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The trade-off between outreach and sustainability of microfinance institutions: does loan delinquency play a mediating role?

Author

Listed:
  • Mohammad Zainuddin
  • Masnun Mahi
  • Ida Md. Yasin
  • Shabiha Akter

Abstract

The outreach-sustainability trade-off in microfinance is often attributed to the high transaction cost of small loans. But does loan delinquency play any role? Is there any relationship between delinquency and poverty level of borrowers? In microfinance, loan delinquency is a key concern, as poor borrowers lack collateral and microfinance institutions (MFIs) face information asymmetry which may lead to problems of adverse selection and moral hazard. This paper empirically examines the relationship between microfinance outreach and sustainability, and the role of loan delinquency in that relationship. Through a rigorous quantitative analysis of a global dataset of microfinance firms, the study confirms that MFI sustainability comes at the expense of outreach and there is a trade-off between the two goals. It demonstrates the mediating role of loan delinquency in the outreach-sustainability relationship and indicates that poor clients, compared to not-so-poor, have high delinquency rates that negatively affect the financial performance of MFIs.

Suggested Citation

  • Mohammad Zainuddin & Masnun Mahi & Ida Md. Yasin & Shabiha Akter, 2023. "The trade-off between outreach and sustainability of microfinance institutions: does loan delinquency play a mediating role?," International Journal of Business Excellence, Inderscience Enterprises Ltd, vol. 30(3), pages 295-317.
    • Handle: RePEc:ids:ijbexc:v:30:y:2023:i:3:p:295-317
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