The bidirectional relationship between MFIs’ financial and social performance: Sustainability and outreach perspective

Figures & data

Table 1. Outreach-sustainability relationship according to literature

Study	Positive relationship	Negative relationship	Non-significant relationship
Bansah (2021)	Cost per borrower, operating expense divided by total assets and loan loss reserve have a positive significant relation with depth of outreach. Gross loan portfolio, portfolio at risk, and interest expense on deposits have a positive significant relation with breadth of outreach.	Operating expenses to the assets, return on equity, loan loss ratio, debt to equity ratio have a negative significant relation with depth of outreach. Operational self-sufficiency, cost per borrower, and operating expenses divided by total assets have a negative significant relation with breadth of outreach.
Hoque et al. (2011)	Size of the loan portfolio and age of an MFI have a positive significant relation with outreach.	ROE have a negative significant relation with outreach.
Gibson (2012)		A weak relation between performance and outreach.	Operational sustainability with respect to performance and outreach, average loan size, net deposits, have a positive non-significant relation with sustainability.
Narwal and Yadav (2014)	Number of offices has positive significant relation with outreach.	Size of MFIs, age, personnel allocation ratio, and asset structure have a negative significant relation with outreach.
Long and Marwa (2015)	Debt to equity ratio a have a positive significant relation with sustainability.	Profitability, portfolio at risk and operating expenses have a negative significant relation with sustainability.
Quayes (2015)	Outreach has a positive significant relation with sustainability.	Total expense ratio and loan loss reserve ratio have a negative significant relation with sustainability.
Bayai and Ikhide (2016)	Equity has a positive significant relation with depth of outreach. Deposits have a positive relation with breadth of outreach.	Borrowings and deposits have a negative significant relation with depth of outreach. Borrowings have a negative significant relation with breadth of outreach.
El-maksoud (2016)	Macroeconomic variables, economic freedom, size, and age of an MFI have a positive relation with outreach and sustainability. Domestic credit to GDP has a positive relation with outreach. Sustainability has a positive relation with outreach for NGOs.	Development of the formal banking system, liquid liabilities to GDP have a negative significant relation with sustainability.	MFI type has non-significant relation with sustainability. Sustainability and development of the formal banking system has a non-significant relation with outreach.
Khan et al. (2016)	Leverage, female borrowers, regulations, and profit have a positive significant relation with depth of outreach.	Sustainability, credit methodology, and age of the institution have a negative significant relation with depth of outreach.
Khachatryan et al. (2019)	Loans and savings have a positive significant relation with outreach and sustainability.
Khalaf and Saqfalhait (2019)	Borrower per Staff Member, portfolio at risk have a positive significant relation with breadth of outreach. Gross loan portfolio has a positive significant relation with depth of outreach.	Yield has a negative relation with depth of outreach.	Yield has a non-significant relation with breadth of outreach. Average loan size has a non-significant relation with sustainability.
Ario (2020)			There is non-significant relationship between depth of outreach and sustainability in group lending.
Parvin et al. (2020)	Equity to asset ratio and size have a positive significant relation with sustainability.	Debt to loan ratio and risk have a negative significant relation with sustainability.
Wasiaturrahma et al. (2020)	Age, ratio of total grants to equity, financing to deposit ratio have a positive significant relation with outreach.	Size, non-performing financing, leverages have a negative significant relation with outreach.	Number of branches has a non-significant relation with outreach.
Githaiga (2021)	Revenue diversifications have a positive significant relation with sustainability.	Leverage has a negative significant relation with sustainability.
Navin and Sinha (2021)	Sustainability, gross loan portfolio, equity-to-assets ratio have a positive significant relation with sustainability and outreach. Age has a positive significant relation with sustainability.	Average loan size and Portfolio at risk has a negative significant relation with sustainability. Yield, Age, operational cost per borrower and financial cost per borrower have a negative significant relation with outreach.
A. K. Kar (2012)	Leverage has a positive significant relation with sustainability.	Leverage has a negative significant relation with depth of outreach.	Capital structure has a non-significant relationship to outreach.
Khachatryan et al. (2019)	Grants and loans at below-market-interest rates and loans from social investors have a positive significant relation with outreach.	Loans from social investors has a negative significant relation with sustainability.	Deposits have non-significant relationship to sustainability.
Rocha et al. (2019)	Size has a positive significant relation with outreach and sustainability.	Capital structure, financial performance, and environment have a negative significant relation with operating efficiency. Operating efficiency has a negative relationship with outreach.	Capital structure, size and environment have a non-significant relationship to financial efficiency.
A.K. Kar (2013)	Gross loan portfolio and the number of active borrowers have a positive significant relation with outreach and sustainability.	Risk and size have a negative significant relation with outreach and sustainability. Age has a negative significant relation with depth of outreach.
Churchill and Marr (2017)	Outreach has a positive significant relation with sustainability in Latin America and the Caribbean.	Outreach has a negative significant relation with sustainability in South Asia.
S.A. Churchill (2020)		Depth of outreach has a negative significant relation with sustainability.
Ponce et al. (2021)	Outreach has a positive significant relation with sustainability.

