessing economic impact of microcredit scheme: A review of past studies on Amanah Ikhtiar Malaysia (AIM).  Journal of Nusantara Studies, 5(1), 124-142. http://dx.doi.org/10.24200/jonus.vol5iss1pp124-142

Go for a Woman if you Feel Risky: Evidence from Gender Diversity in MFIs

This paper contributes to the literature on management and corporate governance in microfinance institutions. Themicrofinance market is one of the rare markets with a large representation of women in management and governanceroles. The objective of our paper is to reveal the effects of women’s presence on the financial and social performance ofmicrofinance institutions.To achieve this, we develop a model that allows for capturing the influence of gender diversity in the microfinance fieldwhilst controlling for risks. We focus on the role of women as loan officers, on boards of directors, and involved inmanaging the creation of microfinance institutions. Our model utilises two sets of panel data regressions, one for socialperformance and one for financial performance, and is tested on data from 193 microfinance institutions across EasternEurope and Central Asia for the financial years 2010 through 2014.The results of our investigation indicate that the activity of female members of management, CEOs, and boards ofdirectors could increase performance indicators for riskier microfinance institutions. This is illustrated particularly inthe case of projects with greater stakes in portfolios that are more than 90 days in arrears. We also provide evidencethat women on boards tend more towards promoting a strategy utilising large quantities of small loans with greaterinterest. The social performance of microfinance institutions is crucially determined by the microfinance institutions’size. For the largest microfinance institutions, questions of social performance lie in the field of boards of directors, whilesmaller institutions’ social performance is mostly driven by CEOs and staff, with significant evidence of a positive femaleinfluence on performance indicators.The novelty of this study is demonstrated the scope of our research. We combine several contemporary issues of peculiarcross-disciplinary interest, and offer succinct and compelling results which will be of immediate applicability in a widerange of academic and professional fields. Our results will be of interest to scholars of gender, social studies, psychology,business, corporate structure, and more. More specifically, we add to the evolving sub-field of study of microfinanceinstitutions, which has the potential to develop rapidly in the near future. This paper represents a cross-section ofcommercial and business research across a wide territory, with a large sample size, and provides compelling conclusions,which add to these fields of study by both validating existing research, and highlighting new areas for future analysis.

Market Structure and Competition in the Indian Microfinance Sector

Executive Summary The Indian microfinance sector has experienced fundamental changes in the structure of ownership and management of microfinance institutions (MFIs). The current study seeks to evaluate the competition level of the Indian microfinance sector during the period 2005–2017 and attempts to find the cause-and-effect relationship between concentration and competition. Furthermore, it analyzes the performance of leading MFIs to explore if there is evidence of exploitation of clients by these institutions. The study is the first of its kind with explicit focus on the market structure of the Indian microfinance market. The study uses unbalanced panel data sets generated from the microfinance information exchange (MIX) data source. The representative sample includes firm specific data of 127 MFIs of different legal statuses and sizes. The dynamic equation model is estimated applying the difference generalized methods of moments (GMM). The results of the empirical investigation find a rise in the concentration with a decrease in competition in the Indian microfinance market during recent years. Intense competition in the past and introduction of new regulations in the wake of sectoral crisis are responsible for this transition. High concentration gives large MFI market powers to exploit the customers. However, the study fails to find any evidence of any such exploitation from the conduct of the leading MFIs. The survey highlights the potential connection between the drop in the competitiveness of the sector and the first appearance of new regulations in light of the sectoral crisis. It is imperative that regulators keep a tight vigil on the operations of leading MFIs and take necessary actions to ensure a healthy competitive environment in the sector. Furthermore, existing rules should be modified to help small MFIs as they play a very crucial role in the fulfilment of the primary objective of the microfinance.

