Nexus between good governance and financial sustainability: evidence from microfinance sector of India

Abstract

Purpose Microfinance emerged as an essential catalyst for socio-economic development and financial inclusion to reduce poverty. Microfinance institutions cannot meet their primary objective of poverty reduction if they are not sustainable financially. With the theoretical support of profit incentive theory, this paper aims to investigate the impact of organizational structure (OS), growth outreach (average loan per borrower [ALPB] and number of active borrowers), women empowerment (percentage of women borrowers [PWB]), liquidity, leverage and cost efficiency (cost per borrower) on the financial sustainability of microfinance providers (MFPs) in India and explore the possible moderating effect of the national governance indicators (NGIs). Design/methodology/approach A financial sustainability index has been developed by using principal components analysis, including both conventional measures (return of assets and return on equity) and efficiency measures (operational self-sufficiency and financial self-sufficiency). Due to the existence of endogeneity and heteroskedasticity, this study uses two-step system generalized method of moments estimates to examine the relationships for a period of 2006 to 2018. Findings The finding reveals that there is a strong significant relationship between financial sustainability and its influential factors. Organizatioanl Structure, loan size, women borrowers, Gross Domestic Products and inflation enhance the financial sustainability of India’s microfinance sector. However, a number of borrowers, liquidity, leverage and operating costs negatively affect the financial sustainability of MFPs of India. The estimates demonstrate that NGIs significantly moderate the association between financial sustainability and its influential factors. The NGIs negatively affect the positive impact of Organizatioanl Structure on financial sustainability. National governance increases the positive effect of loan size (ALPB) and reduces the negative effect of a number of borrowers and leverage on the financial sustainability of MFPs of India. However, NGIs negatively affect the positive relationship between Percentage of Women Borrowers and Financial sustainability of Microfinance Providers of India. Originality/value To the best of the authors’ knowledge, this study is the first of its kind that incorporates all of the six dimensions of the National Governance Indicators (NGIs) and uses as a moderator. Secondly, a financial sustainability index has been developed for measuring the financial sustainability of Microfinance Providers (MFPs).