Performance of Microfinance Institutions-A Macroeconomic and Institutional Perspective

Abstract

Under the continued effects of global financial crisis where the donor's investment in microfinance sectors has become shrunk, how the macroeconomic factors or the crisis or the macro-institutional factors would affect the performance of microfinance institutions (MFIs) have become one of the key debates among the policy makers and practitioners. The present paper has investigated the effect of both institutional factors and the macro economy on the financial performance of MFIs drawing upon the Microfinance Information Exchange (MIX) data as well as cross-country data of macro economy, finance and institutions drawing upon three stage least squares (3SLS) and fixed effects vector decomposition (FEVD) to take account of the endogeneity of key explanatory variables. In contrast to Ahlin et al.'s (2010), we generally find that institutional factors affect MFIs' financial performance, in particular, profitability, operating expense, and portfolio quality. It is also found that the macro-economic and financial factors, such as GDP and share of domestic credit to GDP, have positive impacts on MFIs' financial performance, such as profitability, operating expense ratio and portfolio quality. It is thus concluded that while macroeconomic factors are important, improving macro-institutional factors, policies to raise country-level institutional qualities are required for making the activities of MFIs more sustainable under the global recession.