Lending Behavior of Microfinance Institutions in Sub-Saharan Africa: Does Capitalization Matter?

Tehulu, Tilahun Aemiro

dc.contributor.author	Tehulu, Tilahun Aemiro
dc.date.accessioned	2022-09-14T08:30:45Z
dc.date.available	2022-09-14T08:30:45Z
dc.date.issued	2021-04
dc.identifier.uri	To cite this paper: Tehulu, T. A. (2021) Lending behavior of microfinance institutions in Sub-Saharan Africa: Does capitalization matter?, Bahir Dar University, PhD dissertation. http://ir.bdu.edu.et/handle/123456789/14136
dc.description.abstract	The first core goal of sustainable development goals (SDGs) is to eradicate poverty. While microfinance institutions (MFIs) are considered important instruments for poverty alleviation in developing countries as they provide credit access to the poor, there is surprisingly little evidence of the drivers of the lending behavior of microfinance institutions. Accordingly, we examined the determinants of MFI credit growth using a sample of 130 MFIs operating across 31 countries in Sub-Saharan Africa (SSA) during the period 2004–2014. Using the Arellano-Bover/Blundell-Bond two-step Generalized Method of Moments (GMM) Windmeijer bias-corrected standard errors, we show that both MFI specific and macroeconomic factors matter in the lending behavior of MFIs. We found that while capitalization, liquidity, and size are positively associated with credit growth, profitability negatively impacts credit growth. Besides, the findings regarding scale effects show that lower gross loan portfolio (GLP) in the preceding year amplifies the magnitude of the current credit growth rate, but higher GLP reduces credit growth rates. However, other MFI specific factors namely portfolio quality, deposit growth, and non-deposit borrowing growth have little direct effects on MFI credit growth. Furthermore, we uncovered that MFI credit growth is pro-cyclical but negatively related to GDP per capita consistent with the theory of convergence. On the other hand, inflation and employment are not important covariates in the lending behavior of MFIs. Similarly, profit status, regulation status, legal status, and location do not matter in the credit growth of MFIs, other things constant. Additionally, we found marginal persistency in the credit growth of MFIs in SSA. Using different specifications and estimation methodologies, overlapping rolling regressions, and time varying analysis, we ascertain that our empirical findings are robust. Nevertheless, the time varying analysis revealed that the catch-up phenomenon is stronger during and subsequent to the global financial crisis. We also found that credit growth is negatively related to inflation during and prior to the global financial crisis, though statistically insignificant; whereas, its effect subsequent to the crisis period is positive and statistically significant. Finally, although credit growth is positively related to capitalization (as measured by the book capital ratio), the findings fail to support the hypothesis that capitalization impacts MFI lending behavior through the divergence between the actual capital ratio and the implicit target capital. Our findings have several practical and theoretical implications which are discussed in the Conclusions part of the paper. Some research areas for further investigation are also identified and suggested as part of the Conclusions of the study.	en_US
dc.language.iso	en	en_US
dc.subject	ACCOUNTING AND FINANCE	en_US
dc.title	Lending Behavior of Microfinance Institutions in Sub-Saharan Africa: Does Capitalization Matter?	en_US
dc.type	Dissertation	en_US