Financial Performance And Outreach Nexus:a Case Of Microfinance Institutions From Latin America

Along with reaching the poor and excluded community from the traditional financial system,microfinance institutions are inclined towards gaining sustainability due to decline in government subsidies and donation from Non-government organizations(NGOs).However,how microfinance institutions operate with dual objectives of obtaining outreach and financial sustainability?There is a great concern that both behave in the opposite manner as the goal of obtaining financial sustainability may prevail over outreach to the poor.Thus,it prompts the debate that the original objective of obtaining outreach of the poorest people may be slowed down if microfinance institutions prioritize attaining financial sustainability.The debate generates two views on this issue,one of which dominates financial sustainability and other dominates outreach.The question crops up here is that whether and to what extent outreach has impacted on the financial sustainability of microfinance institutions?The objective of this dissertation is to examine the performance-outreach relation of microfinance institutions for Latin American economies with the help of important macro and micro level economic factors.Additionally,it also explores this association with the help of sub samples and several control variables,and elaborates this important nexus and its implications for various types of performance.Most of the previous studies have focused on developed regions;furthermore,several studies investigated countries on an individual basis with bivariate models.Contrary to the existing studies,this work adds to the literature by focusing on all Latin American economies and by making a comparison with small data samples.This study used the sample of 405 microfinance institutions across 21 Latin American countries for the period of ten years from 2005 to 2014.Selected microfinance institutions might have missing values in one or more years due to new entry or exit from market or due to unavailability of data.Thus,for econometric analysis,we used panel data estimation i.e.random effect model(RE).Additionally,we used panel two step system general method of momentum(GMM)and pooled OLS model for reliable and consistent results.At first,our results indicate that all the four measures of financial performance show the presence of mission drift with outreach.Result show that profitability increase with the increase in breadth,and vice versa in case of depth-profitability relationship.With regard to the relationship between efficiency and outreach,result indicate that efficiency increase with the depth and breadth of outreach.With reference to the relationship between productivity and outreach,our results suggest that serving the better off clients increase productivity.For the relationship between outreach and portfolio quality(P30),our results suggest that extending large loans to better-off clients decreases credit risk.The second consideration of this research is to evaluate the impact of ownership and regulation status on outreach and financial sustainability.Results obtained are almost the same with very few exceptions.Results show that NGOs and credit unions work for the welfare of the society and target poorest of the poor clients without charging must cost as compare to other institutions,which decline their profitability,same is the case with Unregulated Microfinance institutions.NGOs work with low cost among other type of microfinance institutions hence,improve their efficiency.Same is the case with unregulated micro finance institutions,they have to pay less administrations cost and other regulatory expenses so,they are able to manage cost per borrower hence improve efficiency.This research has several policy implications for developing countries,especially for emerging Latin American economies.On the basis of our results;we suggest that microfinance institutions should improve efficiency and credit risk management to improve their profitability.Microfinance institutions should not exclude poor clients and shifted merely to better-off clients,but focus to excel in technologies to reduce cost to serve on a macro level.Microfinance institutions should take serious steps to reduce agency cost.For this,microfinance institutions should hire experienced management.Last but not least,microfinance institutions rely on governments and non-government organizations for donations,attracting institutional investors is still a challenge for microfinance institutions.Thus,to maximize profitability,the microfinance institutions are required to increase their capital base by attracting institutional and private investors for funds.