Microfinance Complementarity and Trade-Off between Financial Performance and Social Impact

Abstract

There is a widespread belief that providing access to financial services (microfinance) or reaching the poor with microcredit are perfect solutions to establish a sustainable economy or to help kick-start a bottom-up recovery and social development animated by the poor themselves through self-employment and microenterprises. Microfinance has therefore become an important instrument for poverty alleviation and for improving the welfare of the poor in both developing and transition economies. Due to the difficulty of targeting the poor, who have a lack of collateral, microfinance institutions (MFIs) are called on to achieve a balance between social impact (poverty reduction) and positive financial performance. This paper assumes that the financial objectives of MFIs operate in opposition to each other and that a trade-off is inevitable. Unbalanced panel data of MFIs for the period 1995-2013 has been extracted from the MIX Market website. In order to solve the endogeneity problem, this paper employed the dynamic system GMM (generalized method of moments) of Blundell and Bond (1998) that is considered as the new methodology currently in use in the empirical investigation of the financial performance in banking and finance. This paper outlines some of the parameters that affect the nature of trade-offs and complementarities between social and financial objectives in microfinance performance, and provides empirical evidence from cross-country analysis. Sustainability has a positive link with outreach. MFIs tend to expand their outreach in order to achieve sustainability, based on the advantages of the economies of scale. However, a threshold which makes the trade-offs or complementarities between financial and social objectives reverse if it goes beyond a certain point is also observed.

Double bottom line commitments of microfinance: evidence from Indian institutions

“…Both the revenue indicators, i.e., yield and profit margin show a positive relationship with OSS. This suggests that profitability and returns hold key to sustainability of the MFIs, although the results could not establish any significant relationship between outreach and sustainability as observed in the earlier works (Omri and Chkoundali, 2011;Louis et al, 2013;Ngo, 2015).…”

Competition and microfinance institutions’ performance: evidence from India

“…Recently, a double bottom line approach 1 has become popular in microfinance. MFIs have also been started pursuing a balance between social and financial performance (Ngo, 2015). Rating organizations have already started rating MFIs based on the ability to pursue their double bottom line objectives (Gutiérrez-Nieto, Serrano-Cinca, & Molinero, 2009).…”

“…Moreover, like the main notion of microfinance, it is clear that Indian MFIs have double bottom line objectives, MFIs' social outreach, and financial sustainability (Morduch, 1999). Although some MFIs have been striving to achieve a balance between social and financial performance, competition makes it very challenging and sometimes lead to mission drift (Ngo, 2015).…”

How does microfinance prosper? An analysis of environmental, social, and governance context

“…Several studies (e.g., Hartarska, Shen, & Mersland, ; Hermes & Lensink, ; Hermes, Lensink, & Meesters, ; Périlleuxa & Szafarzb, ) have used the percentage of female borrowers (representing women empowerment) as a proxy of MFIs social performance. For the depth of outreach, several studies have used the average loan balance per borrower (e.g., Ngo, ; Sheremenko, Escalante, & Florkowski, ). Nonetheless, others have used the average loan balance per borrower divided by gross national income per capita (ALBGNI), (Aggarwal et al, ; Al‐Azzam & Mimouni, ; Barry & Tacneng, ; Bos & Millone, ; Cull, Demirgüç‐Kunt, & Morduch, ; Louis, Seret, & Baesens, ; Quayes, ).…”