The objective of this chapter is to analyse the financial sustainability versus the social impact of microfinance institutions. To carry out the study, several social and financial benchmarks for entities specialized in evaluating the performance of microfinance institutions (such as MIX and Planet Rating), and which are normally used in similar research projects, were used. Thus, it is intended to study the profile of microfinance institutions that have a greater social impact, through financial operations with clients with less income, like women, contributing to a higher level of income in target audiences, usually outside of the formal financial system. The definition of such a profile of institutions will make it possible to study whether these entities are able to guarantee the financial sustainability of their activity and, at the same time, focus on social impact through the provision of financial services to the poorest.
TopIntroduction
Poverty is one of the major problems of contemporary society since more than 20% of the world’s population still lives with less than 1.25 USD per day. This reality is related to the social and financial exclusion of a large number of people who do not have access to the formal financial system. Also, the number of women who cannot obtain financing to create or develop their business stands out negatively. On the other hand, women represent a great pillar in most regions’ families, making their access to the financial system even more critical to fighting poverty worldwide. Women are the cornerstone of families’ development; they do not leave their families to work in cities with better wages and have an enormous influence on the education of their children and as a consequence for the future generation.
Thus, over the years, a parallel financial system has been developing, referred to as microfinance. For which the preferential public is the poorest and those with greater difficulty obtaining credit from commercial banks, namely women. The greatest worldwide reference is the Grameen Bank, which started the process of granting microcredits in Bangladesh. However, today microfinance is present in most countries, with an emphasis on its importance in Asia and Sub-Saharan Africa (the region below the Sahara Desert).
At the same time, however, there has been a debate about the trade-off between reaching the poorest and the financial sustainability of microfinance institutions since operations traditionally carried out with the lower classes of society have lower profitability (smaller amounts and lower interest rates).
Thus, this study aims to analyze the trade-off between financial performance and the social outreach of microfinance institutions.
For the empirical study, the sample corresponds to 495 microfinance institutions in different continents that have published their financial and social annual statements in the Microfinance Information Exchange (MIX) database, representing the largest source of information in the sector. The year 2018 is considered since it is the last fiscal year with more financial information available.
Concerning the structure of the paper, it will be composed of two main parts. Part I addresses the concept of microfinance and the trade-off between financial sustainability and social outreach in the activity of these organizations.
Part II, concerning the empirical study, addresses the objectives, hypotheses, and research methodology in more detail. Lastly, the analysis and discussion of the results obtained will be performed.