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What drives credit risk of microfinance institutions? International evidence

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  • Naima Lassoued

Abstract

Purpose - The purpose of this paper is to shed light on the factors that affect microfinance institutions’ (MFI) credit risk. These factors include MFIs’ characteristics and country-level indicators. Design/methodology/approach - This empirical study uses an unbalanced panel data of 638 MFIs from 87 countries observed over a period ranging from 2005 to 2015. Random-effects models are used to estimate the models. Findings - The results reveal that group-lending methodology, percent of loan granted to women and diversification activities reduce credit risk; credit quality is enhanced by the relevance of the information published by public or private bureaus and law enforcement cost increases credit risk. Finally, credit risk tends to be limited in a good institutional environment. Practical implications - Several implications can be drawn in light of these findings. For MFIs’ managers, using group lending or granting more credit to women and diversifying their activities enhance their credit quality. Furthermore, authorities need to strength debt repayment institutions and reinforce institutional environment to help MFIs to limit their credit risk. Originality/value - Previous studies focus on specific MFIs’ practices that enhance repayment rate or on country-level indicators. One of the contributions of this paper is the use of both types of indicators.

Suggested Citation

  • Naima Lassoued, 2017. "What drives credit risk of microfinance institutions? International evidence," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 13(5), pages 541-559, August.
    • Handle: RePEc:eme:ijmfpp:ijmf-03-2017-0042
    DOI: 10.1108/IJMF-03-2017-0042
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    Citations

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    Cited by:

    1. Abiodun Omidiji & Nives Botica Redmayne & Dimu Ehalaiye & Ernest Gyapong, 2024. "Internal audit in microfinance institutions‐ evidence from transitional and developing economies," Economics of Transition and Institutional Change, John Wiley & Sons, vol. 32(1), pages 109-141, January.
    2. Musiliu Okesina, 2022. "Why Does Microfinance Target Women? Empirical Evidence from Nigeria," Global Journal of Emerging Market Economies, Emerging Markets Forum, vol. 14(2), pages 246-264, May.
    3. Nyarko, Samuel Anokye, 2022. "Gender discrimination and lending to women: The moderating effect of an international founder," International Business Review, Elsevier, vol. 31(4).
    4. Mohamed, Toka S. & Elgammal, Mohammed M., 2023. "Credit risk in Islamic microfinance institutions: The role of women, groups, and rural borrowers," Emerging Markets Review, Elsevier, vol. 54(C).

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