Social performance, financial risk and financial performance in microfinance institutions

Abstract

PurposeThis paper examine whether social performance moderates the linkage between financial risk and financial performance in microfinance institutions (MFIs). The study focuses on the financial self-sufficiency and long-term sustainability of MFIs.Design/methodology/approachThe empirical study uses unbalanced panel data of 2,694 worldwide MFIs from 2009 to 2019. In the first step, the study inspects the impact of social performance and risk on financial performance, proxied as return on assets and operational self-sufficiency. In the second stage, moderated hierarchical regression is applied to test whether social performance moderates the relationship between risk and financial performance. Lastly, the study confirms the significant moderation effects with slope tests.FindingsThe study detects robust evidence that financial risk is negatively related to financial performance. Though social performance exhibits a weak positive link with financial performance in silos, the evidence of its moderating effects on risk is mixed and significant. Social performance indicators, such as the borrower retention rate and female representation, positively moderate the relationship between financial risk and financial performance. The study documents that social performance impacts financial performance and operational self-sufficiency through risk moderation. Thus, social performance fosters the sustainability of these institutions over the long haul.Research limitations/implicationsThe study is relevant to academics and theorists to consider the stakeholder approach in microfinancing. In the context of stakeholder theory, the study advances the specific social responsiveness process, namely stakeholder engagement.Practical implicationsThe evidence that socially sensitive operations can curtail the adverse effects of credit risks on financial performance signify the required attention to social performance. For MFI managers and practitioners, the findings justify the business case for social performance. Stakeholder engagement, under the auspices of social responsiveness, acts as a risk-mitigation mechanism to eventually foster financial performance and self-sufficiency.Social implicationsThe study motivates MFIs to do more for their stakeholders and society by highlighting the benefits of social performance.Originality/valueThe study reaffirms that social performance remains at the epicenter of the MFIs' mission and is an essential risk mitigation mechanism. The study adds to the extant literature on stakeholder engagement and its effects on MFIs.

Social versus financial performance: evidence from microfinance institutions in Ethiopia

“…In addition, OSS has a positive significant impact on NABs whereas has a positive insignificant effect on the remaining dependent variables, implying that MFIs, which are operational self-sufficient, to some extent, tend to achieve a social performance; specifically, it has a higher contribution to increase the number of borrowers. This is the same result as found in Singh (2023), Beisland et al (2020). Besides, the operating margin (OM) has a positive significant impact on the NABs when it is measured by the fixed effect estimation model whereas has a positive insignificant effect on the outreach measures in the SUR estimation and a fixed effect, signifying that MFIs, which have a higher operating margin, to some extent, tend to have a higher outreach at Ethiopian MFIs.…”

“…Khalaf et al (2023) and Bhayana and Sharma (2022) argued that social performance has a positive relationship with sustainability. In addition, Singh (2023), Beisland et al (2020) and Yeshi (2015) argue that the social outreach of MFIs is significantly related to sustainability. According to The Welfarists Approach, targeting the very poor is the primary objective and profitability shall be secondary.…”

Digitization of Microfinancing Operational Procedures

“…An indication of successful loan disbursement performance is the presence of customers who complete their loans and return for additional ones, signifying that borrowed funds are used for the intended purpose. This concept is recognized as one of the social indicators of positive financial performance (Singh, 2023). Considering social performance indicators in microfinancing, studies have established a strong correlation between microfinancing services and the income stability of identified businesses (Apat & Bawica, 2022).…”

The effect of capital structure on the financial sustainability of microfinance institutions: A meta‐analysis

“…While for-profit MFIs prioritize profit generation and employ financial practices aligned with this goal, not-for-profit MFIs (including SACCOs) concentrate on fulfilling their social mission, which significantly influences their financial management approaches. But still, social performance significantly contributes to the long-term sustainability of these institutions (Singh, 2023). Hence, the effect of the sources of finance on the financial sustainability of MFIs is better understood when considering the diversification of MFIs.…”