| Abstract: |
Microfinance institutions which specialize on the provision of financial
services to low-income clients and micro-entrepreneurs have grown
significantly in recent years. Lützenkirchen and Weistroffer (2012) highlight
that MFIs had extended loans to more than 200 million clients by the end of
2010, whereas through various socio-economic ties of the borrowers and their
families, microfinance has influenced the lives of around 1 billion people in
emerging and developing countries. Another particular characteristic of the
MFIs’ borrowers is that they usually lack credit history and collateral which
limits their access to financing from traditional commercial banks (Banerjee
and Duflo, 2007). Therefore, it is not surprising that MFIs have attracted
considerable attention by academics and policy makers, with recent studies
focusing on a variety of topics like the impact of microfinance on poverty or
child health outcomes (Imai et al., 2012; DeLoach and Lamanna, 2011),
competition between microfinance non-governmental organizations (Ly and Mason,
2012), microfinance and female empowerment (Ngo and Wahhaj, 2012), the use of
credit scoring models from MFIs (Blanco et al., 2013; Cubiles-De-La-Vega et
al., 2013), the diversification benefits from adding microfinance funds to a
portfolio of risky international assets (Galema et al., 2011), the drivers of
buffer capital (Tchuigoua, 2016), and the determinants of governance quality
(Tchuigoua, 2015). The aim of the present study is twofold. The first aim is
to provide an overall measure of the performance of MFIs. As discussed in
Devinney et al. (2010), the performance of firms is of central interest to
managers, researchers and policy makers; however, there is little convergence
of opinion on how performance should be measured. To this end, Devinney et al.
(2010) argue in favour of an overall measure of performance. This becomes even
more crucial in the case of MFIs, due to the double challenge that they face.
More detailed, MFIs not only have to provide financial services to the poor
(outreach), but they also have to cover their costs to avoid bankruptcy
(sustainability). Furthermore, as mentioned in von Stauffenberg et al. (2003)
all performance indicators tend to be of limited value when examined in
isolation and this is particularly the case for the profitability indicators
of MFIs. They also highlight that to understand how an institution achieves
its profits the analysis must also take into account other indicators that
influence the operational performance of the institution, such as operational
efficiency and portfolio quality. Finally, the profitability analysis is
further complicated by the fact that a significant number of MFIs receive
grants and subsidized loans. Therefore, ideally various dimensions should be
taken simultaneously into account in the assessment of their performance.
Nonetheless, as discussed in Weber and Luzzi (2007) very few attempts have
been made to aggregate the numerous indicators of MFI’s performance into a
single measure and most of the studies simply compare the financial condition
of MFIs on the basis of univariate tests of individual ratios such as the
return on assets (e.g. Bi and Pandey, 2011; Agarwal and Sinha, 2010). Zeller
et al. (2003) propose the construction of an overall measure; however, their
suggestions are limited to the assignment of arbitrary weights to the
indicators or the derivation of weights through principal components analysis
(e.g. Weber and Luzzi, 2007). A few recent papers also estimate the efficiency
and/or productivity of MFIs using frontier techniques (e.g. Servin et al.,
2012; Wijesiri et al., 2015; Wijesiri and Meoli, 2015), which provide an
overall score. However, the majority of these studies tend to measure how
efficient the MFIs are in transforming inputs (e.g. number of credit officers,
total assets) to outputs (e.g. financial revenue), while ignoring other
aspects like portfolio risk and capital strength.[1] In this paper, I follow a
different approach, and I propose the use of the PROMETHEE II multicriteria
method that summarizes both the financial and social performance of MFIs in a
single score of relative performance on the basis of pairwise comparisons
across a set of often conflicting criteria.[2] The second aim of the present
study is to explain differences in the overall performance indicator, obtained
from the PROMETHEE II method, on the basis of firm-specific and
country-specific attributes. The investigation of the determinants of
performance has attracted the interest of researchers from the fields of
international business, strategic management, and finance (e.g. McGahan and
Porter, 2002; Joh, 2003; Short et al., 2007; McGahan and Victer, 2010).
However, MFIs are considerably under-research compared to non-financial firms
and traditional banking institutions. The few existing studies examine the
impact of firm-level attributes such as corporate governance and legal status
(Hartarska, 2005; Mersland and Strøm, 2009; Tchakoute-Tchuigoua, 2010) or
country-level characteristics such as regulations, macroeconomics, and
institutional development (Cull et al., 2011; Ahlin et al., 2011) on single
indicators of the profitability and growth of MFIs. |