IDEAS home Printed from https://ideas.repec.org/a/eme/ijoemp/ijoem-08-2020-1002.html
   My bibliography  Save this article

What drives microfinance institution lending behavior? Empirical evidence from Sub-Saharan Africa

Author

Listed:
  • Tilahun Aemiro Tehulu

Abstract

Purpose - While poverty alleviation is the first core goal of Sustainable Development Goals (SDGs), and microfinance institutions (MFIs) are considered important instruments for poverty alleviation in developing countries as they provide credit access to the poor, there is surprisingly little evidence of the drivers of the lending behavior of microfinance institutions. Hence, the purpose of this study is to identify the factors that influence the credit growth of MFIs in Sub-Saharan Africa (SSA). Design/methodology/approach - The study relies on unbalanced panel dataset of 130 MFIs operating across 31 countries in SSA during the period 2004–2014 constituting 546 useable observations. The study uses the Arellano-Bover/Blundell-Bond two-step generalized method of moments (GMM) Windmeijer bias-corrected standard errors to estimate the models. Findings - The results confirm that while capitalization, liquidity and size are positively associated with credit growth, profitability negatively impacts credit growth; whereas, other MFI specific factors namely portfolio quality, deposit growth and nondeposit borrowing growth have little direct effects on MFI credit growth. The results also show that MFI credit growth is pro-cyclical but negatively related to GDP per capita consistent with the theory of convergence. On the other hand, inflation and employment are not important covariates in the credit growth of MFIs. Practical implications - The findings suggest that if MFIs improve their liquidity and size by attracting more deposits and nondeposit borrowings, among others, they can increase credit access to the poor. Moreover, since the lending behavior of MFIs is not resilient to GDP shocks, different measures are needed to increase the financial stability of the microfinance industry. In this respect, since MFI capitalization is positively associated with credit growth and MFI credit growth is pro-cyclical, the findings provide useful insights to central banks/regulatory authorities and the Basel Committee as to the need for a counter-cyclical capital buffer requirement in the microfinance industry. Originality/value - The study is the first comprehensive study to examine the drivers of MFI lending behavior as an extension to lending behavior models from the banking industry.

Suggested Citation

  • Tilahun Aemiro Tehulu, 2021. "What drives microfinance institution lending behavior? Empirical evidence from Sub-Saharan Africa," International Journal of Emerging Markets, Emerald Group Publishing Limited, vol. 18(8), pages 1745-1765, July.
    • Handle: RePEc:eme:ijoemp:ijoem-08-2020-1002
    DOI: 10.1108/IJOEM-08-2020-1002
    as

