Linkages between social and financial performance: Evidence from Sub-Saharan Africa microfinance institutions

Abstract

Microfinance Institutions provide financial services to low-income clients and the poor who are excluded from formal financial institutions. Hence, the sustainability of microfinance institutions (MFIs) remains essential. This study examines the relationship between social and financial performance and whether there is a trade-off between both objectives after the 2008 global financial crisis. The study used 735 observations from 105 Microfinance Institutions across 26 countries in Sub-Saharan Africa from 2011 to 2017 and employed the Generalized Method of Moment and Seeming Unrelated Regression for the analyses. The results indicate that increasing the number of customers [breadth of outreach increased the financial performance (return on equity)]. The result also showed that the Percentage of Female Borrowers contributes to the sustainability of Microfinance Institutions due to their higher loan repayment rate than males. In addition, our results document a trade-off between the Depth of Outreach and Operational Self-Sustainability among Microfinance Institutions. The study recommends the following: 1) Microfinance institutions should purposefully increase credit facilities extended to female borrowers since that will make them sustainable. 2) Governments in Sub-Saharan African countries should provide increased financial support in the form of subsidies and tax holidays to Microfinance Institutions operating in very deprived areas, and 3) Management of Microfinance institutions on the continent should regularly re-train and upgrade their staff capacity to effectively assess and manage customers before and after extending credit to them to sustain the industry.