Microfinance Performance in the OIC Member States – Does Regulation Status Matter?

Abstract

Despite the emerging concern of mission drift, microfinance institutions (MFIs) in various developing nations have been commercializing and transforming into regulated financial intermediaries. However, a hidden dread is still alive until it is disclosed that the regulated MFIs are actually performing better in both of their financial and social obligations. Hence, this study aims to investigate the effect of regulatory status on the performance of MFIs, using a panel dataset from the OIC member states containing 285 observation years for the period of 2011-2015. A robust estimation of OLS techniques to the general form of cross-sectional and temporal dependency were applied. The findings do not show any significant evidence that the regulatory status affects the profitability of MFIs. However, the result indicates that the regulated MFIs decrease their outreach to female clientele. The study additionally reveals that the interest rates accelerate the profitability, but it does not necessarily harm the outreach. Nevertheless, the study believes that ethical practices and fair pricing in MFIs must be contained so that the poor will not be exploited and MFIs can avoid mission drift.