The Impact of Socio-Economic Development on Microfinance: Evidence from Developing Countries

Abstract

Microfinance has expanded considerably in recent years as a tool for supporting individuals who face difficulties in access to finance, especially in developing countries. The socio-economic development in the economy and the macroeconomic environment affect the functioning of microfinance institutions (MFIs). This study examines the impact of socio-economic development measured by the Human Development Index (HDI) on the size and performance of MFIs. The size is measured by the natural log of total assets, and the performance is captured by the solvency of MFIs, which is measured by the leverage ratio. The analysis is conducted by employing a Panel Generalized Estimated Least Squares model by using data for 81 MFIs in 16 developing countries from 2014-2022. The results of the study imply that socioeconomic development has a positive and significant impact on the size and performance of MFIs in developing countries, in which a 1% increase in HDI results in a 1.04% increase in the size and a 6.85% decrease in the leverage, implying an increase in solvency and improvement in the performance of MFIs.