Examining the Trade-off Between Social Outreach and Financial Efficiency: Evidence from Micro-finance Institutions in South Asia

Abstract

The micro-finance institutions (MFI) have been successfully operating for poverty alleviation. The recent turmoil in financial sustainability of major MFIs worldwide has raised the question of whether trade-off exists: Financial performance cannot be achieved without sacrificing the main objective—social outreach. This article examines the presence of such a trade-off by examining the empirical evidence from 127 South Asian MFIs over 2009–2013. The findings of this article reveal that MFIs have neutral trade-off in achieving the double bottom line: financial performance and social outreach. Moreover, there is a mission drift which is caused by higher portfolio at risk and resulted in lower capacity in targeting the poorest segment of citizens. In case of social outreach, it is found that financial performance of MFIs is dependent on the size of MFIs, years of operations and lending processes (group lending).

Social Performance of Rural Bank: Impact of Commercialization Factors

“…Thus, the higher the profitability, the easier it will be for banks to carry out their social functions. This finding contradicted with the previous studies (Kipesha & Zhang, 2013;Abdulai & Tewari, 2017;Huq et al, 2017) that concluded the negative connection between Return on Assets (ROA) with "outreach", one of the indicator for the social function. Thus, this research concluded that the two aims of MFIs could be achieved at the same time, and there is no trade-off between profitability and the achievement of social function for rural banks.…”

“…The dependent variable in this research is social performance, proxied by the number of clients (Schreiner, 2002;Huq et al, 2017). The independent variables in the model are profitability which proxied with Return on Assets, the regulation which proxied with Capital Adequacy Ratio and competition which proxied with the prime lending rate (De Cloet & Moyaert, 2014;Gwasi & Ngambi, 2014;Axmann, 2015;Johnson, 2015;Quayes, 2015).…”

“…On the other hand, there were rural banks that capable enough to extend their outreach with a large number of clients, but their financial performance was not good enough. At several rural banks, the tradeoff between these two targets sometimes appears Kipesha & Zhang, 2013;Abdulai & Tewari, 2017;Huq et al, 2017). However, some previous studies showed that the two aim of MFIs could be achieved at the same time (Arsyad, 2008;Bassem, 2012;Zerai & Rani, 2012;Gakhar & Meetu, 2013;Qinlan & Izumida, 2013;Lebovics et al, 2016;Caserta et al, 2018) Commercialization factors have been identified as the cause of the difference in achievement of social performance at MFIs (Zerai & Rani, 2012;Qinlan & Izumida, 2013;Kaur, 2014;Gashayie, 2015).…”

Multilevel latent class modeling to segment the microfinance market

“…This cluster is nonetheless associated with a higher operation interest rate than of Cluster 2, possibly due to the need to cover possible losses, because these clients are considered at high risk. This group of clients can be defined as the poorest in the CrediAmigo program (Huq et al , 2017).…”

“…This type of client can take out a loan with a traditional bank. On the other hand, Huq et al . (2017) wondered whether microfinance programs are really helping the very poor; they argued that microfinance programs can serve poor people, but not the poorest.…”