Assessing the overall performance of microfinance institutions

Abstract

In recent years, there has been a growing interest in microfinance institutions (MFIs). Some studies assess the financial condition of MFIs on the basis of individual criteria while a few others attempt to explain differences in profitability on the basis of firm-level attributes and country-level characteristics. However, there is no widely accepted measure for assessing the performance of MFIs. At the same time, these institutions face a challenge, as they have to provide financial services to the poor, and at the same time to cover their costs and grow. The present study employs a two stage analysis. In the first stage, I propose the use of the PROMETHEE II multicriteria method which is based on the outranking relations concept. This allows the evaluation of the overall performance of the MFIs using a set of, often conflicting, financial performance and social performance criteria. In the second stage of the analysis, I use regression analysis to explain differences in the overall performance of the MFIs on the basis of various country-specific characteristics such as macroeconomics, financial and institutional development. The results show that the size of the MFIs has a robust non-linear, inverted U-shaped impact on overall performance. Age and the status of non-governmental institution also appear to matter. As it concerns the country-level attributes, GDP growth has a robust positive impact on overall performance. Regional differences also appear to matter.

The Nexus of Competition Freedom and the Efficiency of Microfinance Institutions

“…This finding indicates that MFIs earn a higher profit while having a higher DTE ratio of MFIs. Gaganis (2016) investigated the relationship between GDP and performance of MFIs, with results showing a positive relationship between GDP and MFIs' overall performance. This finding might be seen as implying that good economic performance can boost the productivity of MFIs.…”

“…On the other hand, Donou-Adonsou & Sylwester (2017) found a negative correlation between real GDP and microfinance growth, a result that seems to indicate that the higher the real GDP functions in a country, the lower the microfinance growth in the country is. Gaganis (2016) examined the relationship between inflation and the efficiency of MFIs and found no significant relationship, i.e. a higher or a lower inflation rate does not affect the efficiency of MFIs.…”

Impact of regulatory efficiency and market openness to social and financial efficiency: empirical evidence from microfinance institutions

“…This indicated that the higher DTE ratio of MFIs, the higher the profits they earn. Gaganis (2016) investigated the relationship between GDP and the performance of MFIs. Results showed there is a positive relationship between GDP and MFIs’ overall performance.…”

“…This implied that higher inflation will lead to poorer profitability of MFIs and they will obtain a benefit if the formal financial system is stable. Gaganis (2016) investigated the relationship between inflation and efficiency of MFIs and found no relationship results. This implied that a higher or lower inflation rate does not affect the efficiency of MFIs.…”

“…The first research gap found there are limited studies on the effect of MFIs’ specific characteristics and macroeconomic determinants in both social and financial efficiency. Most of the studies examined the MFIs efficiency either in a financial way or social way (Wijesiri et al , 2017; Nanayakkara, 2017; Caro, 2017; Gaganis, 2016). The second research gap that had identified is there are limited research analyse that focusses on how economic freedom effects on efficiency of MFIs in both financial and social efficiency (Lebovics et al , 2016; Wijesiri et al , 2015; Louis et al , 2013).…”