    Download full text from publisher

    File URL: https://www.emerald.com/insight/content/doi/10.1108/IJOEM-08-2020-1002/full/html?utm_source=repec&utm_medium=feed&utm_campaign=repec
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://www.emerald.com/insight/content/doi/10.1108/IJOEM-08-2020-1002/full/pdf?utm_source=repec&utm_medium=feed&utm_campaign=repec
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://libkey.io/10.1108/IJOEM-08-2020-1002?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Tchakoute Tchuigoua, Hubert, 2016. "Buffer capital in microfinance institutions," Journal of Business Research, Elsevier, vol. 69(9), pages 3523-3537.
    2. Edmond Ofori, 2020. "The effects of Ponzi schemes and revocation of licences of some financial institutions on financial threat in Ghana," Journal of Financial Crime, Emerald Group Publishing Limited, vol. 30(2), pages 583-593, March.
    3. Mario Quagliariello, 2007. "Banks' riskiness over the business cycle: a panel analysis on Italian intermediaries," Applied Financial Economics, Taylor & Francis Journals, vol. 17(2), pages 119-138.
    4. Hearn, Bruce & Oxelheim, Lars & Randøy, Trond, 2018. "The institutional determinants of private equity involvement in business groups—The case of Africa," Journal of World Business, Elsevier, vol. 53(2), pages 118-133.
    5. Karmakar, Sudipto & Mok, Junghwan, 2015. "Bank capital and lending: An analysis of commercial banks in the United States," Economics Letters, Elsevier, vol. 128(C), pages 21-24.
    6. Valentina Michelangeli & Enrico Sette, 2016. "How does bank capital affect the supply of mortgages? Evidence from a randomized experiment," BIS Working Papers 557, Bank for International Settlements.
    7. 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.
    8. Tilahun Aemiro Tehulu, 2019. "Deterrents to the Success of Micro and Small Enterprises in Ethiopia: The Case of Amhara Region MSEs," Journal of Social Economics Research, Conscientia Beam, vol. 6(2), pages 117-125.
    9. Francesco Vallascas & Jens Hagendorff, 2013. "The Risk Sensitivity of Capital Requirements: Evidence from an International Sample of Large Banks," Review of Finance, European Finance Association, vol. 17(6), pages 1947-1988.
    10. Niels Hermes & Marek Hudon, 2018. "Determinants Of The Performance Of Microfinance Institutions: A Systematic Review," Journal of Economic Surveys, Wiley Blackwell, vol. 32(5), pages 1483-1513, December.
    11. Hessou, Helyoth & Lai, Van Son, 2018. "Basel III capital buffers and Canadian credit unions lending: Impact of the credit cycle and the business cycle," International Review of Financial Analysis, Elsevier, vol. 57(C), pages 23-39.
    12. Beccalli, Elena & Anolli, Mario & Borello, Giuliana, 2015. "Are European banks too big? Evidence on economies of scale," Journal of Banking & Finance, Elsevier, vol. 58(C), pages 232-246.
    13. Gambacorta, Leonardo & Mistrulli, Paolo Emilio, 2004. "Does bank capital affect lending behavior?," Journal of Financial Intermediation, Elsevier, vol. 13(4), pages 436-457, October.
    14. Ms. Deniz O Igan & Marcelo Pinheiro, 2011. "Credit Growth and Bank Soundness: Fast and Furious?," IMF Working Papers 2011/278, International Monetary Fund.
    15. Jose M. Berrospide & Rochelle M. Edge, 2010. "The effects of bank capital on lending: What do we know, and what does it mean?," CAMA Working Papers 2010-26, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    16. Ben S. Bernanke & Cara S. Lown, 1991. "The Credit Crunch," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(2), pages 205-248.
    17. Wagner, Charlotte & Winkler, Adalbert, 2013. "The Vulnerability of Microfinance to Financial Turmoil – Evidence from the Global Financial Crisis," World Development, Elsevier, vol. 51(C), pages 71-90.
    18. Gambacorta, Leonardo & Shin, Hyun Song, 2018. "Why bank capital matters for monetary policy," Journal of Financial Intermediation, Elsevier, vol. 35(PB), pages 17-29.
    19. 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.
    20. Dilruba Khanam & Muhammad Mohiuddin & Asadul Hoque & Olaf Weber, 2018. "Financing micro-entrepreneurs for poverty alleviation: a performance analysis of microfinance services offered by BRAC, ASA, and Proshika from Bangladesh," Journal of Global Entrepreneurship Research, Springer;UNESCO Chair in Entrepreneurship, vol. 8(1), pages 1-17, December.
    21. Bruce Hearn & Jenifer Piesse, 2010. "Barriers to the development of small stock markets: A case study of Swaziland and Mozambique," Journal of International Development, John Wiley & Sons, Ltd., vol. 22(7), pages 1018-1037.
    22. Edmond Ofori, 2020. "The effects of Ponzi schemes and revocation of licences of some financial institutions on financial threat in Ghana," Journal of Financial Crime, Emerald Group Publishing Limited, vol. 30(2), pages 583-593, March.
    23. Kathleen Beegle & Luc Christiaensen, 2019. "Accelerating Poverty Reduction in Africa [Accélérer la réduction de la pauvreté en Afrique]," World Bank Publications - Books, The World Bank Group, number 32354, April.
    24. Tilahun Aemiro Tehulu, 2021. "Do location and legal status matter in microfinance institutions’ performance? Evidence from sub-Saharan Africa," Development in Practice, Taylor & Francis Journals, vol. 31(3), pages 404-420, April.
