The Interactive and Causal Relationship between Productivity and Profitability of Vietnam’s Formal Microfinance Institutions

Abstract

Productivity and profitability are the most complex areas of financial decision making due to their interrelationship with other financial decision variables. At the same time, productivity and profitability are factors affecting the operations and goals of formal microfinance institutions (MFIs) in Vietnam. This study's purpose was to discover the interaction and causal relationship between productivity and profitability and to examine factors that affect the productivity and profitability of formal MFIs. After regression analysis on a set of panel data from 2010 to 2018 of all formal MFIs in Vietnam, it appeared that profitability and debt-to-equity ratio have positive relationships with productivity and that the number of branches and deposits have negative relationships with productivity. Productivity has a positive relationship with profitability and both the debt-to-equity ratio and equity have negative impacts on profitability. The study found bidirectional interactions and a causal relationship between productivity and profitability. Based on the findings the study proposes policy measures that could be implemented by the managers of formal MFIs to increase productivity and ensure a more efficient distribution of economic resources. This study also helps managers of formal MFIs understand the key determinants for better management of formal MFIs. Contribution/ Originality:This study is one of very few studies which have investigated panel data on the interactive and causal relationship between productivity and profitability of Vietnam's Formal Microfinance Institutions and the results could serve as a valuable reference for other developing countries.

Reciprocity Between Productivity and Credit Growth in Vietnam’s Co-operatives Credit Institutions

“…The regression result showed a negative relationship between the loan-to-deposit ratio and the productivity with coefficient values of -18.76 with the significance level of 10%. This result disagreed with the analysis results of DiSalvo and Johnston (2017) and Ha (2019a). Because, the CCIs became more difficult to find borrowers, they increased the average loan size and the fact that the CCIs had a higher average loan per borrower which leaded to an increase in the loan-to-deposit ratio and reduced their productivity over the years.…”

“…Therefore, the return on assets has a positive impact on the microfinance institutions' productivity. Ha (2019a) also concluded that there was a positive bidirectional interactions relationship between profitability and productivity.…”

“…Therefore, it has a positive impact on the credit institutions' productivity. According to Ha (2019a), the loan-to-deposit ratio had positive relationships with the credit growth and the number of borrowers. Hence, the loans-to-deposits ratio contributed to increase the microfinance institutions' productivity.…”