Table 2. Variables and their measurements

Variable	Definition	Measurement (Selected Studies)
SI	Sustainability index	The Technique for Order of Preference by Similarity to Ideal Solution (TOPSIS) Method (Bhanot & Bapat, 2015)
OSS	Operational self sufficiency	Financial Revenue/(Financial Expense + Net Impairment Loss + Operating Expense (Cull, et al., 2007; Ek, 2011; Quayes, 2015; Abrar & Javaid, 2016; Bayai & Ikhide, 2016; Abdulai & Tewarib, 2017; Khalaf & Saqfalhait, 2019; Abu Wadi et al., 2022; Githaiga, 2022)
OI	Outreach index	TOPSIS Method
LNAB	Natural log of the number of active borrowers	The natural log of the number of individuals who currently have an outstanding loan balance with the financial institution or are primarily responsible for repaying any portion of the gross loan portfolio (A. K. Kar, 2012; Khachatryan et al., 2019; Ahmed et al., 2018; Anisul Islam & Nasreen, 2018; Khalaf & Saqfalhait, 2019; Githaiga, 2022)
LBB	Average loan balance per borrower	Gross Loan Portfolio/Number of Active Borrowers (Quayes, 2015; Khan et al., 2016; Ahmed et al., 2018; Khalaf & Saqfalhait, 2019; Abu Wadi et al., 2021; Navin & Sinha, 2021)
FB	Percent of female borrowers	Number of active female borrowers/Number of Active Borrowers (A. K. Kar, 2012; Khachatryan et al., 2019; Abrar & Javaid, 2016; Khan et al., 2016; Ahmed et al., 2018; Abu Wadi et al., 2021; Navin & Sinha, 2021)
ROA	Return on Assets	(Net Operating Income—Taxes)/Average Total Assets (Narwal & Yadav, 2014; Quayes, 2015; Abrar & Javaid, 2016; Khan et al., 2016; Khachatryan et al., 2019; Parvin et al., 2020; Abu Wadi et al., 2022; Githaiga, 2022)
ROE	Return on equity	(Net Operating Income—Taxes)/Average Total Equity (Hoque et al., 2011; A. K. Kar, 2012; Narwal & Yadav, 2014; Abrar & Javaid, 2016; Abu Wadi et al., 2022; Githaiga, 2021)
CAR	Capital-assets ratio	Total Equity/Total Assets (A. K. Kar, 2012; Masood & Ashraf, 2012; Francis, 2013; Perera et al., 2013; Ahmed et al., 2018; Abu Wadi et al., 2022)
PAR	Portfolio at risk, 30 days	Outstanding balance, portfolio overdue > 30 Days + renegotiated portfolio/Gross Loan Portfolio (Cull et al., 2007; A. K. Kar, 2012; Abdulai & Tewarib, 2017; Khachatryan et al., 2019; Ahmed et al., 2018; Anisul Islam & Nasreen, 2018; Khachatryan et al., 2019; Khalaf & Saqfalhait, 2019; Abu Wadi et al., 2022; Navin & Sinha, 2021)
SIZE	MFI’s size	The natural log of total assets (Kyereboah-Coleman, 2007; A. K. Kar, 2012; Narwal & Yadav, 2014; Abrar & Javaid, 2016; Khachatryan et al., 2019; Anisul Islam & Nasreen, 2018; Towo et al., 2019; Parvin et al., 2020; Wasiaturrahma et al., 2020; Abu Wadi et al., 2022)

Table 3. Descriptive Statistics

	N	Mean	Std. Deviation	Minimum	Maximum
SI	1399	0.001	0.0270	0.000	0.749
OSS	702	142.539	337.853	−43.310	8121.880
OI	725	0.087	0.106	0.057	1.000
LNAB	720	9.499	1.680	3.611	13.067
LBB	700	808.119	1130.827	33	14,152
FB	634	59.433	28.681	0.000	100
ROA	632	2.373	10.868	−87.980	32.820
ROE	633	−6.128	268.134	−6355.790	693.510
CAR	693	58.528	28.612	0.160	147.550
PAR	619	6.288	12.534	0.000	95.730
SIZE	718	15.986	1.667	8.659	19.784

