Understanding Relevance of Business Environment for Financial Performance: The Case of Asian Non-Banking Microfinance Institutions

Abstract

Microfinance aims at providing productive loans to deprived segments of society that helps in poverty eradication. Existing studies ignore some essential factors of business environment, which can influence the performance of microfinance institutions. We have collected data from the Doing Business project of the World Bank and audited financial statements of 52 Asian non-banking microfinance institutions for the period of 2012–2016. This study has employed system method of moments (GMM) technique with xtabond2 command, and the findings of analyses reveal the significant impact of different business environmental factors such as getting credit, protecting minor investors and paying taxes on financial performance of selected institutions. These findings recommend that practitioners need to pay particular attention to the formulation of such policies that can help these institutions in coping better with their external business environment.

Impact of Financial Risk on the Financial Performance of Microfinance Institutions: A Literature Review

“…This might be a result of MFIs using distinct lending strategies, like group lending, to outperform traditional lending institutions in terms of debt recovery. It has been observed that various business environmental factors, including obtaining credit, safeguarding small investors, and paying taxes, have a substantial consequence on the financial performance of specific institutions (Farooq et al, 2022). Group lending reduces the possibility of morally hazardous behavior and unfavorable selection.…”

Financial and social efficiency of microcredit programs of partner organizations of Pakistan Poverty Alleviation Fund

“…Navajas et al [15] also argue that unsustainable MFPs cannot help the poor continuously because they generally disappear in the long run. In the field of microfinance, profitability and sustainability/self-sufficiency are usually measured with the help of accounting-based indicators such as; OSS, Financial Self-Sufficiency (FSS), Returns on Equity (ROE), and Returns on Assets (ROA) [46,[62][63][64][65][66][67][68]. These indicators are also helpful in investigating the financial viability of the MFPs [69, pg.49].…”

“…The sustainability of MFPs starts with OSS, where the operating costs of the institutions are covered regardless of the revenue sources [73]. The expression used to calculate OSS ratio can be described as follow [68]:…”