Do client protection principles matter for the economic and social performance of microfinance institutions?

This study investigates the influence of client protection principles (CPPs) in lending practice on the economic and social performance of Microfinance Institutions (MFIs). The demand for ethical and fair treatment of microfinance borrowers has increased in recent years after several incidences of exploiting clients in different parts of the world. In response to this call, many MFIs adopted CPPs in lending operations to borrowers. However, there is a debate about whether adopting CPPs enhances the economic and social performance of MFIs. We empirically test this using a unique panel dataset of 1015 MFIs (5650 MFI-year observations) operating in 93 countries from 2007 to 2018. We find a positive impact of client protection on social performance in the short- and long-run. The impact of client protection on financial performance is negative in the short run, but the effect diminishes in the long run. Our documented findings are robust across a battery of robustness tests and account for endogeneity using propensity score matching, two-stage least squares estimation, and a two-step system generalized method of moments. Detailed analyses show that not all the client protection principles have a significant impact on MFI performance. Additional analyses show that the influence of CPPs on social performance is more pronounced in larger than smaller MFIs. Also, adopting CPPs increases the clients' access to savings and the MFIs’ access to subsidized funds.