Impact of outreach on financial performance of microfinance institutions: a moderated mediation model of productivity, loan portfolio quality, and profit status

Abstract

Agency theory posits that the profit orientation of firms influences their social and organisational performance. However, due to the extensive heterogeneity of lending organisations operating in the microfinance industry, there is no general agreement in the literature on how profit orientation affects social and organisational outcomes of microfinance institutions (MFIs). In this paper, we contribute to this debate by analysing whether the relationship between outreach and financial performance of MFIs is mediated by their productivity and loan portfolio quality, and, separately, whether this relationship is moderated by their profit orientation. To this end, a par- tial least squares (PLS) multi-group analysis is applied to a worldwide sample of 435 MFIs. First, we find substantial differences in the business model among non- profit-oriented and profit-oriented lenders, but the findings also reveal that both types of MFIs can increase their outreach while improving their financial outcomes. Essentially, the analysis shows a negative direct effect of outreach on financial per- formance for non-profit lenders, but we also find that this negative effect is posi- tively mediated via productivity and portfolio quality of non-profit lenders which leads to a positive overall impact of outreach on financial performance. Hence, our findings do not support the mission drift hypothesis popular in the microfinance lit- erature. On the contrary, the results suggest that non-profit-oriented lenders achiev- ing higher levels of productivity and loan portfolio quality can additionally obtain better financial outcomes.