Determinants of operational risk and Microfinance Banks performance in Pakistan

Aim/Purpose – This paper presents the analysis of determinants of operational risk and their impact on Microfinance Banks (MFB’s) performance. Design/methodology/approach – The sample size was 120 consisting of thirty respond-ents from each of four MFB’s out of eight in total. A standard data collection tool; the questionnaire was used. In addition, personal interviews with few regulators were also conducted for a better understanding of the subject from a practical perspective. Statistical Package for Social Sciences (SPSS) was used to analyze the collected data and for further analysis Ordinal Logistic Regression was used. Findings – Show that staff salaries, employee education, technical support, employee training and consumer education were some of the most important factors which explain MFB’s performance. Overall Ordinal Logistic Regression results show that internal control system is the major source of operational risk and has a high impact on MFB’s performance while the intensity of the impact was low in case of human resource. Research implications/limitations – Due to the limited time and cost issues, only those MFB’s were considered which had operations either in Islamabad or in Punjab province. Data collection tool was revised multiple times to make it easier, friendly and profes-sional because organizations were reluctant to respond. The small sample size was con-sidered in order to reduce traveling time and cost; however the large sample size will absolutely produce better results. Originality/value/contribution – Despite the addition in existing knowledge, the paper highlighted the strategic importance of different selected variables including consumer financial literacy for MFB’s performance. Nevertheless, it also presents a list of 24 fac-tors, perceived by regulators, which impede the ability to achieve their desired organiza-tional objectives.