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Microfinance Performance and Social Capital: A Cross-Country Analysis

Author

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  • Luminita Postelnicu

    (Université Libre de Bruxelles)

  • Niels Hermes

    () (Université Libre de Bruxelles
    University of Groningen)

Abstract

In recent years, the microfinance industry has received a substantial amount of cross-border funding from both public and private sources. This funding reflects the increasing interest in microfinance as part of a more general trend towards socially responsible investments. In order to be able to secure sustained interest from these investors, it is important that the microfinance industry can show evidence of its contribution to reducing poverty at the bottom of the pyramid. For this, it is crucial to understand under what conditions microfinance institutions (MFIs) are able to reduce poverty. This paper contributes to this discussion by investigating the relationship between the extent to which social capital formation is facilitated within different societies and the financial and social performance of MFIs. This focus on social capital formation is important, because in many cases MFIs use group loans with joint liability to incentivize asset-poor borrowers to substitute the lack of physical collateral by their social capital. Hence, the success of a large part of the loan relationship between MFIs and their borrowers depends on the social capital those borrowers can bring into the contract. We carry out a cross-country analysis on a dataset containing 100 countries and identify different social dimensions as proxies for how easy social capital can be developed in different countries. We hypothesize that microfinance is more successful, both in terms of their financial and social aims, in societies that are more conducive to the development of social capital. Our empirical results support our hypothesis.

Suggested Citation

  • Luminita Postelnicu & Niels Hermes, 2018. "Microfinance Performance and Social Capital: A Cross-Country Analysis," Journal of Business Ethics, Springer, vol. 153(2), pages 427-445, December.
  • Handle: RePEc:kap:jbuset:v:153:y:2018:i:2:d:10.1007_s10551-016-3326-0
    DOI: 10.1007/s10551-016-3326-0
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    Cited by:

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    2. Solomon Bizuayehu Wassie & Hitoshi Kusakari & Masahiro Sumimoto, 2019. "Performance of Microfinance Institutions in Ethiopia: Integrating Financial and Social Metrics," Social Sciences, MDPI, Open Access Journal, vol. 8(4), pages 1-13, April.
    3. Zheng, Chen & Zhang, Junru, 2021. "The impact of COVID-19 on the efficiency of microfinance institutions," International Review of Economics & Finance, Elsevier, vol. 71(C), pages 407-423.
    4. Lucky Nugroho & Caturida Meiwanto Doktoralina & Fitri Indriawati & Safira Safira & Salimah Yahaya, 2020. "Microeconomics and Tawhid String Relation Concept (TSR)," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(3), pages 293-306.
    5. Rahul Nilakantan & Deepak Iyengar & Samar K. Datta & Shashank Rao, 0. "On Ethical Violations in Microfinance Backed Small Businesses: Family and Household Welfare," Journal of Business Ethics, Springer, vol. 0, pages 1-18.

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