Switching from Group Lending to Individual Lending: The Experience at China’s Largest Microfinance Institution

ABSTRACT We analyze group and individual lending using data from 26,579 loan-specific observations in 2014–2016 for CFPA Microfinance, China’s largest microfinance institution (MFI). We show that MFIs in China have converted a large share of their group liability portfolio into individual liability lending, particularly in southern China. Changes in loan contracts, especially loan size and interest rates, significantly increased repayment risk, whereas long borrowing history improved repayment performance. The higher repayment risk of individual lending was likely compensated by higher interest income. Our research indicates that, under certain circumstances, individual lending can be an important form of loans for MFIs.

To profit or not to profit? Assessing financial sustainability outcomes of microfinance institutions

AbstractWe used a multilevel approach on comparing for‐profit and not‐for‐profit microfinance institutions (MFIs). The database was composed of 202 MFIs (in 52 countries) from the most widely used microfinance dataset (the Microfnance Information eXchange, Inc. Market), with 669 observations from 2010 to 2014. Four financial sustainability outcomes were considered: yield on gross portfolio; return on assets; portfolio at risk, 30 days; and operational self‐sufficiency (OSS). Although for‐profit MFIs had a higher Yield, there was no significant effect of profit orientation on ROA, PAR30, and OSS. Further analysis shows that although profit orientation has a significant effect on the yield of small MFIs, it does not have any effect on larger MFIs, which is consistent with the theory that larger MFIs can distribute its fixed costs better, requiring lower interest rates and allowing smaller yield on the gross portfolio. In addition, we show that the intrinsic characteristics of the MFIs account for the majority of the variance from the four outcomes.

Double bottom line commitments of microfinance: evidence from Indian institutions

PurposeThe purpose of the paper is to confirm the adherence of double bottom line objectives by the microfinance institutions (MFIs) of India and, further, to identify the causal factors that work out their double bottom line commitments.Design/methodology/approachThe study uses an empirical data set for the period of 10 years, i.e. from 2005–2006 to 2014–2015, gathered from www.mixmarket.org. It follows an exploratory approach with overall and segmented performance analysis. Further, a panel data regression model is applied to identify the causal factors of double bottom line.FindingsThe study finds that MFIs are adhering to the notion of double bottom line. The segregated analysis does not give any solid indications of trade-off. The mature and small MFIs are found to be better in attaining social objective but the new and large are better in sustainability. The non-governmental organization (NGO) category is more committed to the double bottom line than the non-NGO. The causal analysis could not show any relationship between financial performance and outreach. Though age and outreach size show relationships with small loan sizes, they do not influence sustainability. The operating and financial expenses along with portfolio quality are found to be the main causal variables of sustainability.Practical implicationsThere are indications for the policy makers to frame regulations and prepare a roadmap for the mature and the large MFIs. This would help them adhere to the double bottom line, which would further streamline the operations of the MFIs in the long run. Containing operating expenses and controlling the asset quality still remain to be the challenges which need to be addressed with proper policy guidelines.Originality/valueThe analysis of the study focuses on industry classifications, which make it more intriguing in nature given the fact of the varied features like age, legal status and outreach. India being the largest microfinance market in the world has limited studies. Most of the studies in double bottom line are based on a cross-country analysis, which generalizes the individual characteristics. The study fills this gap and adds to the understanding of the double bottom line commitments in the Indian context.

Evolution of market concentration and competition in the microfinance industry of Bangladesh

PurposeThe purpose of this paper is to measure and track the evolution of market concentration and competition in the microfinance industry in Bangladesh by employing both the structural and non-structural measurement techniques.Design/methodology/approachBy using a unique panel data set generated from the microcredit regulatory authority (MRA) annual reports, the sample includes 169 microfinance institutions (MFIs) and covers the period 2009-2014. The authors employed the Herfindahl-Hirschman index (HHI) and concentration ratio (CR) (largest 3, 8 and 20 MFIs) as structural measurement techniques and the Lerner index as a non-structural measurement technique. In addition, four different market indicators are used as representatives of deposit and credit markets to better explain the evolution of market concentration.FindingsThe results of HHI indicate that the sector is moderately concentrated and currently transitioning to an unconcentrated market. However, based on CR, the industry is still dominated by a few large MFIs. The Lerner index (non-structural approach) also confirmed that the level of competition is relatively high and likely to follow an inverted U-shape during the study period.Practical implicationsThe findings of this study will enhance our understanding of the market structure in the Bangladesh’s microfinance industry so as to inform important policy prescriptions. The results also provide impetus to the relatively young MRA to nurture competition in the market; simultaneously, the findings prompt management of the MFIs to cope with a competitive market environment.Originality/valueThis study is one of the first of its kind that includes a large data sample of microfinance market for a single country by employing both structural and non-structural measurement approaches.

