What drives credit risk of microfinance institutions? International evidence

The purpose of this paper is to shed light on the factors that affect microfinance institutions’ (MFI) credit risk. These factors include MFIs’ characteristics and country-level indicators.

This empirical study uses an unbalanced panel data of 638 MFIs from 87 countries observed over a period ranging from 2005 to 2015. Random-effects models are used to estimate the models.

The results reveal that group-lending methodology, percent of loan granted to women and diversification activities reduce credit risk; credit quality is enhanced by the relevance of the information published by public or private bureaus and law enforcement cost increases credit risk. Finally, credit risk tends to be limited in a good institutional environment.

Several implications can be drawn in light of these findings. For MFIs’ managers, using group lending or granting more credit to women and diversifying their activities enhance their credit quality. Furthermore, authorities need to strength debt repayment institutions and reinforce institutional environment to help MFIs to limit their credit risk.

Previous studies focus on specific MFIs’ practices that enhance repayment rate or on country-level indicators. One of the contributions of this paper is the use of both types of indicators.