Financial efficiency versus social outreach of Indian microfinance institutions: mission drift or character shift?

Lalitagauri Kulkarni ()
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Lalitagauri Kulkarni: Gokhale Institute of Politics and Economics

Journal of Social and Economic Development, 2017, vol. 19, issue 2, No 5, 323-340

Abstract: Abstract The efforts of microfinance institutions to improve financial profitability and attract funding from the market may not necessarily conflict with the outreach objective of empowering the poor. In fact, a better-managed financially sound institution may promise a more sustainable effort toward outreach falsifying the occurrence of the trade-off between outreach and financial profitability. The study analyzes the trends in financial indicators reflecting portfolio risk, financial efficiency, productivity and outreach for microfinance institutions in India. The objective of the study is to verify the association between financial performance and outreach. The MIX market data on 46 microfinance institutions for 2005–2014 are used for the analysis. The panel data method with fixed effect model is applied to adjust for the heterogeneity within the sector. The present study finds no evidence of the trade-off between efficiency and outreach objectives in India. The results of the study are important for the investors and policy makers as it provides evidence that increasing outreach will not adversely affect the financial health of the microfinance institutions if they are operationally efficient and productive. The present study draws attention to the fact that the character of MFIs is shifting from unprofessionally managed naïve institutions run by people for the benefit of the people. Most of the MFIs today are professionally run, investor-friendly, profit conscious, or rather profit-driven organizations. This character shift calls for reconsidering the system costs of various subsidies and concessional refinance given to these institutions on a blanket basis.

Keywords: Microfinance institutions; MFIs; Financial inclusion; Panel data analysis (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1007/s40847-018-0049-3

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