Credit risks, national governance and profitability in microfinancing sector: evidence from some emerging economies of world importance

Abstract

Purpose

The world order is experiencing unremitting changes. With this, the national governance of emerging economies is also becoming robust. Therefore, the current study examines the efficacy of national governance in the context of emerging economies by investigating its effects on the profitability of the microfinancing sector. Further, the study inspects if national governance mitigates the impact of credit risks to protect profitability.

Design/methodology/approach

The study considers panel data from 224 microfinancing institutions from five economies of world importance: Brazil, Russia, India, China and South Africa (BRICS). The study uses dynamic panel data modeling, particularly the generalized method of moments, alongside multiple univariate and multivariate techniques.

Findings

The findings indicate that credit risks negatively impact profitability. In addition, the study documents a significant positive linkage between national governance and profitability. However, national governance fails to restrict the adverse effects of credit risks. National governance is found to be effective in reducing internal agency problems; the monitoring effects successfully limit the moral hazards due to managers' actions. Conversely, the national governance in these economies misses the mark in regulating the moral hazards due to borrowers' behavior.

Originality/value

The current study provides fresh perspectives on the efficacy of national governance in microfinancing in the setting of emerging economies.

Citation

Singh, K. (2023), "Credit risks, national governance and profitability in microfinancing sector: evidence from some emerging economies of world importance", International Journal of Emerging Markets, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJOEM-04-2023-0665