Do Client Protection Principles Matter for the Economic and Social Performance of Microfinance Institutions?

Abstract

This study investigates the influence of client protection principles (CPPs) in lending practice on the economic and social performance of Microfinance Institutions (MFIs). The demand for responsible treatment of borrowers has increased in recent years. However, there is a debate about whether the adoption of CPPs enhances the economic and social performance. We empirically test this by using a unique panel dataset of 1015 MFIs operating in 93 countries for 2007-2018. We find a positive impact of client protection on social performance. The impact of client protection on financial performance is negative in the short run, but the negative effect does not hold in the long run. Our documented findings are robust across the alternative measurement of financial and social performance, after controlling for country-level fixed-effects and accounting for endogeneity using propensity score matching, two-stage least squares estimation, and a two-step system generalised method of moments. Detailed analyses show that not all the client protection principles have a significant impact on MFI performance. Additional analyses show that the influence of CPPs on social performance is more pronounced in profit-oriented MFIs than in not-for-profit MFIs and in larger than smaller MFIs. Also, the adoption of CPPs increases access to subsidized funds.

Keywords: Microfinance institutions, client protection principles, economic and social performance