Economics & Sociology

ISSN: 2071-789X eISSN: 2306-3459 DOI: 10.14254/2071-789X
Index PUBMS: f5512f57-a601-11e7-8f0e-080027f4daa0
Article information
Title: The Influence of Institutional Characteristics on Financial Performance of Microfinance Institutions in the OIC Countries
Issue: Vol. 11, No 2, 2018
Published date: 06-2018 (print) / 06-2018 (online)
Journal: Economics & Sociology
ISSN: 2071-789X, eISSN: 2306-3459
Authors: Yusnidah Ibrahim
School of Economics, Finance and Banking, College of Business, Universiti Utara Malaysia

Iftekhar Ahmed
School of Economics, Finance and Banking, College of Business, Universiti Utara Malaysia

Minai Sobri Mohd
School of Business Management, College of Business, Universiti Utara Malaysia
Keywords: microfinance, financial performance, sustainability, OIC
DOI: 10.14254/2071-789X.2018/11-2/2
Index PUBMS: e3820c22-cd81-11e8-92b1-901b0efa6e97
Language: English
Pages: 19-35 (17)
JEL classification: G21, L25

Microfinance institutions (MFIs) proved to be a powerful tool for financial inclusion through developing entrepreneurial activities in rural areas. MFIs provide small-scale loans to the poor who have no access to traditional banking and financial system. However, in the pursuit to meet their social obligation, MFIs need to be financially sustainable and this sustainability largely depends on the institution’s characteristics. This study investigates the influence of MFIs’ characteristics on their financial performance, using the panel dataset of 57 microfinance institutions from the member countries of the Organisation of Islamic Cooperation (OIC). The empirical results show that, as expected, the interest rate charged and the period of existence in the market have a significant positive relationship with the financial performance of MFIs. The results also indicate that credit union and cooperatives, non-bank financial institutions and non-governmental organisations outperformed their counterparts financially. Therefore, the study concludes that charging a high rate of interest may improve institutions’ financial self-sufficiency; however, it is unable to secure MFIs' profit maximization strategy. Conversely, not-for-profit MFIs can ensure their financial viability while serving the poorest clients which is the prime goal of any microfinance program. Hence, MFIs can earn profits, but within limits, complying with their social promise at the same time.


1. Abate, G. T., Borzaga, C., & Getnet, K. (2014). Cost-efficiency and outreach of microfinance institutions: Trade-offs and the role of ownership. Journal of International Development, 26, 923-932.

2. Ahlin, C., Lin, J., & Maio, M. (2011). Where does microfinance flourish? Microfinance institution performance in macroeconomic context. Journal of Development Economics, 95, 105-120.

3. Ahmed, I., Bhuiyan, A. B., Ibrahim, Y., & Said, J. (2016). Profitability and accountability of South Asian microfinance institutions (MFIs). Journal of Scientific Research and Development, 3(3), 11-21.

4. Ahmed, I., Bhuiyan, A. B., Ibrahim, Y., Said, J., & Salleh, M. F. M. (2016). Social Accountability of Microfinance Institutions in South Asian Region. International Journal of Economics and Financial Issues, 6(3), 824-829.

5. Armendáriz, B., D’Espallier, B., Hudon, M., & Szafarz, A. (2011). Subsidy Uncertainty and Microfinance Mission Drift. CEB Working Paper 11, Université Libre de Bruxelles.

6. Armendáriz, B., & Morduch, J. (2000). Microfinance beyond group lending. Economics of Transition, 8, 401-420.

7. Ayayi, A. G., & Sene, M. (2010). What drives microfinance institution’s financial sustainability. The Journal of Developing Areas, 44, 303-324.

8. Battiliana, J., Lee, M., Walker, J., & Dorsey, C. (2012). In search of the hybrid ideal. Stanford Social Innovation Review, 10, 50-55.

