Understanding the Impacts of Diversification on Financial Performance and Sustainability: A Case of South Asian Microfinance Institutions
Main Article Content
Abstract
The concept of microfinance has gained much importance as it can effectively eradicate poverty of deprived segments and achieve economic development especially in developing economies. Microfinance institutions (MFIs) are observed to have a hybrid objective of both social and financial nature. Existing literature has ignored some essential dimensions of diversification that can influence the financial performance of microfinance institutions. This study collected data from the World Bank for 152 South Asian microfinance institutions for the time period 2012-2019. This research has employed GMM approach with xtabond2 command and findings of the study reveal the significant impacts of various dimensions of diversification for sustainability of microfinance institutions. This study suggests that commercialization of MFIs and adoption of technological advancements has emerged as a result of enormous drop in subsides and donations that doubted goal of sustainability and profitability. Thus, all MFIs generate income through both financial and non-financial services. This has also led to their expansion of social outreach as well as decrease in their operational cost and hence, high financial performance and ultimately sustainability. These findings recommend that microfinance institutions have to pay attention to formulate various policies and offer more diversified services to attain their hybrid objective.
Article Details
References
Ansoff, H.I. (1957) Diversification Strategy. Harvard Business Review.
Asian Development Bank. (2019). Key indicators for Asia and the Pacific 2017 (Publication No. FLS178890-2). Asian Development Bank
Arellano M, Bond S (1991) Some tests of specification for panel data: monte carlo evidence and an application to employment equations. Rev Econ Stud, 58, 277–297
Bandelj, A. (2016). Should banks be geographically diversified? Empirical evidence from cross country diversification of European banks. European Journal of Finance, 22 (2), 143-166.
Bedson, J. (2009). Microfinance in Asia: Trends, Challenges and Opportunities (Publication No. 48906071306). Queensland, Australia: The Foundation for Development Cooperation.
BNP Paribus. (2017). Microfinance Barometer 2017: Global trends of the sector.
Blundell R, Bond S (1998) Initial conditions and moment restrictions in dynamic panel data models. J Econ, 87, 115–143.
Chen , Xian. Wei, L. Zhang, Yong Shi. (2013). Sectoral Diversification and the Banks’ Return and Risk: Evidence from Chinese Listed Commercial Banks. Procedia Computer Science, 18, 1737 – 1746.
Chiorazzo, V., C. Milani, & F. Salvini (2008). Income diversification and bank performance: Evidence from Italian banks. Journal of Financial Services Research, 33(3), 181-203.
Churchill, (2020). Microfinance financial sustainability and outreach: is there a trade-off?, Empirical Economics, Springer, 59(3), 1329-1350.
Chikalipah, Sydney. (2017). Financial sustainability of microfinance institutions in sub-Saharan Africa: Evidence from GMM estimates. Enterprise Development and Microfinance. 28. 182-199.
Cull, Robert, Asli Demirgüç-Kunt, & Jonathan Morduch (2007). Financial performance and outreach: A global analysis of leading microbanks. Economic Journal, 117(517), 107- 133.
Deng, Saiying E., & Elyas Elyasiani (2008). Geographic Diversification, Bank Holding Company Value, and Risk. Journal of Money, Credit and Banking, 40(6), 1217–1238.
DeYoung, R, & Rice. T, (2004). Noninterest Income and Financial Performance at U.S. Commercial Banks. 41(3), Financial Review, 449-450.
Duho, K.C.T., Onumah, J.M., Owodo, R.A., Asare, E.T. and Onumah, R.M. (2020), "Bank risk, profit efficiency and profitability in a frontier market", Journal of Economic and Administrative Sciences, 36(4), . 381-402
Elsas, R., A. Hackethal, & M. Holzhauser (2010). The anatomy of bank diversification. Journal of Banking & Finance, 34(6), 1274-1287.
M. Fresno and D. Hanggraeni (2020). Impact of diversification on systemic risk of conventional banks listed on the Indonesia Stock Exchange. Banks and Bank Systems, 15(4), 80-87
Githaiga, (2021). Revenue diversification and financial sustainability of microfinance institutions. Asian Journal of Accounting Research Emerald Publishing Limited, 2443-4175
Hayden, Evelyn, Daniel Porath, & Natalja v. Westernhagen (2007). Does Diversification Improve the Performance of German Banks? Evidence from Individual Bank Loan Portfolios. Journal of Financial Services Research, 32, 123-140.
Hermes, N., Lensink, R. and Meesters, A. (2011), “Outreach and efficiency of microfinance institutions”, World Development, 39(6), 938-948.
Jackson, S. L. (2009). Research methods and statistics. California: Wadsworth Cengage Learning.
