Financial and social sustainability in the European microfinance sector

Lucia Dalla Pellegrina (), Damla Diriker (), Paolo Landoni (), Davide Moro () and Mahinda Wijesiri ()
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Lucia Dalla Pellegrina: Department of Economics, Management and Statistics (DEMS), University of Milano-Bicocca, Centre for European Research On Microfinance (CERMi), Center for Interdisciplinary Studies in Economics, Psychology and Social Sciences (CISEPS), Center for European Studies (CefES)
Damla Diriker: Vrije Universiteit Amsterdam
Paolo Landoni: Politecnico Di Torino
Davide Moro: Politecnico Di Torino
Mahinda Wijesiri: Université du Québec

Small Business Economics, 2024, vol. 63, issue 3, No 16, 1249-1292

Abstract: Abstract This paper investigates the balance between social and financial sustainability goals in the European microfinance sector using an original dataset obtained from a survey conducted in 2016–2017 on 159 microfinance institutions (MFIs) operating in 38 European countries. Overall, our results show that MFIs that are more likely to comply with their social sustainability objectives are also doing well financially. The only aspect on which social sustainability does not seem to have a positive effect on financial sustainability is the financing of the poorest through the provision of small-scale loans. A phenomenon that seems peculiar to the European context is that larger MFIs operating in countries with stringent financial regulation tend to show a comparative advantage and better withstand competition from the traditional banking sector. However, a separate issue that deserves attention is the specific regulation on interest rates, which seems to penalize the MFIs operating in countries imposing interest rate caps due to the impossibility to pass on the high unit costs of microlending to borrowers. Our results are robust to alternative measures of financial sustainability and to the use of the Generalized Method of Moments (GMM) and Instrumental Variable (IV) estimation techniques to overcome the problem of endogeneity.

Keywords: Microfinance; European Union; Social sustainability; Outreach; Mission drift; Financial sustainability; G21; I32; L26; O16 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11187-023-00850-7

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