Culture and the performance of microfinance institutions

Abstract

The aim of this study is to assess the effect of culture on the performance of Microfinance Institutions (MFIs). Usingfinancial ratios relating to both the financial and social objectives of microfinance as performance measures and six variables from Hofstede's cultural dimensions as culture measures, we assess the role of culture in determining MFI performance. Our final dataset comprises 503 MFIs from 44 countries over the period 2012 2018, extracted from the Mix Market database. A random effects model is used in the empirical analysis, followed by instrumental variables to cater for endogeneity. Our findings indicate that microfinance achieves better financial performance and is more self-sufficient in high power distance and in individualistic cultures. Meanwhile, microfinance achieves better social performance in more masculine and more indulgent cultures. Our results are robust upon inclusion of further controls for institution-specific characteristics, and macroeconomic and formal institution environment variables. Our findings provide further evidence to support the existence of a trade-off in microfinance. We thus argue that the extent of public support for microfinance should not only be a function of the broad objectives of funding parties, but should additionally depend on the cultural environment in which an MFI operates.