Institutional quality and credit growth: “Sand” or “grease” effect? Evidence from microfinance institutions

Figures & data

Table 1. Description of variables*

Variables	Description	Formula
Credit Growth (CG): Dependent Variable	It is the growth rate of Gross Loan Portfolio	(GLPt/GLPt-1)-1
Voice and Accountability (VACC)	Represents “perceptions of the extent to which a country’s citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association, and a free media”	Estimate ranges from −2.5 (weak) to 2.5 (strong) governance performance
Political Stability and Absence of Violence (PSAV)	Reflects “perceptions of the likelihood of political instability and/or politically-motivated violence, including terrorism”.
Government Effectiveness (GOVE)	It measures “perceptions of the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government’s commitment to such policies”.
Regulatory Quality (REGQ)	Measures “perceptions of the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development”.
Rule of Law (RLAW)	Represents “perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence”.
Control of Corruption (CCOR)	Measures “perceptions of the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as ‘capture’ of the state by elites and private interests”.
Capitalisation (CTAR)	“Total equity compared to assets”	Total Equity/Total Assets
Risk: Portfolio at risk > 30 days (%) (RISK)	Measures “the portion of loans greater than 30 days past due, including the value of all renegotiated loans (restructured, rescheduled, refinanced and any other revised loans) compared to gross loan portfolio”.	(Outstanding balance, portfolio overdue > 30 days + Renegotiated loans)/Gross loan portfolio
Profitability-Return on Assets (PROF)	Represents “Net operating income (less of taxes) compared to average assets”.	(Net operating income, less Taxes)/Average assets
Liquidity: Non-earning liquid assets as a % of total assets (LIQ)	“Total cash and cash equivalents compared to total assets.”	Cash and cash equivalents/Total assets
Size (LNTA)	The size of MFIs measured as the natural logarithm of total assets (USD)	LN(Total Assets)
Scale Dummies (LSCA & SSCA)	These are indicator variables representing the magnitude of the gross loan portfolio	Takes one for large (LSCA) and small (SSCA), otherwise zero; Large: > 8 million (USD); Medium: 2 million—8 million (USD); Small: < 2 million (USD)
GDP growth (annual %) (GDPG)	“Annual percentage growth rate of GDP at market prices based on constant local currency”
Inflation, consumer prices (annual %) (INFL)	It is measured by the consumer price index and reflects “the annual percentage change in the cost to the average consumer of acquiring a basket of goods and services”.
Employment Rate (EMPR)	Employment ratio is the proportion of a country’s population that is employed. Ages 15 and older are generally considered the working-age population.	Employment to population ratio, 15+, total (%)
Catch-up Phenomenon (CUPP)	It indicates the level of institutional and economic development of a country	Natural logarithm of GDP per capita (current US$)
Pre-crisis Dummy (BGFC)	A dummy variable that takes 1 if the year is within the pre-crisis period (Prior to 2008), otherwise zero
Post-crisis Dummy (AGFC)	A dummy variable that takes 1 if the year is after the crisis period (Post 2009), otherwise zero

*Our description of variables is mostly based on the World Bank and MIX Market definitions since the dataset are obtained from the same.

Table 2. Descriptive statistics

Variables	Obs.	Mean	Std. Dev.	Min.	Max.
Credit Growth	1135	0.3765545	0.7572647	−0.9474	10.6053
Voice and Accountability	1324	−0.3964577	0.5939794	−1.7	0.72
Political Stability and Absence of Violence	1324	−0.5329381	0.7427723	−2.5	1.2
Government Effectiveness	1324	−0.6364653	0.4252322	−1.75	0.64
Regulatory Quality	1324	−0.5069184	0.3866671	−1.68	0.7
Rule of Law	1324	−0.5903021	0.4170509	−1.72	0.35
Control of Corruption	1324	−0.6322885	0.4151969	−1.53	0.76
Capitalisation	1271	0.3350419	0.4061091	−1.5337	1.0000
Risk	1031	0.0824762	0.1016014	0	0.97
Profitability	1149	−0.0079609	0.1031569	−0.8507	0.3577
Liquidity	1040	0.2135976	0.1904877	0.0001	0.7909
Size*	1276	15.91601	1.929068	10.14624	22.17605
GDP growth	1324	0.0566245	0.0308277	−0.0813044	0.3362937
Inflation	1324	0.0786817	0.0691938	−0.0897474	0.4439128
Employment Rate	1324	0.6885373	0.1114593	0.3646	0.8782
GDP per Capita*	1324	6.588874	0.6870069	4.854657	8.988131

*Size and GDP per Capita are in natural logarithm

Table 3. Institutional Quality and MFI Lending Behavior: GMM Results (Outcome Variable: Credit Growth)

