STRUCTURING MICROFINANCE INSTITUTIONS FOR PERFORMANCE: FOR PROFIT OR NON-PROFIT?

Abstract

Microfinance institutions (MFIs) serve micro-enterprises and financially needy individuals by providing financial services to them. Given many recent calls for the transformation of non-profit MFIs to for-profit MFIs, this study examines how the profit status of a MFI affects its financial and social performance. Grounded in the business ethics theory and the property rights theory, this paper hypothesizes that for-profit MFIs will attain higher financial but lower social performance than the non-profit MFIs. This hypothesis is being tested using a large global data set of 855 MFIs in 96 countries over a period of 6 years (2005 through 2010). The results of the current study confirm that for-profit MFIs offer higher financial performance than non-profit MFIs. As for social performance, the results exhibit that the profit status of a MFI does not influence the breadth of social performance (as measured by the number of active borrowers), but it does have an effect on to the depth of social performance. Specifically, when average outstanding loan size per borrower is used as an indicator for the depth of social outreach, the social performance of non-profit MFIs is better than that of profit-oriented MFIs. Therefore, conversion from non-profit to for-profit MFIs could be undesirable because this may potentially result in MFIs losing their primary focus of reaching out to the “poorest” of the low-income population.