By Roy Mersland, Trond Randoy, Reidar Oystein Strom, forthcoming in the International Business Review (2010), available for purchase at http://dx.doi.org/10.1016/j.ibusrev.2010.07.006
International influence on microfinance institutions (MFIs) comes in many forms: An MFI could borrow money from international capital markets, have an international director, be founded by an international organization (international initiator) or be a member of an international microfinance network such as Women’s World Banking, FINCA or Opportunity International. Yet, what is the impact of each of the above influences on the social and financial performance of MFIs?
Using financial data on MFIs from 2001 to 2008 obtained from rating reports by microfinance rating agencies such as MicroRate, Microfinanza, Planet Rating, Crisil and M-CRIL, the authors conducted regression analysis to tease out the effects of various international influences. They found that international influence is correlated with enhanced social returns, but has an inconclusive correlation with financial sustainability, contrary to the widely held view that international influence unequivocally boosts MFIs’ financial performance over time. Specifically, the paper studied the four following hypotheses:
Hypothesis 1) MFIs with an international initiator achieve better financial and social performance
The authors found that MFIs with an international initiator on average have higher levels of social outreach to women and lower levels of rural outreach. It was argued that most international initiators have an ‘exit strategy’ from MFIs and thus would tend to stay away from efforts to bolster rural outreach, which are often considered to be costly. After adjusting for unspecified subsidies, the paper found no statistically significant correlation between being founded by international actors and the financial performance of MFIs. A statistically significant negative relationship between having an international director and operational self-sufficiency was identified however. The authors posit that costs related to having an international directors such as salaries, might represent a significant cost burden for MFIs.
Hypothesis 2) MFIs that have undertaken international commercial or subsidized debt have better financial and social performance
The authors found that MFIs that undertake international debt have higher levels of rural outreach, while MFIs that undertake more subsidized debt in general have greater outreach to women. The authors argue that this is because most international lenders are concerned with the double bottom line (social and financial returns) and thus specifically want MFIs to target female clients.
Hypothesis 3) MFIs that have an international board member have better financial and social performance
The study found a negative correlation between international directorship and financial performance, but a positive relationship with social performance. This, the authors argue, is because international board directors might bring along a ‘culture of higher costs’ along with a focus on social outreach.
Hypothesis 4) MFIs affiliated with an international network have better financial and social performance
The study found that being affiliated with an international network improves social performance with regard to both women and rural outreach but not financial performance. The authors argue that joining an international network facilitates a transfer of knowledge and best practices.
By Trevor Kwong, Research Assistant