Variables	Model 1	Model 2	Model 3	Model 4	Model 5	Model 6	Model 7	Model 8	Model 9	Model 10
Credit Growth (Lag)	0.128*	0.120	0.143**	0.125	0.129*	0.129	0.130	0.138*	0.121*	0.127
Voice and Accountability	−0.145		−0.097
Political Stability	−0.264	−0.324**		−0.158					−0.323**	−0.324**
Government Effectiveness	0.104				0.291
Regulatory Quality	0.250					0.185
Rule of Law	0.553*	0.625**					0.299		0.724***	0.547*
Control of Corruption	−0.080							0.155
Capitalisation	0.547**	0.602**	0.624***	0.538**	0.706***	0.722***	0.707**	0.659**	0.542**	0.460*
Risk	−0.576	−0.567	−0.567	−0.729	−0.540	−0.653	−0.610	−0.619	−0.410	−0.375
Profitability	−1.385***	−1.311***	−1.399***	−1.363***	−1.324***	−1.276***	−1.296***	−1.316***	−1.100***	−1.067***
Liquidity	0.033	0.034	0.020	0.059	0.034	0.023	0.027	.0040	−0.022	−0.014
Size	0.263***	0.281***	0.297***	0.282***	0.328***	0.301***	0.327***	0.317***	0.314***	0.319***
Large Scale	−0.248**	−0.252**	−0.301***	−0.249**	−0.254**	−0.232*	−0.249**	−0.260**	−0.310**	−0.284**
Small Scale	0.310***	0.334***	0.391***	0.366***	0.357***	0.347***	0.396***	0.365***	0.406***	0.443***
GDP growth	1.459	1.524*	1.639**	1.816**	1.439*	1.534*	1.433*	1.616**	2.273***	1.741**
Inflation	−0.010	0.007	0.270	0.269	0.146	0.298	0.211	0.318	−0.068	−0.031
Employment Rate	−1.417	−1.480	−0.871	−0.722	−1.805	−1.111	−1.532	−1.211	−1.088	−0.908
Catch-up	−0.302	−0.268	−0.163	−0.112	−0.320	−0.268	−0.320	−0.212	−0.259	−0.254
Pre-crisis Dummy	0.147*	0.124*	0.173**	0.194***	0.155**	0.196***	0.150*	0.182**	0.111	0.106
Post-crisis Dummy	−0.054	−0.066	−0.036	−0.059	−0.045	−0.036	−0.045	−0.035	−0.081	−0.076
Constant	−1.002	−1.552	−3.244	−3.466	−1.821	−2.335	−2.009	−2.878	−2.376	−2.699
Wald Test	chi2(20) = 137.02 Prob>chi2 = 0.0000	chi2(16) = 101.64 Prob>chi2 = 0.0000	chi2(15) = 104.76 Prob>chi2 = 0.0000	chi2(15) = 98.78 Prob>chi2 = 0.0000	chi2(15) = 214.69 Prob>chi2 = 0.0000	chi2(15) = 120.21 Prob>chi2 = 0.0000	chi2(15) = 108.52 Prob>chi2 = 0.0000	chi2(15) = 101.66 Prob>chi2 = 0.0000	chi2(16) = 99.07 Prob>chi2 = 0.0000	chi2(16) = 100.27 Prob>chi2 = 0.0000
Sargan Test^a	Prob>chi2 = 0.9302	Prob>chi2 = 0.9448	Prob>chi2 = 0.9446	Prob>chi2 = 0.9417	Prob>chi2 = 0.9534	Prob>chi2 = 0.9304	Prob>chi2 = 0.9394	Prob>chi2 = 0. 0.9552	Prob>chi2 = 0.3410	Prob>chi2 = 0.1985
AR(1)^b	Prob > z = 0.0039	Prob > z = 0.0059	Prob > z = 0.0034	Prob > z = 0.0041	Prob > z = 0.0038	Prob > z = 0.0041	Prob > z = 0.0047	Prob > z = 0.0036	Prob > z = 0.0072	Prob > z = 0.0080
AR(2) ^b	Prob > z = 0.1269	Prob>z = 0.1445	Prob> z = 0.1499	Prob > z = 0.1712	Prob > z = 0.1527	Prob > z = 0.1624	Prob > z = 0.1514	Prob > z = 0.1524	Prob > z = 0.1616	Prob > z = 0.1654
Observations	632	632	632	632	632	632	632	632	632	632
No. of groups	131	131	131	131	131	131	131	131	131	131
No. of instruments	109	105	104	104	104	104	104	104	78	61

^aSargan test of over-identifying restrictions where H0: overidentifying restrictions are valid. ^bArellano-Bond test for zero autocorrelation in first-differenced errors where H0: no autocorrelation. *** show significance at 1% level; ** indicate significance at 5% level and * reflect significance at 10% level.