Reciprocity, performance, and training expenditure in microfinance institutions: evidence from South Asia

Abstract

This paper examines the effect of training and capacity building on reciprocity in microfinance institutions (MFI). Borrower loyalty requirements in MFI go beyond financial incentives and capacity building helps in skilling borrowers and securing borrower loyalty. The study proposes training expenditures as a determinant of reciprocity. Using an unbalanced panel data of 211 Indian MFIs, we proxy training expenditures by cost per loan and training services are approximated by offices and borrower per staff member. The paper shows that training expenditure has a positive and significant effect on reciprocity, measured in terms of borrower retention and deposit to loan ratio. We also show the interrelationship between training expenditures and performance measures. Our paper contributes to practice by identifying the positive role of training expenditures in securing borrower loyalty and increase in outreach which, in turn, helps to improve performance of MFIs.