Loan demand in Jordanian microfinance market: interest rate elasticity and loan-acceptance prediction via logistic regression

Currently, more and more competitors enter the Jordanian microfinance market, offering a greater range of differentiated loan products, aggressive interest rates and loan terms. Our goal is to formulate loan-acceptance prediction methods and, ultimately, pricing strategies for Jordanian microfinance products by studying the customer behaviour of one of the three largest microfinance institutions in Jordan with a particular focus on interest elasticity of demand. We examine the hypothesis of a low interest rate elasticity of demand, and the possibility of increasing the interest rate without cannibalizing loan demand. We plan a methodology to pin down average interest rate elasticity by determining the driving factors affecting the demand. The methodologies we use are based on empirical demand studies and a logistic regression dependence model for loan demand. As a by-product of these studies, we provide a data set including 63 different demographic, educational, household, loan, and other characteristics ...

Lender–entrepreneur relationships and credit risk: A global analysis of microfinance institutions

Prior research suggests that long-term relationships with microfinance institutions (MFIs) are necessary for sustained growth of microcredit-initiated small businesses. However, we present robust evidence that long-term lending relationships may worsen the credit risk of MFIs. Based on information on 1087 MFIs from 69 countries over the period of 2003–2014, we show that, at the initial stage, credit risk declines as an MFI makes more relationship-based loans, but after a certain level, default and delinquencies increase with the magnitude of relationships. We further show that the non-linear, U-shaped, association between relationship lending and credit risk is stronger (a) among small MFIs compared to that among large MFIs and (b) among MFIs that make individual loans compared to those making joint liability-based loans. We discuss policy implications of these findings.

Modelling Credit Default in Microfinance—An Indian Case Study

Credit score models have been successfully applied in a traditional credit card industry and by mortgage firms to determine defaulting customer from the non-defaulting customer. In the light of growing competition in the microfinance industry, over-indebtedness and other factors, the industry has come under increased regulatory supervision. Our study provides evidence from a large microfinance institutions (MFI) in India, and we have applied both the credit scoring method and neural network (NN) method and compared the results. In this article, we demonstrate the capability of credit scoring models for an Indian-based microfinance firm in terms of predicting default probability as well the relative importance of each of its associated drivers. A logistic regression model and NN have been used as the predictive analytic tools for sifting the key drivers of default.

The efficiency of microfinance institutions with problem loans: A directional distance function approach

This article examines the question of whether the inclusion of problem loans leads to any variation in the technical efficiency of microfinance institutions (MFIs). This question has become pertinent as MFIs, which are well known for their excellent asset quality, have been vulnerable to a delinquency crisis worldwide. Traditionally, the efficiency of MFIs has been measured through non-parametric data envelopment analysis (DEA) or parametric stochastic frontier analysis. As both methods are not flexible enough to cover undesirable outputs, we have instead used the method of directional distance function (DDF) that accounts for the joint production of both desirable and undesirable outputs. Using data from 64 large MFIs, this study reveals corroborative evidence that, with the inclusion of at-risk portfolios as undesirable outputs in the efficiency analysis, the scores and rankings of sample MFIs differ significantly from the results of conventional DEA after the use of DDF. MFIs whose numbers of at-risk portfolios are comparatively high have exhibited lower efficiency scores and vice versa. It is therefore critical that MFIs also include problem loans in their efficiency assessment. This would help MFIs get a more accurate picture of their performance as compared to their peers.

The relationship between the performance and legal form of microfinance institutions

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.