9. Butcher, W., & Galbraith, J. (2015). Microfinance Control Fraud in Latin America. Forum for Social Economics, 1-23.

10. Campion, A., & White, V. (1999). Institutional metamorphosis: Transformation of microfinance NGOs into regulated financial institutions. MicroFinance Network.

11. Chan, S. H., & Lin, J. J. (2015). Microfinance Products and Service Quality in Financial and Quasi‐Financial Institutions in China. Strategic Change, 24, 267-284.

12. Cull, R., Demirgüç-Kunt, A., & Morduch, J. (2007). Financial performance and outreach: A global analysis of leading microbanks*. The Economic Journal, 117, F107-F133.

13. Cull, R., Demirgüç-Kunt, A., & Morduch, J. (2011). Does Regulatory Supervision Curtail Microfinance Profitability and Outreach? World Development, 39, 949-965.

14. Daher Lâma, & Le Saout Erwan (2015). The Determinants of the Financial Performance of Microfinance Institutions: Impact of the Global Financial Crisis. Strategic Change, 24(2), 131-148.

15. Dehem, T., & Hudon, M. (2013). Microfinance from the Clients’ Perspective: An Empirical Enquiry into Transaction Costs in Urban and Rural India. Oxford Development Studies, 41, S117-S132.

16. Driscoll, J. C., & Kraay, A. C. (1998). Consistent covariance matrix estimation with spatially dependent panel data. Review of Economics and Statistics, 80, 549-560.

17. Eicker, F. (1967). Limit theorems for regressions with unequal and dependent errors (Vol. 1, pp. 59-82). Presented at the fifth Berkeley symposium on mathematical statistics and probability.

18. Fitch (2009). Microfinance – Testing its resilience to the global financial crisis. New York: Fitch Ratings.

19. Golesorkhi, S., Mersland, R., & Randøy, T. (2011). Effects of Institutional Context on the Performance of Microfinance Institutions. Paper presented at the Second European Research Conference on Microfinance, Groningen.

20. Greene, W. H. (2008). The econometric approach to efficiency analysis. The Measurement of Productive Efficiency and Productivity Growth, 1, 92-250.

21. Gutiérrez-Nieto, B., Serrano-Cinca, C., & Mar Molinero, C. (2009). Social efficiency in microfinance institutions. Journal of the Operational Research Society, 60, 104-119.

22. Hair, J. F., Anderson, R. E., Babin, B. J., & Black, W. C. (2010). Multivariate data analysis: A global perspective (Vol. 7). Pearson Upper Saddle River, NJ.

23. Hartarska, V. (2005). Governance and performance of microfinance institutions in Central and Eastern Europe and the Newly Independent States. World Development, 33, 1627-1643.

24. Hartarska, V., & Nadolnyak, D. (2007). Do regulated microfinance institutions achieve better sustainability and outreach? Cross-country evidence. Applied Economics, 39, 1207-1222.

25. Hoechle, D. (2007). Robust standard errors for panel regressions with cross-sectional dependence. Stata Journal, 7, 281.

26. Honohan, P. (2004). Financial sector policy and the poor: Selected findings and issues. World Bank Publications.

27. Hsiao, C. (2014). Analysis of panel data. Cambridge university press.

28. Huber, P. J. (1967). The behavior of maximum likelihood estimates under nonstandard conditions (Vol. 1, pp. 221-233). Presented at the fifth Berkeley symposium on mathematical statistics and probability.

29. Janda, K., & Turbat, B. (2013). Determinants of the financial performance of microfinance institutions in Central Asia. Post-Communist Economies, 25, 557-568.

30. Kar, A. K. (2011). Microfinance Institutions: A Cross-Country Empirical Investigation of Outreach and Sustainability. Journal of Small Business & Entrepreneurship, 24, 427-446.

31. Kar, A. K., & Swain, R. B. (2014). Interest rates and financial performance of microfinance institutions: Recent global evidence. European Journal of Development Research, 26, 87-106.

