Commercialisation of Microfinance Institutions (MFIs) and Financial Performance & Outreach. A Cross-Country Analysis and Case Study of Nepal.

Microfinance institutions (MFIs) are designed to improve the socio-economic status of lowincome households and reduce poverty in developing countries. Initially, MFIs were developed as non-commercial institutions (not-for-profit). However, in recent decades, a growing number of commercial MFIs (for-profit) have begun to emerge which means an increasing percentage of MFIs are now interested in their own financial gain. These MFIs have received criticism for neglecting their purported social objective. In spite of this institutional shift and the resultant criticism, very few studies have investigated the impact of the commercialisation of MFIs on their performance—and even among the few studies that do exist, there is little consensus on the matter. Therefore, this thesis investigates the effect of the growing commercialisation of MFIs on their financial performance and outreach, utilising data from the MIX Market from 2002 to 2016—data which cover 2,102 MFIs from 114 developing countries. The generalised method of moments (GMM) has been applied to analyse the data, and the findings show that the commercialisation of MFIs has no significant effect on their financial performance but has a significant positive effect on the breadth and a significant negative effect on the depth of the outreach of MFIs.

Furthermore, using multiple MFI cases from Nepal, this study investigates the effect of the commercialisation of MFIs at a micro-level and also investigates how the commercialisation of MFIs affects their financial performance and outreach due to the lack of study. The mixed method has been applied and found that commercial MFIs are less profitable and operationally selfsufficient than non-commercial MFIs in Nepal. The result also shows that the profitability of commercial MFIs decreases in the short run but increases in the long run. Moreover, the results presented that commercial MFIs have higher number of borrowers than non-commercial MFIs in Nepal. Similarly, the findings show that commercial MFIs are providing smaller loans compared to non-commercial MFIs but also reveal that the loan size is increasing. In addition, the qualitative analysis shows that the commercialisation of MFIs mainly affects three endogenous factors, i.e., profit intention, size, and management and staff efficiency which affects their financial performance and outreach.

Finally, this thesis also examines whether the profitability of MFIs affects their decisions to offer loans to business start-ups as some argue that higher bank profitability dissuades a bank’s risk taking; thus, it is associated with larger capital reserves because profitable banks stand to lose more shareholder value if downside risks are realised. On the other hand, more profitable banks can borrow more and engage in risky activities on a larger scale under the presence of leverage constraints. A review of the current literature shows that no studies have been done on this subject in the context of MFIs. Therefore, this study uses data from 566 MFIs in 93 countries from the period of 2008 to 2018 and performs an analysis using a random intercept multilevel model. The results show that the profitability of MFIs has a negative relationship with the provision of financial capital to business start-ups.