Does product diversification and emphasis on profitability in microfinancing alleviate poverty?

Microfinancing institutions (MFIs) are likely to change their management policies and focus more on profitability and product diversification as they mature and expand in size because of a number of reasons, including among them, donor pressure and/or lack of funding to expand. The present study empirically tests whether such changes occur in MFIs over time and how these changes affect their performance with regard to alleviating poverty. Using data from a sample of 234 MFIs from around the world, including in the Asia-Pacific region, the study analyses the relationships between age, size, product diversification and emphasis on profitability of MFIs and their impact on the performance in alleviating poverty. Multiple regression techniques and path analysis were used to test the above relationships. The main analysis was also repeated on MFIs in the Asia-Pacific region to assess the relevance of the findings of the main study to the Asia-Pacific region. Results of the main analysis comprising the 234 MFIs in the sample show that MFIs expand in size with age. As MFIs mature, they diversify to offer other services in addition to providing loans (product diversification). However, size acts as a mediating variable in this relationship. Ageing leads to more emphasis on profitability, which, in turn, leads to an improvement in the performance of MFIs in alleviating poverty. However, product diversification has a negative effect on the performance. The more recently established MFIs, which tend to focus only on providing loans, perform better than older ones (see figure 5). The analysis, which was repeated only on the 70 MFIs in the Asia-Pacific region, show similar results to those of the main analysis with one exception. The results generally agree with the main findings that as MFIs grow in size with age, they focus more on profitability and adopt product diversification with this transformation. They also agree that emphasis on profitability leads to an improving performance with regard to alleviating poverty. However, the results show that product diversification by MFIs in the Asia-Pacific region has a positive impact on the performance compared with the negative effect found on the main sample. The findings of this study confirm the shift to commercialism by MFIs over time by emphasizing profitability and product diversification. However, it also indicates that MFIs need be cautious when adopting product diversification strategies.