Culture and the performance of Microfinance Institutions (MFIs)

Proceedings of ‏The 3rd International Conference on Business, Management and Economics

Year: 2020

DOI: https://www.doi.org/10.33422/3rd.icbme.2020.03.23

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Culture and the performance of Microfinance Institutions (MFIs)

Tony Ndakoh

 

ABSTRACT: 

Microfinance has been of strategic importance in the fight against global poverty and the drive towards enhanced sustainable development across the developing world. While interest in Microfinance among global development partners and investors has kept increasing, the industry’s performance in reaching key development outcomes has not been even across countries enjoying an active Microfinance presence. An interesting variable hypothesised and empirically proven to explain this discrepancy in Microfinance performance is the formal institutional framework of respective countries relating to elements like laws and governance. Little attention has however been paid to the origin of these formal institutions, namely the informal institutions of a country. This paper investigates the effect of culture (an informal institution) on the performance of Microfinance Institutions (MFIs) using data from 116 MFIs active in 21 countries. Based on the theoretical literature discussing the role of cultural elements such as trust, beliefs, and values, I hypothesize that Microfinance is more successful, both in terms of financial and social objectives, in countries with cultural qualities that give rise to higher inequality, high uncertainty avoidance, low innovation, and low overall trust in others and formal institutions. I test this hypothesis using various culture measures which are linked to measures of financial and social performance of MFIs. The empirical results are generally supportive of my hypothesis, though culture seems to have a stronger explanatory power on social performance measures than it does on financial performance. The results are robust to the use of alternative culture measures, and instrumental variables for the culture measures.

Keywords: Credit; Development; Information asymmetry; Institutions; Performance.