Bridging the Information Gap between Borrowers and Microfinance Lenders

We use a fixed effect two-stage least squares regression approach on a time series of 82 microfinance institutions (MFIs) in Africa during the period 1997-2008 to understand what drives MFI performance. MFIs with higher debt-to-equity ratios and strong profit margins tend to have stronger financial performance than institutions with low debt-to-equity and weak profit margins. Further, MFI size and expense ratio are inversely related to financial performance. Finally, we find that the older the MFI, the better the financial performance. Our study contributes to the microfinance literature by using a unique sample of non-bank financial institutions across a decade-long time series covering the entirety of the African continent. The results support the asymmetric information theory of microfinance institutions. Overall, our results indicate that it is the financial characteristics rather than MFI structure that determine performance. This may be useful for MFI investors and practitioners.