32. Kennedy, P. (2008). A guide to modern econometrics. Oxford: Blackwell Publishing.

33. Kharti, L. E. (2014). The determinants of financial performance of microfinance institutions in Morocco: a panel data analysis. Savings and Development, 38(1), 27-44.

34. Lacalle-Calderón, M., Chasco, C., Alfonso-Gil, J., & Neira, I. (2015). A comparative analysis of the effect of aid and microfinance on growth. Canadian Journal of Development Studies / Revue Canadienne D’études Du Développement, 36, 72-88.

35. Ledgerwood, J., & White, V. (2006). Transforming microfinance institutions: providing full financial services to the poor. World Bank Publications.

36. Mersland, R., Randøy, T., & Strøm, R. Ø. (2011). The impact of international influence on microbanks’ performance: A global survey. International Business Review, 20, 163-176.

37. Mersland, R., & Strøm, R. Ø. (2009). Performance and governance in microfinance institutions. Journal of Banking and Finance, 33, 662-669.

38. Meyer, J. (2015). Social versus Financial Return in Microfinance. Working Paper, Center for Microfinance, Zurich, Switzerland.

39. Mori, N., & Mersland, R. (2011). Boards in microfinance institutions: how do stakeholders matter? Journal of Management and Governance, 1-29.

40. Nasrin, S., Rasiah, R., Baskaran, A., & Masud, M. M. (2017). What determines the financial performance of microfinance institutions in Bangladesh? a panel data analysis. Quality & Quantity.

41. Newey, W. K., & West, K. D. (1987). A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix. Econometrica, 55, 703-708.

42. Nurmakhanova, M., Kretzschmar, G., & Fedhila, H. (2015). Trade-off between financial sustainability and outreach of microfinance institutions. Eurasian Economic Review, 1-20.

43. Olivares-Polanco, F. (2005). Commercializing microfinance and deepening outreach? Empirical evidence from Latin America. Journal of Microfinance/ESR Review, 7, 47-69.

44. Otero, M. (1999). Bringing development back, into microfinance. Journal of Microfinance/ESR Review, 1, 8-19.

45. PED (2010). Poverty and Equity.

46. Pinz, A., & Helmig, B. (2015). Success Factors of Microfinance Institutions: State of the Art and Research Agenda. Voluntas: International Journal of Voluntary and Nonprofit Organizations, 26, 488-509.

47. Quayes, S. (2012). Depth of outreach and financial sustainability of microfinance institutions. Applied Economics, 44, 3421-3433.

48. Quayes, S. (2015). Outreach and performance of microfinance institutions: a panel analysis. Applied Economics, 47, 1909-1925.

49. Rhyne, E. (1998). The Yin and Yan of micro-finance: Reaching the poor and sustainability. Micro Banking Bulletin, 2(1), 608.

50. Roberts, P. W. (2013). The Profit Orientation of Microfinance Institutions and Effective Interest Rates. World Development, 41, 120-131.

51. Ronzoni, M., & Valentini, L. (2015). 5 Microfinance, poverty relief, and political justice. Microfinance, Rights and Global Justice, 84.

52. SESRIC (2008). Microfinance Institutions in the OIC Member Countries. Ankara.

53. Tchakoute-Tchuigoua, H. (2010). Is there a difference in performance by the legal status of microfinance institutions? Quarterly Review of Economics and Finance, 50, 436-442.

54. WDI (2010). Population.

55. White, H. (1980). A heteroskedasticity-consistent covariance matrix estimator and a direct test for heteroskedasticity. Econometrica: Journal of the Econometric Society, 817-838.

56. Wijesiri, M., Yaron, J., & Meoli, M. (2017). Assessing the financial and outreach efficiency of microfinance institutions: Do age and size matter? Journal of Multinational Financial Management, 40, 63-76.

57. Woolcock, M. J. (1999). Learning from failures in microfinance. American Journal of Economics and Sociology, 58, 17-42.