Legal Form, Performance and Risk in the Microfinance Industry

Abstract

I examine whether a microfinance institution’s (MFI) legal form influences its financial performance and risk using a sample of 349 MFIs from a global dataset over the period of 2004-2012. Three main results emerge. First, after controlling for MFI, country and time- specific effects, an MFI’s commercialisation level has a negative impact on the institution’s financial performance and operating efficiency. Secondly, using a proxy for insolvency risk (LN(Z-score)), the study identifies that a legal form’s commercial orientation has a positive affect on an MFI’s insolvency risk. Finally, in relation to loan quality, I find no significant difference between various legal forms’ loan loss rates as they become more commercially orientated. These findings should prove useful for policy makers and investors involved in the microfinance industry in which there is no established ‘best set-up’.