Interest Rates and Financial Performance of Microfinance Institutions: Recent Global Evidence
2014 (English)In: European Journal of Development Research, ISSN 0957-8811, E-ISSN 1743-9728, Vol. 26, no 1, 87-106 p.Article in journal (Refereed) Published
Recent controversies regarding the high interest rates being charged by the microfinance institutions (MFIs) have been justified in the name of financial sustainability. This paper investigates whether MFIs’ high interest rates improve profitability, reduce repayment rates and lead to mission-drift. Within an agency theoretic framework, instrumental variables (IV) estimations have been employed to account for the endogeneity issues using a comprehensive global panel database consisting of 379 MFIs in 71 countries for 6 years—from 2003 to 2008. Results show that real yield on loan portfolio—a frequently-used proxy for interest rates—has positive and highly significant impact on MFIs’ financial performance and loan repayment rates. We further find that loan delivery methods have a significant impact on financial performance. Individual based lenders tend to show a greater profitability but only till a certain level. We also find that individual-based lenders are more prone to mission drift as compared to village banks.
Place, publisher, year, edition, pages
2014. Vol. 26, no 1, 87-106 p.
Economics and Business
IdentifiersURN: urn:nbn:se:uu:diva-204665DOI: 10.1057/ejdr.2013.33ISI: 000330160600009OAI: oai:DiVA.org:uu-204665DiVA: diva2:639580