Financial and social sustainability in the European microfinance sector

• Published in: Small business economics Vol. 63; no. 3; pp. 1249 - 1292
• Main Authors: Dalla Pellegrina, Lucia, Diriker, Damla, Landoni, Paolo, Moro, Davide, Wijesiri, Mahinda
• Format: Journal Article
• Language: English
• Published: New York Springer US 01-10-2024; Springer Nature B.V
• Subjects: Business and Management; Comparative studies; Entrepreneurs; Entrepreneurship; Financial institutions; Financial management; Financial sustainability; Generalized method of moments; Industrial Organization; Interest rates; Loans; Management; Microeconomics; Microfinance; Policy making; Regulation of financial institutions; Research Article; Small business; Social sustainability; Subsidies; Sustainability; Women; Europe; Social sustainability; L26; Microfinance; European Union; O16; Mission drift; G21; Outreach; I32; Financial sustainability
• ISSN: 0921-898X; 1573-0913
• DOI: 10.1007/s11187-023-00850-7

This paper investigates the balance between social and financial sustainability goals in the European microfinance sector using an original dataset obtained from a survey conducted in 2016–2017 on 159 microfinance institutions (MFIs) operating in 38 European countries. Overall, our results show that MFIs that are more likely to comply with their social sustainability objectives are also doing well financially. The only aspect on which social sustainability does not seem to have a positive effect on financial sustainability is the financing of the poorest through the provision of small-scale loans. A phenomenon that seems peculiar to the European context is that larger MFIs operating in countries with stringent financial regulation tend to show a comparative advantage and better withstand competition from the traditional banking sector. However, a separate issue that deserves attention is the specific regulation on interest rates, which seems to penalize the MFIs operating in countries imposing interest rate caps due to the impossibility to pass on the high unit costs of microlending to borrowers. Our results are robust to alternative measures of financial sustainability and to the use of the Generalized Method of Moments (GMM) and Instrumental Variable (IV) estimation techniques to overcome the problem of endogeneity.
Plain English Summary
European Microfinance Institutions that more tightly pursue social objectives are also more likely to be financially sustainable but are penalized by regulatory restrictions on interest rates.
The microfinance sector underwent a significant global expansion in recent years, creating chances for underprivileged and vulnerable groups, particularly women entrepreneurs, to start their businesses. The balance between social and financial sustainability is one of the most hotly debated themes in a growing number of studies, although there is little empirical evidence on the European microfinance sector. In this paper, we provide one of the first pieces of evidence of this relationship in the European context. Our findings have important implications for researchers, policymakers, and society as a whole. The research reveals that European Microfinance Institutions (MFIs) that more tightly pursue social objectives are also more likely to be financially sustainable. Furthermore, smaller MFIs appear to achieve a double bottom line more easily, especially targeting higher shares of women borrowers. The critical aspect of European MFIs appears to be their greater reliance on subsidies, as well as a regulation that is ill-suited to the microfinance sector, especially regarding interest rate caps. Thus, a more structured regulatory framework focused on social sustainability variables could improve microfinance effectiveness in the coming years.