Is microfinance breaking new grounds? - A cross country empirical investigation of the performance of microfinance institutions
Due to the COVID-19 crisis the PhD defence of Afsheen Abrar will take place (partly) online.
The PhD defence can be followed by a live stream.
Afsheen Abrar is a PhD student in the research group Financial Engineering (FE). Her supervisor is prof.dr. M.R. Kabir from the Faculty of Behavioural, Management and Social Sciences (BMS).
The main aim of this thesis is to examine the performance of microfinance institutions (MFIs) in the global setting. This thesis examines three key questions: (1) How do the relative share of MFIs affect financial development, economic welfare, and banking efficiency of the countries in which they operate alongside commercial banks? (2) Are microfinance banks different from commercial banks in terms of various performance dimensions? and (3) What is the impact of different CEO attributes on the financial performance of MFIs. In particular, I try to concentrate on different angles that have not been previously explored. I analyze MFIs' role taking a macroeconomic perspective, their performance as an active market player alongside commercial banks, and finally, the impact of top management attributes on the performance of these institutions in the form of three research projects. The following paragraphs briefly describe each of the research projects.
Research Project 1
This first project investigates the co-existence of microfinance institutions and commercial banks and analyzes the implications of MFIs presence on the finance-growth nexus. Using financial intermediation and finance-growth theories, I examine whether and how MFIs can accelerate financial development, economic growth and reduce income inequality and poverty at the country level. I also explore whether MFIs alongside commercial banks could increase the efficiency of the whole banking system by putting banks into more competition. Overall, the project aims to provide essential insights into the presence of microfinance institutions, and their impact on enhancing financial development and economic growth, reducing income inequality, poverty, and inefficiency of commercial banks.
Research Project 2
This second project empirically analyses the differences in microfinance banks (MBs) and commercial banks (CBs) in terms of four performance dimensions: efficiency, business model, stability, and asset quality in countries where both types of banks co-exist. By focusing on different theories e.g. financial intermediation theory, resource-based theory, agency theory, asymmetric information theory, I try to find the answers to the following questions: how different are the cost structures of both types of banks? How different are their business models in terms of intermediation capacity, funding structures, and income sources? Which bank type has better liquidity, profitability, and stability? What are the differences in asset quality of both banks in terms of the portfolio at risk, loan loss reserves, and loan loss provisions?
Research Project 3
The third project examines the impact of different CEO attributes on the financial performance of MFIs. Based on upper echelon and resource-based theories, this project accentuates that CEO attributes: gender, business education, domain experience, and founding status are important determinants of the financial performance of MFIs. These CEO attributes are vital in a microfinance setting where most clients are female, and the percentage of female CEOs is higher in MFIs than in traditional firms (Storm et al., 2014). Thus, having a female CEO has the potential to affect the performance of MFIs. Similarly, business education fosters innovation, dynamism, and risk-taking ability, while domain-specific expertise provides a better understanding to deal with organizational problems and consequently enhances performance. Finally, the founding status involves emotional attachment with the firm, this bond enables the CEO to play an extraordinary role in defining the mission and pursuing the firm’s activities that lead to performance differentials. I also analyze the moderating effect of tenure on CEO attributes and financial performance of MFIs as Finkelstein and Hambrick (1990) state that longer tenure exhibits persistent strategies, closely linked to the organizational working industry, and positive organizational performance.
The findings of the three empirical projects of this thesis offer important insights and implications to policymakers, regulators, and MFIs. Since MFIs increase financial development, credit allocation, and reduce poverty, inequality, and operational cost of commercial banks, policymakers must begin to take steps to incorporate microfinancing into a country's mainstream financial system. MFIs’ operations and branches must be opened in places where they have a market niche or where commercial banks cannot support low-income borrowers. Additionally, MFIs could become more active with start-ups and small-scale enterprises, an operation that has the potential to boost economic growth. Furthermore, policymakers and regulators must introduce new technical ways: mobile banking and virtual branch networks to minimize the operational cost of microfinance banks and enhance their penetration in remote areas. Likewise, policymakers and regulators should consider adopting systematic risk management techniques such as credit scoring, computerized databases of borrowers' credit histories, loan delinquency rates, and default records to increase the asset quality of these institutions. Finally, MFIs must consider the demographic characteristics when identifying and selecting suitable candidates for the position of CEO. Research findings indicate that MFIs that hire female CEOs, CEOs with business degrees, CEOs with microfinance experience, and CEOs who are also the founders of MFIs are more likely to increase the financial performance of these institutions.