    25. Sydney Chikalipah, 2018. "Credit risk in microfinance industry: Evidence from sub-Saharan Africa," Review of Development Finance Journal, Chartered Institute of Development Finance, vol. 8(1), pages 38-48.
    26. Tilahun Aemiro Tehulu, 2019. "Deterrents to the Success of Micro and Small Enterprises in Ethiopia: The Case of Amhara Region MSEs," Journal of Social Economics Research, Conscientia Beam, vol. 6(2), pages 117-125.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Doddy Ariefianto, Moch. & Trinugroho, Irwan & Yustika, Ahmad Erani, 2024. "Diversification, capital buffer, ownership and credit risk management in microfinance: An investigation on Indonesian rural banks," Research in International Business and Finance, Elsevier, vol. 69(C).
    2. Tilahun Aemiro Tehulu, 2022. "Institutional quality and credit growth: “Sand” or “grease” effect? Evidence from microfinance institutions," Cogent Business & Management, Taylor & Francis Journals, vol. 9(1), pages 2098637-209, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Doddy Ariefianto, Moch. & Trinugroho, Irwan & Yustika, Ahmad Erani, 2024. "Diversification, capital buffer, ownership and credit risk management in microfinance: An investigation on Indonesian rural banks," Research in International Business and Finance, Elsevier, vol. 69(C).
    2. Hessou, Helyoth & Lai, Van Son, 2018. "Basel III capital buffers and Canadian credit unions lending: Impact of the credit cycle and the business cycle," International Review of Financial Analysis, Elsevier, vol. 57(C), pages 23-39.
    3. 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).
    4. David Martinez-Miera & Rafael Repullo, 2019. "Monetary Policy, Macroprudential Policy, and Financial Stability," Annual Review of Economics, Annual Reviews, vol. 11(1), pages 809-832, August.
    5. Tilahun Aemiro Tehulu, 2022. "Institutional quality and credit growth: “Sand” or “grease” effect? Evidence from microfinance institutions," Cogent Business & Management, Taylor & Francis Journals, vol. 9(1), pages 2098637-209, December.
    6. 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.
    7. Vincenzo D'Apice & Franco Fiordelisi & Giovanni W. Puopolo, 2020. "Judicial Efficiency and Lending Quality," CSEF Working Papers 588, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    8. Cappelletti, Giuseppe & Reghezza, Alessio & Rodríguez d'Acri, Costanza & Spaggiari, Martina, 2022. "Compositional effects of bank capital buffers and interactions with monetary policy," Journal of Banking & Finance, Elsevier, vol. 140(C).
    9. Zheng, Yi, 2020. "Does bank opacity affect lending?," Journal of Banking & Finance, Elsevier, vol. 119(C).
    10. Bredl Sebastian, 2022. "The Role of Non-performing Loans for Bank Lending Rates," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 242(2), pages 223-276, April.
    11. Paul Pelzl & María Teresa Valderrama, 2019. "Capital regulations and the management of credit commitments during crisis times," DNB Working Papers 661, Netherlands Central Bank, Research Department.
    12. Bert Loudis & Ben Ranish, 2019. "CECL and the Credit Cycle," Finance and Economics Discussion Series 2019-061, Board of Governors of the Federal Reserve System (U.S.).
    13. Hristov, Nikolay & Hülsewig, Oliver, 2017. "Unexpected loan losses and bank capital in an estimated DSGE model of the euro area," Journal of Macroeconomics, Elsevier, vol. 54(PB), pages 161-186.
    14. Malgorzata Olszak & Mateusz Pipien & Sylwia Roszkowska, 2016. "The Impact Of Capital Ratio On Lending Of Eu Banks – The Role Of Bank Specialization And Capitalization," Equilibrium. Quarterly Journal of Economics and Economic Policy, Institute of Economic Research, vol. 11(1), pages 43-59, March.
    15. Klein, Paul-Olivier & Turk-Ariss, Rima, 2022. "Bank capital and economic activity," Journal of Financial Stability, Elsevier, vol. 62(C).
    16. Olszak, Małgorzata & Roszkowska, Sylwia & Kowalska, Iwona, 2018. "Macroprudential policy instruments and procyclicality of loan-loss provisions – Cross-country evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 54(C), pages 228-257.
    17. Behn, Markus & Daminato, Claudio & Salleo, Carmelo, 2019. "A dynamic model of bank behaviour under multiple regulatory constraints," Working Paper Series 2233, European Central Bank.
    18. Carlson, Mark & Shan, Hui & Warusawitharana, Missaka, 2013. "Capital ratios and bank lending: A matched bank approach," Journal of Financial Intermediation, Elsevier, vol. 22(4), pages 663-687.
    19. Gabriel Jiménez & Steven Ongena & José-Luis Peydró & Jesús Saurina, 2017. "Macroprudential Policy, Countercyclical Bank Capital Buffers, and Credit Supply: Evidence from the Spanish Dynamic Provisioning Experiments," Journal of Political Economy, University of Chicago Press, vol. 125(6), pages 2126-2177.
    20. Christina Bui, 2018. "Bank Regulation and Financial Stability," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 5-2018, January-A.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eme:ijoemp:ijoem-08-2020-1002. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Emerald Support (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.