Determinants of margin in microfinance institutions

Abstract

Microfinance institutions (MFIs) lend to the poor, fostering these individuals' financial inclusion. However, microfinance clients suffer from high interest rates, a type of poverty penalty. Reducing margins and lowering interest rates should be a target for MFIs with a strong social commitment. This paper analyzes the determinants of margin in MFIs. A banking model has been adapted to the case of MFIs. This model has been empirically tested using 9-year panel data. Some factors explaining bank margin also explain MFI margin, with operating expenses being the most important factor. Specific microfinance factors are donations and legal status, as regulated MFIs can collect deposits. It has also been found that MFIs operating in countries with a high level of financial inclusion have low margins. ABSTRACTMicrofinance institutions (MFIs) lend to the poor, fostering these individuals' financial inclusion. However, microfinance clients suffer from high interest rates, a type of poverty penalty. Reducing margins and lowering interest rates should be a target for MFIs with a strong social commitment. This paper analyzes the determinants of margin in MFIs.A banking model has been adapted to the case of MFIs. This model has been empirically tested using 9-year panel data. Some factors explaining bank margin also explain MFI margin, with operating expenses being the most important factor. Specific microfinance factors are donations and legal status, as regulated MFIs can collect deposits. It has also been found that MFIs operating in countries with a high level of financial inclusion have low margins.JEL classification: G21, C23, R51

RETRACTED: Sustainable financial dimensions of managing poverty in the era of the COVID-19 pandemic: A developing country perspective

“…This means that they are the most relevant determinants of poverty status. This notion is also supported by Cuéllar-Fernández et al (2016), Iqbal W. et al (2020), and Iram et al (2020.…”

Mediation effect of interest rates on MFIs’ financial performance

“…In addition, there is a partial mediation effect between operating expenses and interest rates, which is consistent with the results found in literature stating that the main driver of interest rates are operating expenses (Dorfleitner et al, 2013;Cuéllar-Fernández et al, 2016). Finally, when we test the relation between the average loan balance per borrower, measured as a portion of GNI per capita, and the real yield on gross loan portfolio, we found that this relationship is significant at a 99% confidence level, and that outreach has a negative effect on the interest rate (-0.065).…”

The social vs. commercial ‘Dingpolitik’ of microlending: Mapping the glocal issue trajectory of a ‘messy object’

“…This came with principal criteria and protocols detailing how and which to collect, store, represent and analyse microfinance data. Since its launch in 2002, Mix-Market has played a key role in creating oversight which has been mined for dozens of microfinance studies worldwide (Ahlin et al, 2011; Cuéllar-Fernández et al, 2016; Culley et al, 2010; Hartarska and Nadolnyak, 2008; Hermes et al, 2011). Likewise, microfinance rating agencies appeared and adapted Standard and Poor’s evaluation methods (Beisland et al, 2014; Gutierrez-Nieto and Serrano-Cinca, 2007), whilst standard ratios and benchmarks were developed to measure (financial) performance through comparable, widely accepted, and cost-effective indicators (CGAP, 2006: p. 29).…”

“…These calculative practices thus brought social norms more to presence in the financialized context of microlending. What is more, evaluating socio-economic performance of microlending has been taken seriously in microlending research and ratings (Allet and Hudon, 2015; Cuéllar-Fernández et al, 2016; Gutiérrez-Nieto et al, 2016). However, although this shift prompted some changes in more specific regulatory contexts, it has not produced a coherent, integrative working practice of microlending.…”