Institutional quality and credit growth: “Sand” or “grease” effect? Evidence from microfinance institutions

Tilahun Aemiro Tehulu

Cogent Business & Management, 2022, vol. 9, issue 1, 2098637

Abstract: This article examines the effect of institutional quality on the credit growth of Microfinance Institutions (MFIs) in sub-Saharan Africa (SSA). This paper uses a panel dataset of 131 MFIs across 31 SSA countries spanning 2004–2018 and applies the Arellano-Bover/Blundell-Bond two-step Generalized Method of Moments (GMM) Windmeijer bias-corrected standard errors to estimate the parameters. The study reveals that institutional quality is an important factor in the credit growth of MFIs. We uncover new and interesting evidence that political stability “sands the wheels” of credit growth of MFIs, implying that MFIs operating in more politically stable countries tend to be more risk averse and limit credit supply. On the other hand, the rule of law “greases the wheels” of credit growth of MFIs, suggesting that MFIs expand credits more when the rule of law is stronger. We also uncover that credit growth is linked to regulatory quality/government effectiveness positively, but not statistically significant. Similarly, voice and accountability and control of corruption do not have significant effects on MFI credit growth. The findings have several useful implications as discussed in the paper.

Date: 2022
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DOI: 10.1080/23311975.2022.2098637

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