Interaction and higher order effects of factors affecting the performance of microfinancing institutions

Abstract

Purpose The purpose of this paper is to find the factors that affect the “performance” of microfinancing institutions (MFIs) around the world and to further analyse the interaction and higher order effects of these factors on the performance. Although MFIs can have various objectives from a commercial focus to a social focus when performing their operations, this study analyses the factors that contribute to “performance” of MFIs in relation to their ability to “alleviate poverty in a sustainable manner”. Design/methodology/approach Based on the data relating to 234 MFIs across 63 countries, this study analyses eight factors that can affect performance of MFIs (as defined in this study) and their higher order and interaction effects using multiple regression models. Findings The results show that gender (female), literacy level of the borrowers, operational efficiency, offering only loans (not diversifying), age and emphasis on profitability have a significant effect on the performance. Analysis of higher order effects shows that the relationship of age with performance is a downward concave curve and that with operational efficiency is an upward concave curve. The interaction effects of gender and literacy, age and emphasis on female borrowers, and also age and emphasis on profitability were found to be significant.k Originality/value The findings contribute to understanding the factors that affect the performance of MFIs to alleviate poverty in a sustainable manner and help the policy makers and managers of MFIs to improve their performance in this area. Considering the hundreds of millions of dollars injected into microfinancing, improvement in performance as a result of these findings can lead to savings in millions of dollars.

The Nexus of Competition Freedom and the Efficiency of Microfinance Institutions

“…The result implies that the younger (older) MFIs tend to have higher (lower) financial and social efficiency. The study result also provides support to the argument that young MFIs can learn from past mistakes made by old MFIs and improve their performance in a period of time (Nanayakkara, 2017). Moreover, another argument supports the fact that young MFIs can adopt new technologies and interventions from the oldest to latest technologies.…”

“…In a paper by Nanayakkara (2017), the age of MFIs negatively influences their performance, i.e. newer MFIs are more efficient than old ones.…”

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

“…Results implied that the younger (older) MFIs in Thailand and the Philippines tend to have higher (lower) financial efficiency. It supports the argument that young MFIs are able to learn from past mistakes unlike older MFIs (Nanayakkara, 2017). Another argument that has been asserted is that young MFIs able to implement new technologies and interventions and are subsequently much more efficient in their operations and can make higher profits (Ben Abdelkader and Mansouri, 2019; Alaeddin et al , 2018).…”

“…In the study by Nanayakkara (2017), the age of MFIs had a negative relationship with how well they performed. Younger MFIs firms are more efficient than older ones because microfinance is a relatively new industry; hence, young MFIs are able to learn from past mistakes and improve their performance more effectively.…”

“…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).…”