Institutional quality and credit growth: “Sand” or “grease” effect? Evidence from microfinance institutions

Abstract

This article examines the effect of institutional quality on the credit growth of Microfinance Institutions (MFIs) in sub-Saharan Africa (SSA). This paper uses a panel dataset of 131 MFIs across 31 SSA countries spanning 2004-2018 and applies the Arellano-Bover/Blundell-Bond two-step Generalized Method of Moments (GMM) Windmeijer bias-corrected standard errors to estimate the parameters. The study reveals that institutional quality is an important factor in the credit growth of MFIs. We uncover new and interesting evidence that political stability "sands the wheels" of credit growth of MFIs, implying that MFIs operating in more politically stable countries tend to be more risk averse and limit credit supply. On the other hand, the rule of law "greases the wheels" of credit growth of MFIs, suggesting that MFIs expand credits more when the rule of law is stronger. We also uncover that credit growth is linked to regulatory quality/government effectiveness positively, but not statistically significant. Similarly, voice and accountability and control of corruption do not have significant effects on MFI credit growth. The findings have several useful implications as discussed in the paper.

Institutions and economic growth: the role of financial inclusion, public spending on education and the military

“…To prevent any bias, related to the measures of the variables, we applied natural logarithm in all the variables considered in the study. Previous studies by Ngozi et al (2017) and Tehulu (2022) have proceeded in the same way. Supplementary Table 1 shows the results of the Kaiser-Meyer-Olkin (KMO) adequacy test, which serves to validate the use of institutional quality indicators and financial inclusion indicators.…”

“…Political stability indicates the likelihood of politically motivated violence, terrorism, armed conflict occurring (Singh, 2021;Zhuo et al, 2021). Rule of law refers to trust of households and businesses in public institutions and particularly the police and courts, reflecting in respect for social rules, private property, crime and violence (Singh, 2021;Tehulu, 2022). Regulatory quality indicates the government's ability to formulate and execute policies, regulations that promote the emergence and development of private initiatives (Ouechtati, 2022;Tehulu, 2022).…”

“…In order to avoid the problem of multicollinearity, resulting from the use of highly correlated variables in the model, as well as the respect of the multidimensionality of the variable financial inclusion, we followed the descriptions suggested in Anarfo et al (2020), Jungo et al (2022a), Ongo Nkoa and Song (2022), Ouechtati (2022), Tehulu (2022) and we specify as follows the indicators of institutional quality and financial inclusion:…”

“…Considering that the data are unbalanced, as well as the possibility of endogeneity problems, serial autocorrelation, omission of variables and heteroscedasticity, the study employs the estimation technique of Generalized Moments Method System in two stages, which produces efficient estimates (Ngozi et al, 2017;Tehulu, 2022). In this way our model is specified as follows:…”

“…The data are extracted from three different World Bank databases, namely World Governance Indicators (WGI), World Development Indicators (WDI), and Financial Development Indicators (GFD). Several empirical studies have used the same databases (Jungo et al, 2022a(Jungo et al, , b, 2023Singh, 2021;Tehulu, 2022;Zhuo et al, 2021). It is important to emphasize that the selection of the countries and period of study was conditioned by the greater availability of data on the variables under study.…”