Microfinance Performance. Do Good Institutions Matter?

Abstract

Existing literature suggests that microfinance institutions (MFIs)  are likely to operate in different institutional environments. Unlike retail banks, MFIs bridge two institutional settings: the formal environment, in which they source their funding and in which they are legally embedded, and the informal environment, in which they operate. This study contributes to a growing literature on microfinance performance by investigating whether the institutional environment of the host country matters for MFIs performance. Using panel data corresponding to 167 MFIs for the period 1997-2008, System GMM Estimator is applied to determine the extent to which institutions affect microfinance performance. Estimation results reveals that MFIs profitability is non-negligibly driven by the surrounding institutional environment. Specifically, MFIs are more profitable in countries with political stability, effective and predictable rule of law. However, the magnitude of the effect is sensitive to MFIs age.

JEL classification: E02; G21

Keywords: Microfinance Institutions; Profitability, Institutional Environment

DOI: 10.7176/RJFA/11-16-07

Publication date:August 31^st 2020