Table 4. Unit Root Tests

Variable	Levin, Lin, and Chu	Fisher-ADF	Fisher-PP
SI	−5.044***(0.000)	225.045***(0.000)	364.073***(0.000)
OSS	−13.5564***(0.000)	158.830***(0.000)	200.695***(0.000)
OI	6.596(1.000)	56.493(0994)	46.385(1.000)
OI(d)	−5.052***(0.000)	148.302***(0.000)	145.272***(0.000)
LNAB	−6.074***(0.000)	120.027**(0.013)	398.681***(0.000)
LBB	−3.623***(0.000)	81.271(0.681)	121.485**(0.011)
FB	−8.061***(0.000)	136.332***(0.000)	177.214***(0.000)
ROA	−5.954***(0.000)	119.005***(0.005)	317.592***(0.000)
ROE	32.735(1.000)	132.201***(0.000)	215.518***(0.000)
CAR	−8.237***(0.000)	121.510**(0.015)	126.036***(0.007)
PAR	−334.897***(0.000)	128.087***(0.001)	184.850***(0.000)
SIZE	−6.883***(0.000)	113.976(0.102)	277.894***(0.000)

Note: ^{***, **, *} indicate significance at the 1 percent, 5 percent, and 10 percent, respectively, and the definition of variables is presented in Table 1.

Table 5. Hausman test and Sargan over-identification test

Test	Chi-Sq. Statistic	Prob.
Hausman test (OSS)	35.043	0.000
Hausman test (LNAB)	146.933	0.000
Sargan over-identification test	0.028	0.869

Table 6. The Results of 2SLS Regression Model Using Sustainability and breadth of outreach as Endogenous Variables (System 1)

		Coef.	Std. Err.	T	P>|t|
OSS	LNAB	276.890	79.454	3.48	0.001***
	CAR	2.315	0.720	3.21	0.001***
	PAR	5.028	1.863	2.70	0.007***
	SIZE	−229.744	68.460	−3.36	0.001***
	FB	−4.167	1.271	−3.28	0.001***
	CONS	1267.810	393.782	3.22	0.001***
LNAB	OSS	−0.084	0.136	−0.62	0.538
	ROA	0.544	0.843	0.65	0.519
	ROE	0.000	0.002	0.21	0.833
	CAR	0.001	0.030	0.03	0.974
	PAR	0.042	0.112	0.38	0.707
	SIZE	0.722	0.446	1.62	0.106
	CONS	7.376	16.895	0.44	0.663
Endogenous variables: OSS, LNAB
Exogenous variables: CAR, PAR, SIZE, FB, ROA, ROE

Note: ^{***, **, *} indicate significance at the 1 percent, 5 percent, and 10 percent, respectively, and the definition of variables is presented in Table 1.

Table 7. Hausman test and Sargan over-identification test

Test	Chi-Sq. Statistic	Prob.
Hausman test (OSS)	33.756	0.000
Hausman test (LBB)	83.713	0.000
Sargan over-identification test	0.000	0.987

Table 8. The results of 2SLS regression model using sustainability and depth of outreach as endogenous variables (System 2)

Two-stage least-squares regression
		Coef.	Std. Err.	T	P>|t|
OSS	LBB	−0.404	0.152	−2.66	0.008***
	CAR	2.119	0.889	2.38	0.017**
	PAR	1.877	1.567	1.20	0.231
	SIZE	37.562	15.987	2.35	0.019**
	FB	−4.756	1.873	−2.54	0.011**
	CONS	−6.691	205.040	−0.03	0.974
LBB	OSS	65.261	105.254	0.62	0.535
	ROA	−422.392	653.597	−0.65	0.518
	ROE	−1.353	1.774	−0.20	0.843
	CAR	−1.912	23.295	−0.08	0.935
	PAR	−42.176	87.190	−0.48	0.629
	SIZE	177.361	348.591	0.51	0.611
	CONS	−9312.725	13,124.760	−0.71	0.478
Endogenous variables: OSS, LNAB
Exogenous variables: CAR, PAR, SIZE, FB, ROA, ROE

Note: ^{***, **, *} indicate significance at the 1 percent, 5 percent, and 10 percent, respectively, and the definition of variables is presented in Table 1.

Table 9. The determinants of outreach index (OI) using random effects model based on 524 unbalanced firm/year observations

Variable	Coefficient	Std. Error	t-Statistic	Prob.
C	−0.064	0.024	−2.630	0.009
SI	−0.013	0.071	−0.183	0.855
CAR	0.000	0.000	−1.263	0.207
PAR	−0.0002	0.000	−1.301	0.194
SIZE	0.005	0.001	3.405	0.0007***

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