Social Versus Financial Return in Microfinance

Providing empirical evidence on the relationship between social and financial performance of MFIs

This paper examines the interaction between social and financial returns in microfinance. For the analysis, it uses multivariate regression models based on panel data of 1,508 observations on MFIs between 2004 and 2010. The paper considers two measures of outreach as proxies for social return: percentage of female clients and average loan distributed in relation to gross national income per capita. It uses return on assets, return on equity, and operational self-sufficiency as indicators of MFIs’ financial returns. The paper finds strong evidence suggesting that institutions with more social engagement in terms of outreach to the poor earn higher portfolio yields. Other key findings include:

  • Some measures of increasing outreach result in increased operating expenses;
  • Fund managers still do not put strong emphasis on including social factors in their investment decision processes;
  • Including socially responsible elements in investment decisions might lead to better financial performance of MFIs, as the expected trade-off between social and financial factors does not seem to exist;
  • Besides serving poor clients, funds can emphasize their social approach by signing social investment principles and informing investors about social performance;
  • More socially orientated MFIs charge higher interest rates to compensate for the potential default of very poor clients.

About this Publication

By Meyer, J.