The effect of institutional quality and financial development on the performance of microfinance institutions: evidence from selected African countries

Abstract

Microfinance institutions aim to enhance access to financial services for low-income clients while maintaining financial sustainability, although the relationship between these objectives is often unclear. This study examines the interplay between institutional quality, financial development, and the financial performance of profit-oriented non-bank microfinance institutions (NBMFIs) in Africa. Results from fixed effect and system GMM estimations indicate that institutional size significantly predicts the performance of NBMFIs. Conversely, both the financial development index and the ratio of loan impairment provisions to assets negatively impact performance. Notably, among the various dimensions of institutional quality assessed, only corruption control emerged as a significant positive contributor to the performance of NBMFIs. These findings underscore critical policy implications for enhancing the effectiveness and sustainability of microfinance institutions in Africa.