Jouida, Sameh (2017). Diversification, capital structure and profitability: A panel VAR comments." Research in International Business and Finance. doi: https://doi.org/10.1016/j.ribaf.2017.07.155.
Jha, S.K.; Bhawe, N.; Satish, P. (2021) Scaling Social Enterprises through Product Diversification. Sustainability, 13, 11660.
Kaufmann, D., Kraay, A., & Mastruzzi, M. (2011). The worldwide governance indicators: Methodology and analytical issues. Hague Journal on the Rule of Law, 3(2), 220–246.
Kinde, B.A. (2012) ‘Financial sustainability of microfinance institutions (MFIs) in Ethiopia’, European Journal of Business and Management 4(15): 1–10.
Kuroda, H. (2013). Asia’s Challenges - OECD. Retrieved April 20, 2018, from http://www.oecd.org/economy/asia-challenges.htm
Laeven, L., & R. Levine (2007). Is there a diversification discount in financial conglomerates? Journal of Financial Economics, 85(2), 331-367.
Lapenu, C and M Zeller (2001). Distribution, Growth and Performance of Microfinance Institutions in Africa, Asia and Latin America. FCND Discussion Paper 114, International Food Policy Research Institute (IFPRI), Washington DC.
Markowitz, Harry (1952). Portfolio Selection. The Journal of Finance, 7(1), 77-91.
Mersland, Roy, and Øystein R. Strøm. 2014. "Measuring microfinance performance." In Microfinance Institutions: Financial and Social Performance, edited by Roy Mersland and R. Øystein Strøm. Hampshire, UK: Palgrave Macmillan
Meslier, C., Tacneng, R. and Tarazi, A. (2014), “Is bank income diversification beneficial? Evidence from an emerging economy”, Journal of International Financial Markets, Institutions and Money, 31, 97-126.
Marconatto, D., Cruz, L. B., & Pedrozo, E.A. (2016). Going beyond microfinance fuzziness. Journal of Cleaner Production, 115, 5–22
MIX. MIX Market, Financial Data and Social Performance, Microfinance Information Exchange. http://www.mixmarket.org/
MicroFinance Institutions Network. (2017). Microfinance in Asia: A mosaic future outlook. India
Morduch J. (1999) The role of subsides in microfinance: Evidence from Grameen bank. Journal of Development Economics. 1999;60:229-248.
Nesrine Ammar & Adel Boughrara (2019). The impact of revenue diversification on bank profitability and risk: evidence from MENA banking industry. Macroeconomics and Finance in Emerging Market Economies
Pascal, D, R Mersland, & N Mori. (2017). The influence of the CEO’s business education on the performance of hybrid organizations: the case of the global microfinance industry. Small Business Economics, 1-16.
Remer, H. Kattilakosk (2021). Microfinance institutions’ operational self sufficiency in sub-Saharan Africa: empirical evidence. International Journal of Corporate Social Responsibility, 6(5).
Roodman, D. (2009). How to do Xtabond2: An introduction to difference and system GMM in Stata. The Stata Journal, 9(1), 86–136.
Sanya, Sarah, & Simon Wolfe (2010). Can Banks in Emerging Economies Benefit from Revenue Diversification? Journal of Financial Services Research, 40(1), 79-101.
Sissy, Aisha Mohammed, Mohammed Amidu, & Joshua Yindenaba Abor (2017). The effects of revenue diversification and cross border banking on risk and return of banks in Africa. Research in International Business and Finance, 40 (Supplement C),1-18.
Stiroh, K.J. (2004), “Do community banks benefit from diversification?”, Journal of Financial Services Research, 25 (2-3), 135-160.
Stiroh, Kevin J., & Adrienne Rumble (2006). The dark side of diversification: The case of US financial holding companies. Journal of Banking & Finance, 30(8), 2131-2161.
Wang, H., Yang, M., He, R., & Zheng, P. (2021). Environmental regulation, foreign direct investment, and export sophistication of China: An empirical study based on dynamic system GMM and threshold model. Environmental Science and Pollution Research
Weiss, J., & Montgomery, H. (2005). Great expectations: microfinance and poverty reduction in Asia and Latin America. Oxford Development Studies, 33(3–4), 391–416.
Wondirad (2020). Competition and microfinance institutions’ performance: evidence from India. International Journal of Corporate Social Responsibility, 5(6).
Rahman MW, Jianchao Luo, Minjuan, Z. 2014 Welfare Impacts of NGO type Microfinance Service Providers in China: An empirical study in Shaanxi China. Journal of International Development;
Zamore, Stephen, (2018). Should microfinance institutions diversify or focus? A global analysis. Research in International Business and Finance, 46,105-119.
Zamore, Stephen, Mersland, Roy, (2019). Geographical diversification and credit risk in Microfinance. Journal of banking and finance, 109, 10566