Performance of microfinance institutions in Europe—Does social capital matter?

• Published in: Socio-economic planning sciences Vol. 68; p. 100670
• Main Authors: Chmelíková, Gabriela, Krauss, Annette, Dvouletý, Ondřej
• Format: Journal Article
• Language: English
• Published: Oxford Elsevier Ltd 01-12-2019; Elsevier Science Ltd
• Subjects: Credit risk; Efficiency; Financial institutions; Financial performance; Labor market; Microfinance; Microfinance institutions; Panel data; Regional economics; Social capital; Social performance; Europe; Financial performance; EMN; G21; G23; MFC; Social capital; PCA; MFI; VIF; R23; Microfinance institutions; 015; Efficiency; Regional economics; EAPN; Social performance
• ISSN: 0038-0121; 1873-6041
• DOI: 10.1016/j.seps.2018.11.007

This paper investigates performance drivers of microfinance suppliers in Europe. As such suppliers, in contrast to advanced microfinance suppliers in developing economies, typically focus on uncollateralized microcredit services to individuals at the margins of society and of labor markets, we draw on the theory of social capital and empirically investigate the role that social capital may play in the overall performance of European microfinance suppliers. We build a unique, unbalanced panel data set of 302 microfinance service providers in Europe covering the years 2008–2015, and measure their performance in terms of credit risk, financial and social performance, and efficiency. Pursuing an econometric approach, we test a series of hypotheses using various measures of conditions conducive to building social capital on both the institutional and the country level, such as the client base of a microfinance supplier and the level of cultural fractionalization in a society. Our findings confirm that a higher intensity of social capital is positively associated with all areas of the performance of microfinance suppliers in Europe. Our conclusions could help in the design and launch of microfinance institutions in those European countries in which microfinance markets are developed not at all or only to a very limited extent. Our paper thus contributes to the nascent literature on microfinance in developed economies by applying and extending the theoretical framework and empirical models on social capital and microfinance that were originally elaborated for developing economies.
•Social capital has a positive influence on repayment, profitability, and depth of social outreach.•Higher proportion of clients from rural areas improves most MFI performance indicators.•Smaller lending entities perform better than their bigger counterparts.•Profit-oriented institutions outperform not-for-profits in all the areas of performance.