Nonprofit and For‐Profit Microfinance Institutions: Governance, Outreach and Sustainability

What the paper says

ABSTRACT Microfinance was initially established to serve the poor and financially excluded. However, the allure of high repayment rates and low non‐performing loans has attracted for‐profit investors to the microfinance landscape, seeking not only to extend loan services to the poor but also to generate profits. Consequently, a growing number of for‐profit Microfinance Institutions (MFIs) have emerged in developing countries. This study examines the implications of profit orientation on the governance structure, outreach goal, and financial sustainability of MFIs. To accomplish this, we collected data from 1189 unique MFIs in 105 countries spanning 2010 to 2018 and applied both non‐parametric (e.g., t ‐test and Kruskal Wallis) and parametric tests (e.g., regressions analysis). Our findings revealed significant differences in governance structure between for‐profit and nonprofit MFIs, with the latter exhibiting larger board sizes and greater gender diversity. We also observed variations in outreach, with nonprofit MFIs demonstrating broader coverage and greater depth. Finally, empirical evidence highlighted differences in financial sustainability, as nonprofit MFIs tend to have higher financial health than their for‐profit counterparts. However, the effect of nonprofit status was mostly consistent with the baseline results for middle‐income countries but mixed and insignificant for low‐income countries (except for governance indicators). These findings have policy implications, underscoring the need for MFIs transitioning from nonprofit to for‐profit status to adapt their governance structure, realign their outreach mission, and refocus on financial sustainability accordingly.