The Impact of Socioeconomic Factors and Financial Access on Microfinance Institutions

This paper is an attempt to unravel new factors that contribute to the success of microfinance institutions “MFIs.” We investigate whether countrywide socioeconomic characteristics and financial access can impact MFIs’ performance. Using data on 222 MFIs we find that countrywide socioeconomic characteristics such as fertility, income and education are important determinants of MFIs’ performance. For example, profitability of MFIs is more likely to fall and default on loans is more likely to rise if fertility rate increases. We also find that countrywide financial access indicators have significant impact on MFIs’ performance. For example, access to commercial banks deposit accounts has a significant and positive impact on MFIs’ success. Access to loans and commercial banks outreach appear to have a negative impact on MFIs’ performance. These results are important as they contradict the generally accepted assumption that commercial banks and MFIs operate in two different market segments and, hence, they are not direct competitors. Overall, the results suggest that several socioeconomic characteristics and financial access elements are important ingredients in evaluating MFIs’ performance.