Pakistan Institute of Development Economics



Performance of Asian MFIs: The Role of Capital Structure and Macro-Institutional Quality (Article)

We draw on the capital structure theory and examine whether Modigliani & Miller’s capital leveraging ideology improves the performance of microfinance institutions (MFIs) under different macro-institutional quality. We develop and test a framework of the combined effect of capital structure and macro-institutional quality on both financial and social performance, which is a novel contribution. We collect data on 75 MFIs in Asia from 2009 to 2018 and applied Hausman-Taylor test.

We find that when operating in countries whose institutions are relatively weak, MFIs can better perform both socially and financially by using equity funding instead of debt or donation. As supported by the Market Failure Solution theory of institutions, MFIs perform better socially in weaker institutional quality as they can fill up the gap in the market left by traditional banks. As this gap narrows down with the improvement of institutional factors, MFIs face stronger competition from traditional banks. Such competition transposes MFI’s focus toward financial performance (profit-seeking behaviour) and drifts away from social performance (objective of poverty alleviation). Furthermore, under any institutional condition, MFIs with debt or donation impose less control over capital utilisation compared to equity funding. Thus, despite initiation with a major goal of social performance, MFIs suffer from mission drift even with the support of debts and donations when operating in countries with relatively stronger institutions.


Please download the PDF to view it:

Download PDF