Financial productivity or social productivity? A constant dilemma plaguing microfinance institutions

What the paper says

Purpose Microfinance institutions (MFIs) contribute to sustainable economic development by providing financial services to marginalized populations that lack collateral for mainstream banking. This study investigates the balance between the financial and social productivity of MFIs in six South Asian countries to ensure sustainability. Design/methodology/approach Using the Malmquist total factor productivity index, this study assessed the productivity of selected MFIs over 10 years. It employed Kruskal–Wallis test to identify productivity disparities between nations and Spearman's correlation to analyze the link between financial and social productivity, complemented by the Granger causality test to explore lead–lag relationships. Findings The financial and social performance of MFIs in India, Pakistan, and Nepal showed notable differences, but the productivity estimates across countries did not significantly differ. Furthermore, financial and social productivity had no relations, highlighting the need for a balanced approach by institutions to ensure sustainability. Research limitations/implications The study is constrained by the limited availability of recent data. Moreover, the influence of various national and international factors could not be explored, as their inclusion would have excessively broadened the scope of the study. Practical implications The findings highlight that MFIs need to carefully balance their financial goals with social impact by adopting flexible lending models, diverse funding sources, and optimized operational costs. Originality/value This study contributes to the MFI field by analyzing the trade-off between the financial and social productivity of MFIs in six South Asian countries.