Reciprocity between Financial and Social Performance in Microfinance Institutions

Abstract

Microfinance institutions (MFIs) are hybrid organisations with the dual mission of financial sustainability and social purpose. However, there is little empirical evidence on how the two missions may affect each other intertemporally. In this study, we test the lead-lag reciprocal relation between financial and social performance in a sample of 852 unique MFIs across 96 countries from 2005 to 2012. Although we find an insignificant reciprocal relation between financial and social performance in the full sample, a significant finding emerges when we employ the profit status of MFIs as a discriminating factor. Specifically, we find that financial performance is more positively related to subsequent social performance in for-profit MFIs than in nonprofit ones. This suggests that the financial success of for-profit MFIs contributes to their achievement of social impact. On the other hand, we find a positive relationship between social performance and subsequent financial performance for nonprofit MFIs but not for for-profits. These findings suggest that nonprofit MFIs are more effective than for-profit MFIs in translating social impact into subsequent financial success. Overall, our results uncover different strengths and weaknesses of nonprofit and for-profit MFIs in pursuit of their dual mission over time and offer new insights for developing a more sustainable microfinance industry going forward.

Keywords: Social enterprises, financial sustainability, social mission, reciprocity, profit status, microfinance institutions

JEL Classification: A13, C31, L3, P31